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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549  

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

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 000-55430

Resource Real Estate Opportunity REIT II, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

 

80-0854717

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1845 Walnut Street, 17th Floor, Philadelphia, PA, 19103

(Address of principal executive offices) (Zip code)

 

(215) 231-7050

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

N/A

N/A

N/A

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes No

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

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

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

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

As of November 6, 2020, there were 60,206,977 outstanding shares of common stock of Resource Real Estate Opportunity REIT II, Inc.

 


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

 

 

 

 

 

 

 

PAGE

PART I

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets – September 30, 2020 (unaudited) and December 31, 2019

4

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss – For the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)

5

 

 

 

 

Consolidated Statements of Changes in Stockholders' Equity – For the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows – For the Nine Months Ended September 30, 2020 and 2019 (unaudited)

7

 

 

 

 

Notes to Consolidated Financial Statements – September 30, 2020 (unaudited)

8

 

 

 

ITEM 2.

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

29

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

46

 

 

 

ITEM 4.

Controls and Procedures

46

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

 

 

 

ITEM 6.

Exhibits

52

 

 

 

SIGNATURES

 

53

 

 

 

 

 


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.  You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company’s control and which could materially affect the Company’s results of operations, financial condition, cash flows, performance or future achievements or events.  Factors that could cause actual results to differ materially from these expectations include, but are not limited to, the risk that the proposed mergers (as discussed herein) will not be consummated within the expected time period or at all; the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreements; the inability of Resource Real Estate Opportunity REIT, Inc. (“REIT I”) or Resource Apartment REIT III, Inc. (“REIT III”) to obtain stockholder approval of the respective mergers or the failure to satisfy the other conditions to completion of the mergers; risks related to disruption of management’s attention from the ongoing business operations due to the proposed mergers. In addition, the potential adverse effect of the current pandemic of the novel coronavirus, or COVID-19, on the financial condition, results of operations, cash flows and performance of the Company, particularly its ability to collect rent, the personal financial condition of its tenants and their ability to pay rent, and the real estate market and the global economy and financial markets remains a risk to the Company. The extent to which COVID-19 impacts the Company and its tenants will depend on future developments, which cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, you should interpret many of the risks identified in our Annual Report on Form 10-K for the year ended December 31, 2019 as being heightened as a result of the ongoing and numerous adverse impacts COVID-19. 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.

3


PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

September 30,

2020

 

 

December 31, 2019

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Rental properties, net

 

$

709,204

 

 

$

735,530

 

 

 

 

 

 

 

 

 

 

Cash

 

 

30,723

 

 

 

39,647

 

Restricted cash

 

 

8,464

 

 

 

6,534

 

Subtotal - cash and restricted cash

 

 

39,187

 

 

 

46,181

 

Tenant receivables, net

 

 

240

 

 

 

107

 

Due from related parties

 

 

1

 

 

 

297

 

Prepaid expenses and other assets

 

 

3,181

 

 

 

2,109

 

Operating lease right-of-use assets

 

 

18

 

 

 

38

 

Total assets

 

$

751,831

 

 

$

784,262

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Mortgage notes payable, net

 

$

542,525

 

 

$

547,875

 

Accounts payable and accrued expenses

 

 

4,687

 

 

 

6,435

 

Accrued real estate taxes

 

 

7,986

 

 

 

5,029

 

Due to related parties

 

 

1,434

 

 

 

432

 

Tenant prepayments

 

 

587

 

 

 

634

 

Security deposits

 

 

1,668

 

 

 

1,513

 

Distributions payable

 

 

-

 

 

 

5,993

 

Operating lease liabilities

 

 

18

 

 

 

38

 

Total liabilities

 

 

558,905

 

 

 

567,949

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock (par value $.01, 10,000,000 shares authorized, none issued and outstanding)

 

 

 

 

 

 

Convertible stock (par value $.01; 50,000 shares authorized, 50,000 issued and outstanding)

 

 

1

 

 

 

1

 

Common stock (par value $.01; 1,000,000,000 shares authorized; and 60,206,977 and 60,094,623 shares outstanding, respectively)

 

 

601

 

 

 

600

 

Additional paid-in capital

 

 

529,281

 

 

 

528,464

 

Accumulated other comprehensive loss

 

 

(225

)

 

 

(189

)

Accumulated deficit

 

 

(336,732

)

 

 

(312,563

)

Total stockholders’ equity

 

 

192,926

 

 

 

216,313

 

Total liabilities and stockholders’ equity

 

$

751,831

 

 

$

784,262

 

 

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

4


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

21,411

 

 

$

21,312

 

 

$

64,171

 

 

$

64,391

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental operating - expenses

 

 

3,769

 

 

 

3,800

 

 

 

11,398

 

 

 

10,169

 

Rental operating - payroll

 

 

1,969

 

 

 

1,915

 

 

 

5,515

 

 

 

5,831

 

Rental operating - real estate taxes

 

 

2,887

 

 

 

2,925

 

 

 

8,738

 

 

 

8,804

 

Subtotal - Rental operating expenses

 

 

8,625

 

 

 

8,640

 

 

 

25,651

 

 

 

24,804

 

Management fees

 

 

3,255

 

 

 

3,324

 

 

 

9,624

 

 

 

9,964

 

Transaction costs

 

 

2,759

 

 

 

-

 

 

 

2,759

 

 

 

-

 

General and administrative

 

 

2,058

 

 

 

1,897

 

 

 

6,169

 

 

 

5,759

 

Loss on disposal of assets

 

 

54

 

 

 

30

 

 

 

146

 

 

 

149

 

Depreciation and amortization expense

 

 

10,040

 

 

 

9,912

 

 

 

30,150

 

 

 

29,580

 

Total expenses

 

 

26,791

 

 

 

23,803

 

 

 

74,499

 

 

 

70,256

 

Loss before net gain on disposition

 

 

(5,380

)

 

 

(2,491

)

 

 

(10,328

)

 

 

(5,865

)

Net gain on disposition of property

 

 

-

 

 

 

-

 

 

 

-

 

 

 

20,619

 

Income (loss) before other income (expense)

 

 

(5,380

)

 

 

(2,491

)

 

 

(10,328

)

 

 

14,754

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

 

60

 

 

 

14

 

 

 

188

 

Interest expense

 

 

(3,990

)

 

 

(6,257

)

 

 

(13,844

)

 

 

(20,042

)

Net loss

 

 

(9,369

)

 

 

(8,688

)

 

 

(24,158

)

 

 

(5,100

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated derivatives, fair value adjustment

 

 

(111

)

 

 

48

 

 

 

(36

)

 

 

130

 

Comprehensive loss

 

$

(9,480

)

 

$

(8,640

)

 

$

(24,194

)

 

$

(4,970

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

60,207

 

 

 

60,237

 

 

 

60,243

 

 

 

61,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(0.16

)

 

$

(0.14

)

 

$

(0.40

)

 

$

(0.08

)

 

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

5


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(in thousands)

(unaudited)

 

 

 

Common Stock

 

 

Convertible Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

Balance, at January 1, 2020

 

 

60,095

 

 

$

600

 

 

 

50

 

 

$

1

 

 

$

528,464

 

 

$

(189

)

 

$

(312,563

)

 

$

216,313

 

Common stock issued through distribution reinvestment plan

 

 

371

 

 

 

4

 

 

 

 

 

 

 

 

 

3,127

 

 

 

 

 

 

 

 

 

3,131

 

True-up of prior year cash distributions declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11

)

 

 

(11

)

Common stock redemptions

 

 

(140

)

 

 

(2

)

 

 

 

 

 

 

 

 

(1,223

)

 

 

 

 

 

 

 

 

(1,225

)

Designated derivatives, fair value adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

73

 

 

 

 

 

 

73

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,926

)

 

 

(7,926

)

Balance, at March 31, 2020

 

 

60,326

 

 

$

602

 

 

 

50

 

 

$

1

 

 

$

530,368

 

 

$

(116

)

 

$

(320,500

)

 

$

210,355

 

Common stock redemptions

 

 

(120

)

 

 

(1

)

 

 

 

 

 

 

 

 

(1,087

)

 

 

 

 

 

 

 

 

(1,088

)

Designated derivatives, fair value adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,863

)

 

 

(6,863

)

Balance, at June 30, 2020

 

 

60,206

 

 

$

601

 

 

 

50

 

 

$

1

 

 

$

529,281

 

 

$

(114

)

 

$

(327,363

)

 

$

202,406

 

Distributions declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock redemptions

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Designated derivatives, fair value adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(111

)

 

 

 

 

 

(111

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,369

)

 

 

(9,369

)

Balance, at September 30, 2020

 

 

60,207

 

 

$

601

 

 

 

50

 

 

$

1

 

 

$

529,281

 

 

$

(225

)

 

$

(336,732

)

 

$

192,926

 

 

 

 

 

Common Stock

 

 

Convertible Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

Balance, at January 1, 2019

 

 

61,379

 

 

$

612

 

 

 

50

 

 

$

1

 

 

$

539,493

 

 

$

(379

)

 

$

(276,261

)

 

$

263,466

 

Common stock issued through distribution reinvestment plan

 

 

570

 

 

 

6

 

 

 

 

 

 

 

 

 

4,858

 

 

 

 

 

 

 

 

 

4,864

 

Distributions declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,132

)

 

 

(6,132

)

Common stock redemptions

 

 

(664

)

 

 

(7

)

 

 

 

 

 

 

 

 

(5,946

)

 

 

 

 

 

 

 

 

(5,953

)

Designated derivatives, fair value adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

 

 

 

32

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,697

 

 

 

11,697

 

Balance, at March 31, 2019

 

 

61,285

 

 

$

611

 

 

 

50

 

 

$

1

 

 

$

538,405

 

 

$

(347

)

 

$

(270,696

)

 

$

267,974

 

Common stock issued through distribution reinvestment plan

 

 

397

 

 

 

4

 

 

 

 

 

 

 

 

 

3,304

 

 

 

 

 

 

 

 

 

3,308

 

Distributions declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,045

)

 

 

(6,045

)

Common stock redemptions

 

 

(1,671

)

 

 

(16

)

 

 

 

 

 

 

 

 

(13,930

)

 

 

 

 

 

 

 

 

(13,946

)

Designated derivatives, fair value adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50

 

 

 

 

 

 

50

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,109

)

 

 

(8,109

)

Balance, at June 30, 2019

 

 

60,011

 

 

$

599

 

 

 

50

 

 

$

1

 

 

$

527,779

 

 

$

(297

)

 

$

(284,850

)

 

$

243,232

 

Common stock issued through distribution reinvestment plan

 

 

392

 

 

 

4

 

 

 

 

 

 

 

 

 

3,265

 

 

 

 

 

 

 

 

 

3,269

 

Distributions declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,179

)

 

 

(6,179

)

Common stock redemptions

 

 

(467

)

 

 

(5

)

 

 

 

 

 

 

 

 

(3,898

)

 

 

 

 

 

 

 

 

(3,903

)

Designated derivatives, fair value adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48

 

 

 

 

 

 

48

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,688

)

 

 

(8,688

)

Balance, at September 30, 2019

 

 

59,936

 

 

$

598

 

 

 

50

 

 

$

1

 

 

$

527,146

 

 

$

(249

)

 

$

(299,717

)

 

$

227,779

 

 

 

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

6


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(24,158

)

 

$

(5,100

)

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

 

 

 

 

 

 

 

 

Loss on disposal of assets

 

 

146

 

 

 

149

 

Net gain on disposition of property

 

 

-

 

 

 

(20,619

)

Casualty loss

 

 

-

 

 

 

478

 

Depreciation and amortization

 

 

30,150

 

 

 

29,580

 

Amortization of deferred financing costs

 

 

791

 

 

 

837

 

Amortization of mortgage premiums

 

 

(84

)

 

 

(85

)

Realized loss on ineffectiveness of interest rate caps

 

 

(34

)

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Tenant receivables, net

 

 

(133

)

 

 

(54

)

Due from related parties

 

 

296

 

 

 

56

 

Prepaid expenses and other assets

 

 

(1,053

)

 

 

(158

)

Due to related parties

 

 

1,001

 

 

 

(229

)

Accounts payable and accrued expenses

 

 

(246

)

 

 

2,584

 

Accrued real estate taxes

 

 

1,453

 

 

 

-

 

Tenant prepayments

 

 

(47

)

 

 

(78

)

Security deposits

 

 

156

 

 

 

74

 

Net cash provided by operating activities

 

 

8,238

 

 

 

7,435

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from disposal of property, net of closing costs

 

 

 

 

 

32,882

 

Capital expenditures

 

 

(3,974

)

 

 

(5,536

)

Net cash provided by (used in) investing activities

 

 

(3,974

)

 

 

27,346

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Redemptions of common stock

 

 

(2,312

)

 

 

(23,802

)

Payment of deferred financing costs

 

 

 

 

 

(445

)

Proceeds from borrowings on mortgage notes payable

 

 

 

 

 

8,946

 

Repayments on mortgage notes payable

 

 

(6,057

)

 

 

(4,040

)

Purchase of interest rate caps

 

 

(16

)

 

 

(11

)

Distributions paid on common stock

 

 

(2,873

)

 

 

(9,620

)

Net cash used in financing activities

 

 

(11,258

)

 

 

(28,972

)

Net increase (decrease) in cash and restricted cash

 

 

(6,994

)

 

 

5,809

 

Cash and restricted cash at beginning of period

 

 

46,181

 

 

 

47,988

 

Cash and restricted cash at end of period

 

$

39,187

 

 

$

53,797

 

 

The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets that sums to the total of such amounts:

 

 

 

September 30,

 

 

 

2020

 

 

2019

 

Cash

 

$

30,723

 

 

$

46,739

 

Restricted cash

 

 

8,464

 

 

 

7,058

 

Total cash and restricted cash shown in the consolidated balance sheets

 

$

39,187

 

 

$

53,797

 

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

7


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(unaudited)

NOTE 1 - NATURE OF BUSINESS AND OPERATIONS (LOSS)

Resource Real Estate Opportunity REIT II, Inc. (the “Company”) was organized in Maryland on September 28, 2012. The Company offered up to 100,000,000 shares of common stock in its primary initial public offering for $10 per share, with discounts available to certain categories of investors. The primary portion of the offering closed on February 6, 2016. The Company continued to offer up to 10,000,000 shares pursuant to the Company’s distribution reinvestment plan at a purchase price equal to 95% of the estimated net asset value per share. On January 23, 2020, the Company filed a Registration Statement to offer an additional 1,500,000 shares pursuant to the Company’s distribution reinvestment plan. The distribution reinvestment plan has been suspended since April 1, 2020 when the board of directors of the Company suspended the declaration of distributions.  The Company has adopted a fiscal year ending December 31.  

Prior to the execution of the REIT I Merger Agreement (as defined below), on September 8, 2020, Resource Real Estate Opportunity REIT, Inc. ("REIT I"), a non-traded real estate investment trust ("REIT") sponsored by Resource Real Estate, LLC (“Resource Real Estate”), our initial sponsor, entered into a series of transactions to become self-managed (the “Self-Management Transaction”) and succeeded to the advisory, asset management and property management arrangements in place for the Company. Accordingly, the sponsor of the Company has changed from Resource Real Estate to Resource Real Estate Opportunity OP, LP, the operating partnership of REIT I, while the REIT I Merger (defined below) is pending.

Following the Self-Management Transaction, Resource Real Estate Opportunity Advisor II, LLC (the “Advisor”) is indirectly owned by REIT I.  Prior to September 8, 2020, the Advisor was an indirect wholly owned subsidiary of Resource America, Inc. (“RAI”).  Pursuant to the advisory agreement initially entered in February 2014 and renewed annually thereafter, the Advisor has acted as the Company's external advisor and manages the Company's day-to-day operations and its portfolio of real estate investments and provides asset-management, marketing, investor relations and other administrative services on the Company's behalf, all subject to the supervision of the Company's board of directors. The advisory agreement was amended and restated on September 8, 2020.

RAI is a wholly owned subsidiary of C-III Capital Partners, LLC (“C-III”). Prior to the Self-Management Transaction, C-III controlled the Advisor, Resource Real Estate Opportunity Manager II, LLC, the Company's property manager (the “Manager”) and Resource Securities LLC, the dealer manager for the Company’s public offering, as well as all of the shares of common stock held by the Advisor and RAI. Prior to the Self-Management Transaction, the Advisor transferred all of its shares of the Company’s common stock to a subsidiary of C-III.  

As of September 30, 2020, a total of 60,206,977 shares, including the additional shares purchased by the Advisor and shares issued through the distribution reinvestment plan, have been issued resulting in gross offering proceeds of $644.8 million. As of September 30, 2020, the Company had issued 10,197,719 shares for $88.5 million pursuant to its distribution reinvestment plan.

 

The Company’s objective is to take advantage of the multifamily investing and lending platforms available to the Advisor to invest in apartment communities in order to provide the investor with growing cash flow and increasing asset values. The Company has acquired and may continue to acquire underperforming apartments which it will renovate and stabilize in order to increase rents. To a lesser extent, the Company may acquire or originate commercial real estate debt secured by apartments.

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, commencing with its taxable year ending December 31, 2014. 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 consolidated financial statements and the information and tables contained in the notes thereto, as of September 30, 2020, are unaudited and prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). However, in the opinion of management, these interim financial statements include all of the

8


necessary adjustments to fairly present the results of the interim periods presented. 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, 2019. The results of operations for the nine months ended September 30, 2020 may not necessarily be indicative of the results of operations for the full year ending December 31, 2020.

 

Pending Mergers with Resource Real Estate Opportunity REIT, Inc. and Resource Apartment REIT III, Inc.

On September 8, 2020, the Company entered into merger agreements (as described herein) to acquire each of REIT I and Resource Apartment REIT III, Inc. (“REIT III”). Both mergers are stock-for-stock transactions whereby each of REIT I and REIT III will be merged into a wholly owned subsidiary of the Company. The consummation of the Company’s merger with REIT I is not contingent upon the completion of the merger with REIT III, and the consummation of the Company’s merger with REIT III is not contingent upon completion of the merger with REIT I. We refer to the REIT I Merger (as defined below) and the REIT III Merger (as defined below) collectively as the Mergers.

REIT I Merger

On September 8, 2020, the Company, RRE Opportunity OP II, LP (“OP II”), Revolution I Merger Sub, LLC, a wholly owned subsidiary of the Company (“Merger Sub I”), REIT I, and Resource Real Estate Opportunity OP, LP (“OP I”), entered into an Agreement and Plan of Merger (the “REIT I Merger Agreement”).

Subject to the terms and conditions of the REIT I Merger Agreement, (i) REIT I will merge with and into Merger Sub I, with Merger Sub I surviving as a direct, wholly owned subsidiary of the Company (the “REIT I Company Merger”) and (ii) OP I will merge with and into OP II (the “REIT I Partnership Merger” and, together with the REIT I Company Merger, the “REIT I Merger”), with OP II surviving the REIT I Partnership Merger. At such time, the separate existence of REIT I and OP I shall cease.

At the effective time of the REIT I Company Merger, each issued and outstanding share of REIT I’s common stock (or fraction thereof) will be converted into the right to receive 1.22423 shares of common stock of the Company, and each issued and outstanding share of REIT I’s convertible stock will be converted into the right to receive $0.02 in cash (without interest).

At the effective time of the REIT I Partnership Merger, each common unit of partnership interests in OP I outstanding immediately prior to the effective time of the REIT I Partnership Merger will convert into the right to receive 1.22423 common units of partnership interest in OP II and each Series A Cumulative Participating Redeemable Preferred Unit in OP I issued and outstanding immediately prior to the effective time of the REIT I Partnership Merger will convert into the right to receive one Series A Cumulative Participating Redeemable Preferred Unit in OP II.

The obligations of each party to consummate the REIT I Merger are subject to a number of conditions, including receipt of the approval of the REIT I Merger and of an amendment to the REIT I charter to delete certain provisions regarding roll-up transactions by the holders of a majority of the outstanding shares of the REIT I common stock.

REIT III Merger

On September 8, 2020, the Company, OP II, Revolution III Merger Sub, LLC (“Merger Sub III”), a wholly owned subsidiary of the Company, REIT III, and Resource Apartment OP III, LP (“OP III”), the operating partnership of REIT III, entered into an Agreement and Plan of Merger (the “REIT III Merger Agreement”).

Subject to the terms and conditions of the REIT III Merger Agreement, (i) REIT III will merge with and into Merger Sub III, with Merger Sub III surviving as a direct, wholly owned subsidiary of the Company (the “REIT III Company Merger”) and (ii) OP III will merge with and into OP II (the “REIT III Partnership Merger” and, together with the REIT III Company Merger, the “REIT III Merger”), with OP II surviving the REIT III Partnership Merger. At such time, the separate existence of REIT III and OP III shall cease.

At the effective time of the REIT III Company Merger, each issued and outstanding share of REIT III’s common stock (or fraction thereof) will be converted into the right to receive 0.925862 shares of common stock of the Company.

 

At the effective time of the REIT III Partnership Merger, each unit of partnership interests in OP III outstanding immediately prior to the effective time of the REIT III Partnership Merger will be retired and will cease to exist. In addition, for each share of common stock of the Company issued in the REIT III Company Merger, a common partnership unit will be issued by OP II to the Company.

9


 

The obligations of each party to consummate the REIT III Merger are subject to a number of conditions, including receipt of the approval of the REIT III Merger and of an amendment to the REIT III charter to delete certain provisions regarding roll-up transactions by the holders of a majority of the outstanding shares of the REIT III common stock.  

COVID-19 Pandemic

 

One of the most significant risks and uncertainties facing the Company and the real estate industry generally continues to be the effect of the ongoing public health crisis of the novel coronavirus disease (COVID-19) pandemic. The Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business, including how the pandemic is impacting its tenants. The Company did not incur significant disruptions from the COVID-19 pandemic during the nine months ended September 30, 2020; however, a small percentage of its tenants have requested rent deferral as a result of the pandemic. The Company is evaluating each tenant rent relief request on an individual basis, considering a number of factors. Not all tenant requests will ultimately result in modified agreements, nor is the Company forgoing its contractual rights under its lease agreements. Executed short-term rent relief plans that are outstanding at September 30, 2020 are not significant in terms of either number of requests or dollar value.

The extent to which the COVID-19 pandemic impacts the Company’s operations and those of its tenants depends on future developments, which cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures. The Company is unable to predict the ultimate impact that the pandemic will have on its financial condition, results of operations and cash flows due to numerous uncertainties.

 

 

10


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

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 consolidated financial statements have been prepared in conformity with GAAP.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as follows:

 

Subsidiary

 

Apartment Complex

 

Number of Units

 

Property Location

RRE Opportunity Holdings II, LLC

 

N/A

 

N/A

 

N/A

RRE Opportunity OP II, LP

 

N/A

 

N/A

 

N/A

RRE Bear Creek Holdings, LLC, or Bear

   Creek

 

Adair off Addison

 

152

 

Dallas, TX

RRE Buckhead Holdings, LLC, or

   Buckhead

 

Uptown Buckhead

 

216

 

Atlanta, GA

RRE Farrington Holdings, LLC, or

   Farrington

 

Crosstown at Chapel Hill

 

411

 

Chapel Hill, NC

RRE Mayfair Chateau Holdings, LLC, or

   Mayfair Chateau

 

The Brookwood

 

274

 

Homewood, AL

RRE Fairways of Bent Tree Holdings, LLC,

   or Fairways of Bent Tree

 

Adair off Addison Apartment

Homes

 

200

 

Dallas, TX

RRE Montclair Terrace Holdings, LLC, or

   Montclair Holdings

 

Montclair Terrace

 

188

 

Portland, OR

RRE Grand Reserve Holdings, LLC, or

   Grand Reserve

 

Grand Reserve

 

319

 

Naperville, IL

RRE Canterwood Holdings, LLC, or

   Canterwood

 

Verdant Apartment Homes

 

216

 

Boulder, CO

RRE Spalding Crossing Holdings, LLC, or

   Spalding Crossing

 

1000 Spalding Apartment Homes

 

252

 

Atlanta, GA

RRE Fox Ridge Holdings, LLC, or Fox

   Ridge

 

Arcadia Apartment Homes

 

300

 

Centennial, CO

RRE Riverlodge Holdings, LLC, or

   Riverlodge

 

Ravina Apartment Homes

 

498

 

Austin, TX

RRE Breckenridge Holdings, LLC, or

   Breckenridge

 

81 Fifty at West Hills Apartment

Homes

 

357

 

Portland, OR

RRE Santa Rosa Holdings, LLC, or Santa

   Rosa

 

The Palmer at Las Colinas

 

476

 

Irving, TX

RRE Windbrooke Holdings, LLC, or

   Windbrooke Crossing

 

Windbrooke Crossing

 

236

 

Buffalo Grove, IL

RRE Woods Holdings, LLC, or The Woods

   of Burnsville

 

The Woods of Burnsville

 

400

 

Burnsville, MN

RRE Indigo Creek Holdings, LLC

 

Indigo Creek

 

408

 

Glendale, AZ

RRE Martin's Point Holdings, LLC

 

Martin's Point

 

256

 

Lombard, IL

 

N/A - Not Applicable  

All intercompany accounts and transactions have been eliminated in consolidation.

11


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

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.

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.

Assets Held for Sale

The Company presents rental property assets that qualify as held for sale separately in the consolidated balance sheets. Real estate assets held for sale are measured at the lower of carrying amount or fair value less cost to sell. Subsequent to classification of an asset as held for sale, no further depreciation is recorded. As of September 30, 2020 and December 31, 2019, the Company had no rental properties included in assets held for sale.  

Rental Properties

The Company records acquired rental properties at fair value on their 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's estimated useful lives of its assets by class are 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

 

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. Construction management fees are capitalized along with the related asset. Costs of repairs and maintenance are expensed as incurred.

Concentration of Risk

As of September 30, 2020, the Company's real estate investments located in Texas, Illinois, Colorado, Oregon and Georgia represented approximately 19.5%, 19.0%, 15.7%, 14.1% and 9.0% of the net book value of its rental property assets, respectively. Any adverse economic or real estate developments in these markets, such as the impact of the COVID-19 pandemic, business layoffs or downsizing, industry slowdowns, relocations of businesses, adverse weather events, 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.

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. These estimates consider 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.

If an impairment exists, due to the Company's inability to recover the carrying value of a property, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less 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. As of September 30, 2020, the Company evaluated whether the global economic disruption caused by the COVID-19 pandemic was an impairment indicator. The Company examined a number of factors and concluded that there was no indication that the carrying value of the Company's investments in real estate might not be recoverable as of September 30, 2020. The Company did not recognize any impairment charges during the nine months ended September 30, 2020 and 2019.

12


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

Allocation of Purchase Price of Acquired Assets

On January 1, 2018, the Company adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("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 that 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 screen is not met, and 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 relative fair value.

Upon the acquisition of real properties, the Company allocates the purchase price to acquired tangible assets, consisting of land, buildings, fixtures and improvements, identified intangible lease assets, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases, the value of tenant relationships, and liabilities, 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-cancellable 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-cancellable terms of the respective leases.

The Company measures the aggregate value of in-place leases 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. Factors to be considered in the analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.

In estimating the fair value of both the tangible and intangible acquired assets, the Company also considers information obtained about each property as a result of its pre-acquisition due diligence. 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 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 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 average remaining term of the underlying 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 does 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 Company's reported net income (loss).

Revenue Recognition and Receivables

The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases where collection is considered probable, on a straight-line basis over the term of the related lease. The future minimum rental payments to be received from noncancelable operating leases are $52.2 million and $721,000 for the 12-month periods ending September 30, 2021 and 2022, 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 for cable income from contracts

13


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

with cable providers at the Company's properties. 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.

The Company also has revenues sharing arrangements of cable income from contracts with cable providers at the Company's properties. Included in accrued expenses and other liabilities on the consolidated balance sheet at September 30, 2020 and December 31, 2019 is a $518,000 and $573,000 contract liability related to deferred revenue from contracts with cable providers. The Company recognizes income from these contracts on a straight line basis over the contract periods of 10 years to 12 years. In the three and nine months ended September 30, 2020, approximately $19,000 and $55,000 respectively, of revenue from the contract liability was recognized as income.  In the three and nine months ended September 30, 2019, approximately $28,000 and $120,000 respectively, of revenue from the contract liability was recognized as income.

The Company evaluates its portfolio of operating leases for collectability at both the onset of the underlying leases and on an ongoing basis. Tenant receivables include amounts for which collectability was assessed as probable in accordance with the guidance in ASC 842-30. For tenant receivables, which include base rents, straight-line rentals, expense reimbursements and other revenue or income, the Company also estimates a general allowance for uncollectible accounts under ASC 450-20. The Company determines the collectability of its receivables related to rental revenue 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, and the condition of the general economy and the industry as a whole. If collectability is not probable, the Company adjusts rental income for the amount of the uncollectible revenue. Due to the COVID-19 pandemic, some residents have experienced difficulty making rent payments and the Company’s receivables have increased compared to historical levels.  This caused the Company to further evaluate collectability during the three months ended September 30, 2020. At September 30, 2020 and December 31, 2019, the Company recorded $263,000 and $44,000 of provisions for bad debts, respectively, to appropriately reflect management’s estimate for uncollectible accounts. The provision for bad debts was recorded as a reduction to rental income in the Company’s consolidated statements of operations and comprehensive loss.

Income Taxes

The Company elected to be taxed as a REIT, commencing with its taxable year ended December 31, 2014. To maintain its REIT qualification under the Code, the Company is generally required to distribute at least 90% of its taxable net income (excluding net capital gains) to its stockholders as well as comply with other requirements, including certain asset, income and stock ownership tests. As a REIT, the Company is not subject to federal corporate income tax to the extent that it distributes 100% of its REIT taxable income each year. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it is 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 fails 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 any of its subsidiaries as a taxable REIT subsidiary (“TRS”). 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. 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. As of September 30, 2020 and December 31, 2019 the Company did not treat any of its subsidiaries as a TRS.

The Company evaluates the benefits from tax positions taken or expected to be taken in its tax return. Only the largest amount of benefits from tax positions that will more likely than not be sustainable upon examination are recognized by the Company. The Company does not have any unrecognized tax benefits, nor interest and penalties, recorded in its consolidated financial statements and does not anticipate significant adjustments to the total amount of unrecognized tax benefits within the next 12 months.

The Company is subject to examination by the U.S. Internal Revenue Service and by the taxing authorities in other states in which the Company has significant business operations. The Company is not currently undergoing any examinations by taxing authorities. The Company is not subject to IRS examination for the tax return years 2016 and prior.

14


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

Earnings Per Share

Basic earnings (loss) per share is calculated on the basis of the weighted-average number of common shares outstanding during the year. Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings 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 (see Note 11) are included in the diluted earnings per share calculations because the necessary conditions for conversion have not been satisfied as of September 30, 2020 (were such date to represent the end of the contingency period). For the three and nine months ended September 30, 2019 common shares potentially issuable to settle distributions payable were included in the calculation of basic and diluted earnings per share.

Adoption of New Accounting Standards

In June 2016, FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses”, which requires measurement and recognition of expected credit losses for financial assets held. On January 1, 2020, the Company adopted ASU No. 2016-13 and the adoption did not have a significant impact on its consolidated financial statements and disclosures.  

In August 2018, FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This update removes, modifies and adds certain disclosure requirements in FASB ASC 820, “Fair Value Measurement” (“ASC 820”). The Company adopted the standard on January 1, 2020, and the adoption did not have a significant impact on its consolidated financial statements due to the fact there were no required changes to the Company’s disclosures.

In November 2018, FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with ASC 842, Leases. The Company early adopted the standard on January 1, 2020, and the adoption did not have a significant impact on its consolidated financial statements and disclosures.

In March 2020, FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848).” ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. During the nine months ended September 30, 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

 

On April 10, 2020, the FASB issued a Staff Q&A to respond to some frequently asked questions about accounting

for lease concessions related to the effects of the COVID-19 pandemic. Consequently, for concessions related to the effects of the COVID-19 pandemic, an entity will not have to analyze each lease to determine whether enforceable rights and obligations for concessions exist in the lease and can elect to apply or not apply the lease modification guidance to those leases. Entities may make the elections for any lessor-provided concessions related to the effects of the COVID-19 pandemic (e.g., deferrals of lease payments) as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. The Company has not elected to apply the lease modification guidance to our leases. To date, the impact of lease concessions granted has not had a material effect on the financial statements. The Company will continue to evaluate the impact of lease concessions and the appropriate accounting for those concessions.

Accounting Standards Issued But Not Yet Effective

In August 2020, FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. ASU 2020-06 addresses the complexity of guidance for certain financial (convertible) instruments with characteristics of liabilities and equity. ASU No. 2020-06 will be effective for the Company beginning January 1, 2022. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU 2020-06 to have a material effect on its consolidated financial statements and disclosures due to the fact that the Company did not have instruments subject to this guidance at September 30, 2020.

 

15


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION

The following table presents supplemental cash flow information (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Non-cash financing and investing activities:

 

 

 

 

 

 

 

 

Distributions on common stock declared but not yet paid

 

$

-

 

 

$

6,174

 

Stock issued pursuant to distribution reinvestment plan

 

 

-

 

 

 

11,441

 

Accruals for construction in process

 

 

310

 

 

 

1,353

 

Repayments on borrowings through refinancing

 

 

-

 

 

 

24,469

 

Escrow deposits funded through refinancing

 

 

-

 

 

 

580

 

Non-cash activity related to sales:

 

 

 

 

 

 

 

 

Mortgage notes payable settled directly with proceeds from sale of rental property

 

 

-

 

 

 

29,947

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

13,639

 

 

$

21,114

 

 

NOTE 4 - RESTRICTED CASH

Restricted cash represents escrow deposits with lenders to be used to pay real estate taxes, insurance, and capital improvements. A summary of the components of restricted cash follows (in thousands):

 

 

 

September 30, 2020

 

 

December 31, 2019

 

Real estate taxes

 

$

6,386

 

 

$

3,956

 

Insurance

 

 

637

 

 

 

877

 

Capital improvements

 

 

1,040

 

 

 

1,380

 

Other

 

 

401

 

 

 

321

 

 

 

$

8,464

 

 

$

6,534

 

 

 

 

 

 

 

 

 

 

Unrestricted cash designated for capital expenditures

 

$

14,468

 

 

$

21,706

 

 

NOTE 5 - RENTAL PROPERTIES, NET

The Company’s investments in rental properties consisted of the following (in thousands):

 

 

 

September 30, 2020

 

 

December 31, 2019

 

Land

 

$

119,028

 

 

$

119,028

 

Building and improvements

 

 

723,620

 

 

 

720,420

 

Furniture, fixtures and equipment

 

 

27,411

 

 

 

25,906

 

Construction in progress

 

 

748

 

 

 

1,955

 

 

 

 

870,807

 

 

 

867,309

 

Less: accumulated depreciation

 

 

(161,603

)

 

 

(131,779

)

 

 

$

709,204

 

 

$

735,530

 

 

Depreciation expense for the three months ended September 30, 2020 and 2019 was $10.0 million and $9.9 million, respectively. Depreciation expense for the nine months ended September 30, 2020 and 2019 was $30.2 million and $29.6 million, respectively.

 

NOTE 6 – DISPOSITION OF PROPERTY

 

The following table presents details of the Company’s disposition activity during the nine months ended September 30, 2019. There were no dispositions during the nine months ended September 30, 2020 (in thousands):

16


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

Multifamily Community

 

Location

 

Sale Date

 

Contract Sales Price

 

 

Net Gain on Disposition

 

 

Revenue Attributable to Property Sold

 

 

Net Loss Attributable to Property Sold (1)

 

Overton Trails

 

Fort Worth, Texas

 

February 28, 2019

 

$

64,000

 

 

$

20,619

 

 

$

1,143

 

 

$

(249

)

 

(1) Excludes net gain on disposition

NOTE 7 - IDENTIFIED INTANGIBLE ASSETS, NET

Identified intangible assets, net, consist of in-place rental leases. The gross value of acquired in-place leases totaled $17.3 million as of September 30, 2020 and December 31, 2019; the intangible assets are reported net of accumulated amortization of $17.3 million. Amortization for the three months ended September 30, 2020 and 2019 was $0. Intangible assets have been fully amortized as of both September 30, 2020 and December 31, 2019 and, therefore, there are no intangible assets reported on the balance sheets as of those dates.

NOTE 8 - MORTGAGE NOTES PAYABLE, NET

The following is a summary of the Company's mortgage notes payable, net (in thousands):

 

 

 

Outstanding

borrowings

 

 

Premium,

net

 

 

Deferred

Finance

Costs, net

 

 

Carrying

Value

 

 

Outstanding

borrowings

 

 

Premium,

net

 

 

Deferred

Finance

Costs, net

 

 

Carrying

Value

 

Collateral

 

September 30, 2020

 

 

December 31, 2019

 

Uptown Buckhead

 

$

18,973

 

 

$

-

 

 

$

(153

)

 

$

18,820

 

 

$

19,264

 

 

$

-

 

 

$

(178

)

 

$

19,086

 

Crosstown at Chapel Hill

 

 

42,650

 

 

 

 

 

 

(279

)

 

 

42,371

 

 

 

42,650

 

 

 

 

 

 

(325

)

 

 

42,325

 

The Brookwood - Key Bank

 

 

16,743

 

 

 

109

 

 

 

(51

)

 

 

16,801

 

 

 

17,063

 

 

 

186

 

 

 

(88

)

 

 

17,161

 

The Brookwood - Capital One

 

 

2,530

 

 

 

8

 

 

 

(9

)

 

 

2,529

 

 

 

2,566

 

 

 

14

 

 

 

(15

)

 

 

2,565

 

Adair off Addison and Adair

   off Addison Apartment Homes

 

 

33,210

 

 

 

 

 

 

(333

)

 

 

32,877

 

 

 

33,210

 

 

 

 

 

 

(380

)

 

 

32,830

 

1000 Spalding Crossing

 

 

23,381

 

 

 

 

 

 

(70

)

 

 

23,311

 

 

 

23,737

 

 

 

 

 

 

(113

)

 

 

23,624

 

Montclair Terrace

 

 

19,612

 

 

 

 

 

 

(141

)

 

 

19,471

 

 

 

19,958

 

 

 

 

 

 

(182

)

 

 

19,776

 

Grand Reserve

 

 

47,845

 

 

 

 

 

 

(489

)

 

 

47,356

 

 

 

47,845

 

 

 

 

 

 

(539

)

 

 

47,306

 

Verdant Apartment Homes

 

 

36,402

 

 

 

 

 

 

(137

)

 

 

36,265

 

 

 

36,913

 

 

 

 

 

 

(178

)

 

 

36,735

 

Arcadia Apartment Homes

 

 

39,232

 

 

 

 

 

 

(150

)

 

 

39,082

 

 

 

39,782

 

 

 

 

 

 

(195

)

 

 

39,587

 

Ravina Apartment Homes

 

 

25,694

 

 

 

 

 

 

(111

)

 

 

25,583

 

 

 

26,241

 

 

 

 

 

 

(165

)

 

 

26,076

 

81 Fifty at West Hills Apartment

   Homes

 

 

51,022

 

 

 

 

 

 

(287

)

 

 

50,735

 

 

 

51,833

 

 

 

 

 

 

(368

)

 

 

51,465

 

The Palmer at Las Colinas

 

 

45,700

 

 

 

 

 

 

(387

)

 

 

45,313

 

 

 

45,700

 

 

 

 

 

 

(437

)

 

 

45,263

 

Windbrooke Crossing

 

 

36,657

 

 

 

 

 

 

(220

)

 

 

36,437

 

 

 

37,222

 

 

 

 

 

 

(272

)

 

 

36,950

 

Woods of Burnsville

 

 

37,148

 

 

 

 

 

 

(287

)

 

 

36,861

 

 

 

37,744

 

 

 

 

 

 

(355

)

 

 

37,389

 

Indigo Creek

 

 

39,750

 

 

 

 

 

 

(262

)

 

 

39,488

 

 

 

40,402

 

 

 

 

 

 

(320

)

 

 

40,082

 

Martin's Point

 

 

29,467

 

 

 

 

 

 

(242

)

 

 

29,225

 

 

 

29,944

 

 

 

 

 

 

(289

)

 

 

29,655

 

 

 

$

546,016

 

 

$

117

 

 

$

(3,608

)

 

$

542,525

 

 

$

552,074

 

 

$

200

 

 

$

(4,399

)

 

$

547,875

 

 

17


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

The following table presents additional information about the Company's mortgage notes payable, net at September 30, 2020 (in thousands, except percentages):

 

 

Maturity Date

 

Margin over LIBOR

 

 

Annual Interest Rate

 

 

Average Monthly Debt Service

 

 

Average Monthly Escrow

 

 

 

Uptown Buckhead

 

7/1/2025

 

 

2.22

%

 

 

2.37

%

 

$

70

 

 

$

52

 

 

(1) (3) (5)

Crosstown at Chapel Hill

 

7/1/2025

 

 

1.77

%

 

 

1.92

%

 

 

84

 

 

 

75

 

 

(1) (3) (4)

The Brookwood - Key Bank

 

11/1/2021

 

 

 

 

 

4.73

%

 

 

104

 

 

 

65

 

 

(2) (6)

The Brookwood - Capital One

 

11/1/2021

 

 

 

 

 

5.40

%

 

 

16

 

 

 

 

 

(2) (6)

Adair off Addison and Adair

   off Addison Apartment Homes

 

5/1/2026

 

 

1.64

%

 

 

1.79

%

 

 

73

 

 

 

74

 

 

(1) (3) (4)

1000 Spalding Crossing

 

1/1/2022

 

 

 

 

 

3.88

%

 

 

116

 

 

 

51

 

 

(2) (6)

Montclair Terrace

 

6/1/2023

 

 

2.45

%

 

 

2.60

%

 

 

80

 

 

 

27

 

 

(1) (3) (6)

Grand Reserve

 

5/1/2028

 

 

1.72

%

 

 

1.87

%

 

 

76

 

 

 

90

 

 

(1) (3) (4)

Verdant Apartment Homes

 

5/1/2023

 

 

-

 

 

 

3.89

%

 

 

176

 

 

 

35

 

 

(2) (6)

Arcadia Apartment Homes

 

5/1/2023

 

 

-

 

 

 

3.89

%

 

 

189

 

 

 

38

 

 

(2) (6)

Ravina Apartment Homes

 

5/1/2022

 

 

-

 

 

 

3.76

%

 

 

144

 

 

 

151

 

 

(2) (6)

81 Fifty at West Hills Apartment

   Homes

 

7/1/2023

 

 

2.36

%

 

 

2.51

%

 

 

205

 

 

 

58

 

 

(1) (3) (6)

The Palmer at Las Colinas

 

9/1/2026

 

 

2.11

%

 

 

2.26

%

 

 

85

 

 

 

156

 

 

(1) (3) (4)

Windbrooke Crossing

 

1/1/2024

 

 

2.69

%

 

 

2.84

%

 

 

154

 

 

 

65

 

 

(1) (3) (6)

Woods of Burnsville

 

2/1/2024

 

 

2.13

%

 

 

2.28

%

 

 

145

 

 

 

173

 

 

(1) (3) (6)

Indigo Creek

 

5/1/2024

 

 

1.93

%

 

 

2.08

%

 

 

127

 

 

 

74

 

 

(1) (3) (6)

Martin's Point

 

11/1/2024

 

 

1.86

%

 

 

2.01

%

 

 

111

 

 

 

76

 

 

(1) (3) (6)

 

(1)

Variable rate based on one-month LIBOR of 0.1483% (as of September 30, 2020) plus a fixed margin

(2)

Fixed rate

(3)

Variable rate hedged with interest rate cap cash flow hedge

(4)

Monthly interest-only payment currently required

(5)

Monthly fixed principal plus interest payment required

(6)

Fixed monthly payment of principal and interest payment required

 

On August 21, 2015, the Company recorded a premium, which represented the fair value of the debt assumed over its principal amount in connection with The Brookwood Apartment Homes acquisition. The premium is being amortized to interest expense over the term of the related mortgage loans using the effective interest method. As of September 30, 2020, the net unamortized premium of $116,731 was included as a component of mortgage loans payable in the accompanying consolidated balance sheets.

At September 30, 2020, the weighted average interest rate of all the Company's outstanding indebtedness was 2.68%.

All mortgage notes are collateralized by first mortgage liens on the assets of the respective property as named in the table above. The amount outstanding on the mortgages may be prepaid in full during the entire term with a prepayment penalty on the majority of the mortgages held.

Annual principal payments on the mortgage notes payable, excluding amortization of the mortgage premium and deferred financing costs, for each of the next five 12-month periods ending September 30, and thereafter, are as follows (in thousands):

 

2021

 

$

8,716

 

2022

 

 

76,106

 

2023

 

 

146,821

 

2024

 

 

111,344

 

2025

 

 

85,753

 

Thereafter

 

 

117,276

 

Total principal payments

 

$

546,016

 

 

The mortgage notes payable are recourse only with respect to the properties that secure the notes, subject to certain limited standard exceptions, as defined in each mortgage note. These exceptions are referred to as “carveouts.” The Company has guaranteed the mortgage notes by executing a guarantee with respect to the properties. In general, carveouts relate to damages suffered by the lender for a borrower’s failure to pay rents, insurance or condemnation proceeds to lender, failure to pay water, sewer and other public assessments or charges, failure to pay environmental compliance costs or to deliver books and records, in each case as required in the loan documents. The exceptions also require the Company to guarantee payment of

18


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

audit costs, lender’s enforcement of its rights under the loan documents and payment of the loan if the borrower voluntarily files for bankruptcy or seeks reorganization, or if a related party of the borrower does so with respect to the subsidiary.

Deferred financing costs incurred to obtain financing are amortized over the term of the related debt. As of September 30, 2020 and December 31, 2019, accumulated amortization of deferred financing costs was $4.2 million and $3.4 million, respectively. Amortization of deferred financing costs for the next five 12-month periods ending September 30, and thereafter, is as follows (in thousands):

 

2021

 

$

1,042

 

2022

 

 

903

 

2023

 

 

739

 

2024

 

 

420

 

2025

 

 

254

 

Thereafter

 

 

250

 

 

 

$

3,608

 

 

NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents the changes in accumulated other comprehensive loss (in thousands):

 

 

 

Net unrealized loss on derivatives

 

Balance, January 1, 2019

 

$

(379

)

Designated derivatives, fair value adjustment

 

 

268

 

Unrealized loss on designated derivatives

 

 

(78

)

Balance, December 31, 2019

 

 

(189

)

Designated derivatives, fair value adjustment

 

 

81

 

Unrealized loss on designated derivatives

 

 

(117

)

Balance, September 30, 2020

 

$

(225

)

 

NOTE 10 - RELATED PARTY TRANSACTIONS

Relationship with the Advisor

The Company is externally managed and advised by the Advisor. Prior to the Self-Management Transaction on September 8, 2020, the Advisor was an indirect wholly-owned subsidiary of RAI. After the Self-Management Transaction, the Advisor is an indirect wholly-owned subsidiary of OP I, the operating partnership of REIT I.  

Pursuant to the terms of the Advisory Agreement, the Advisor provides the Company with the services of its management team, including its officers, along with appropriate support personnel. The Advisor is 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 REIT I, our sponsor following the Self-Management Transaction, or one of its affiliates. The Company does not have any employees. The Advisor is not obligated to dedicate any specific portion of its time or the time of its personnel to the Company’s business. The Advisor is at all times subject to the supervision and oversight of the Company’s board of directors and has only such functions and authority as the Company delegates to it.

The Advisory Agreement has a one -year term and can 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 receives fees and is 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 loans, including acquisition expenses and any debt attributable to such investments.  Pursuant to the Advisory Agreement, the Advisor agreed to waive an acquisition fee and debt financing fee in connection with the REIT III Merger.  No such waiver was sought with respect to the REIT I Merger because, if owed, it would be paid with OP II funds to an entity that would then be wholly owned by OP II.

Asset management fees. The Advisor earns a monthly asset management fee equal to one-twelfth of 1.0% of the cost of each asset, without deduction for depreciation, bad debts or other non-cash reserves. The asset management fee is based only on

19


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

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 earns a disposition fee in connection with the sale of a property equal to the lesser of (i) one-half of the aggregate brokerage commission paid, or if none is paid, the amount that customarily would be paid at a market rate or (ii) 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.  As described above, the Advisor has waived any debt financing fee in connection with the REIT III Merger.

Expense reimbursements. The Company also pays directly or reimburses 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 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.

Relationship with RAI and C-III

Prior to the Self-Management Transaction on September 8, 2020, RAI and C-III were related parties of the Company.

Property loss pool: The Company participates (with other properties directly or indirectly managed by RAI and C-III) in a catastrophic insurance policy, which covers claims up to $250 million, after either a $25,000 or $100,000 deductible per incident, depending on location and/or type of loss. Therefore, unforeseen or catastrophic losses in excess of the Company's insured limits could have a material adverse effect on the Company's financial condition and operating results. This policy will expire on March 1, 2021.

General liability loss policy: The Company (with other properties directly or indirectly managed by RAI and C-III) has an insured and dedicated limit for the general liability policy of $1.0 million per occurrence. Total claims are limited to $2.0 million per premium year. In excess of these limits, the Company participates (with other properties directly or indirectly managed by RAI and C-III) in a $50.0 million per occurrence excess liability program. Therefore, the total insured limit per occurrence is $51.0 million for the general and excess liability program, after a $25,000 deductible per incident. This policy will expire on March 1, 2021.

Internal audit fees. Prior to the Self-Management Transaction RAI performed, RAI performed internal audit services for the Company.

Directors and officers insurance: The Company participates in a liability insurance program for directors and officers coverage with REIT I and REIT III.  Prior to the Self-Management Transaction, the Company participated in a liability insurance program for directors and officers’ coverage with other C-III managed entities and subsidiaries.

Other expenses. The Company utilizes the services of The Planning and Zoning Resource Company, an affiliate of C-III, for zoning reports for acquisitions.

Relationship with the Manager

The Manager manages real estate properties and real estate-related debt investments and coordinates the leasing of, and manages construction activities related to 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. The Manager subcontracts certain services to an unaffiliated third-party and pays for those services from its property management fee.

20


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

Construction management fees. The Manager earns a construction management fee of 5.0% of actual aggregate costs to construct improvements, or to repair, rehab or reconstruct a property.

Debt servicing fees. The Manager earns a debt servicing fee of 2.75% on payments received from loans held by the Company for investment. No debt servicing fees were earned during the three months ended September 30, 2020 and 2019.

Expense reimbursement. During the ordinary course of business, the Manager or other affiliates may pay certain shared operating expenses on behalf of the Company for which they are reimbursed by the Company.


21


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

The fees earned/expenses incurred and the amounts payable to such related parties are summarized in the following tables (in thousands):

 

 

September 30,

2020

 

 

December 31, 2019

 

Due from related parties:

 

 

 

 

 

 

 

 

RAI - self-insurance funds held

 

$

-

 

 

$

33

 

Operating expense reimbursements

 

 

-

 

 

 

264

 

Properties

 

 

 

 

 

 

 

 

Green Trails

 

 

1

 

 

 

-

 

 

 

$

1

 

 

$

297

 

Due to related parties:

 

 

 

 

 

 

 

 

Advisor

 

 

 

 

 

 

 

 

Operating expense reimbursements

 

$

1,111

 

 

$

6

 

Internal audit

 

 

7

 

 

 

-

 

Manager

 

 

 

 

 

 

 

 

Property management fees

 

 

316

 

 

 

328

 

Operating expense reimbursements

 

 

-

 

 

 

96

 

Properties

 

 

 

 

 

 

 

 

Meridian

 

 

-

 

 

 

2

 

 

 

$

1,434

 

 

$

432

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Fees earned / expenses incurred:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisor

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management fees (1) (5) (6)

 

$

2,303

 

 

$

2,321

 

 

$

6,777

 

 

$

7,054

 

Debt financing fees (2)

 

$

 

 

$

 

 

$

 

 

$

39

 

Disposition fees(4)

 

$

 

 

$

 

 

$

 

 

$

274

 

Operating expense reimbursements (2) (8)

 

$

845

 

 

$

834

 

 

$

2,920

 

 

$

2,682

 

Internal audit (9)

 

$

27

 

 

$

-

 

 

$

79

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manager

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property management fees (1) (7)

 

$

952

 

 

$

1,003

 

 

$

2,847

 

 

$

2,910

 

Construction management fees (3)

 

$

 

 

$

37

 

 

$

103

 

 

$

150

 

Construction payroll reimbursements (3)

 

$

 

 

$

7

 

 

$

 

 

$

61

 

Operating expense reimbursements (2)

 

$

 

 

$

 

 

$

 

 

$

70

 

 

(1)

Included in Management fees on the consolidated statements of operations and comprehensive income (loss).

(2)

Included in General and administrative on the consolidated statements of operations and comprehensive income (loss).

(3)

Capitalized and included in Rental properties, net on the consolidated balance sheets.

(4)

Included in Net gain on disposition of property on the consolidated statements of operations and comprehensive income (loss).

(5)

Net with acquisition fees returned as a result of capital expense reallocation.

(6)

After the Self-Management Transaction on September 8, 2020, approximately $563,000 of this balance was earned by Resource Real Estate Opportunity OP, LP.

(7)

After the Self-Management Transaction on September 8, 2020, approximately $231,000 of this balance was earned by Resource Real Estate Opportunity OP, LP.

(8)

After the Self-Management Transaction on September 8, 2020, approximately $279,000 of this balance was earned by Resource Real Estate Opportunity OP, LP.

(9)

After the Self-Management Transaction on September 8, 2020, approximately $7,000 of this balance was earned by Resource Real Estate Opportunity OP, LP.

 

22


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

NOTE 11 - EQUITY

Preferred Stock

The Company’s charter authorizes the Company to issue 10,000,000 shares of its $0.01 par value preferred stock. As of September 30, 2020, no shares of preferred stock were issued or outstanding.

Convertible Stock

As of September 30, 2020, the Company had 50,000 shares of $0.01 par value convertible stock outstanding, which are owned by the Advisor and affiliated persons. The convertible stock will convert into shares of the Company’s 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 7% 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 and, on or after the 31st trading day following the listing, the Company’s value based on the average trading price of its common stock since the listing, plus prior distributions, combine to meet the same 7% return threshold.

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)

the lesser of

 

(i)

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 7% 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 September 30, 2020 or were probable to occur.

Common Stock

As of September 30, 2020, the Company had an aggregate of 60,206,977 shares of $0.01 par value common stock outstanding (dollars in thousands):

 

 

 

Shares Issued

 

 

Gross Proceeds

 

Shares issued through initial public offering

 

 

55,791,297

 

 

$

556,197

 

Shares issued through stock distributions

 

 

246,365

 

 

 

 

Shares issued through distribution reinvestment plan

 

 

10,197,719

 

 

 

88,479

 

Advisor's initial investment, net of 5,000 share conversion 1

 

 

15,000

 

 

 

150

 

Total

 

 

66,250,381

 

 

$

644,826

 

Shares redeemed and retired

 

 

(6,043,404

)

 

 

 

 

Total shares outstanding

 

 

60,206,977

 

 

 

 

 

1= As part of the self-management transaction on September 8, 2020, these shares were transferred by the Advisor.

23


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

Redemptions

During the nine months ended September 30, 2020, the Company redeemed shares as follows (in thousands, except per share data):

Month

 

Total Number of Shares Redeemed

 

 

Average Price Paid per Share

 

 

Cumulative Number of Shares Purchased as Part of a Publicly Announced Plan or Program

 

January 2020

 

 

 

 

$

 

 

 

 

February 2020

 

 

 

 

$

 

 

 

 

March 2020

 

 

140

 

 

$

8.77

 

 

 

140

 

April 2020

 

 

 

 

$

 

 

 

 

May 2020

 

 

 

 

$

 

 

 

 

June 2020

 

 

120

 

 

$

9.08

 

 

 

260

 

July 2020

 

 

 

 

$

 

 

 

 

August 2020

 

 

 

 

$

 

 

 

 

September 2020

 

 

 

 

$

 

 

 

 

 

The Company will not redeem in excess of 5% of the weighted-average number of shares outstanding during the 12 -month period immediately prior to the effective date of redemption.  Generally, the cash available for redemption will be limited to proceeds from the distribution reinvestment plan plus, if the Company had positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous fiscal year.  These limitations apply to all redemptions, including redemptions sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility. 

Effective March 20, 2020, the share redemption program was suspended except for redemptions sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility (collectively, “special redemptions”). On September 8, 2020, the share redemption program was fully suspended in connection with signing the merger agreements with respect to the REIT I Merger and the REIT III Merger and subsequently resumed with respect to special redemptions on October 22, 2020.  While the partial suspension of the share redemption program is in effect, the Company will only accept requests for redemption in connection with a special redemption and all other pending or new requests will not be honored or retained, but will be cancelled with the ability to resubmit when, if ever, the share redemption program is fully resumed.  

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 special redemptions.

Distributions

For the nine months ended September 30, 2020, the Company paid aggregate distributions of $6.0 million, including $2.9 million of distributions paid in cash and $3.1 million of distributions reinvested in shares of common stock through the Company's distribution reinvestment plan, as follows (in thousands):

 

Authorization Date

 

Per Common Share per day

 

 

Record Dates

 

Distribution Date

 

Distributions reinvested in shares of Common Stock

 

 

Net Cash Distributions

 

 

Total Aggregate Distributions

 

December 11, 2019

 

$

0.001095890

 

 

December 31, 2019 through January 30, 2020

 

January 31, 2020

 

$

1,074

 

 

$

968

 

 

$

2,042

 

December 11, 2019

 

$

0.001095890

 

 

January 31, 2020 through February 27, 2020

 

February 28, 2020

 

$

965

 

 

$

883

 

 

$

1,848

 

December 11, 2019

 

$

0.001095890

 

 

February 28, 2020 through March 30, 2020

 

March 31, 2020

 

$

1,092

 

 

$

1,022

 

 

$

2,114

 

 

 

 

 

 

 

 

 

 

 

$

3,131

 

 

$

2,873

 

 

$

6,004

 

 

24


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

The Company announced on March 30, 2020 that it was suspending distributions as of April 1, 2020 in order to preserve cash and offset any impact to the Company’s liquidity that may occur as a result of the impact of the COVID-19 pandemic on its operations.

The following is a reconciliation of total aggregate distributions paid to total distributions declared for the nine months ended September 30, 2020 (in thousands):

 

Total aggregate distributions paid

 

$

6,004

 

Less: distributions payable at December 31, 2019

 

 

(5,993

)

Add: distributions payable at September 30, 2020

 

 

-

 

True-up of prior year cash distributions declared

 

$

11

 

 

Distributions are payable in cash or reinvested in shares of common stock at the discretion of the shareholder.

NOTE 12 - FAIR VALUE MEASURES AND DISCLOSURES

In analyzing the fair value of its investments 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 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, restricted 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.    

Derivatives (interest rate caps) which are reported at fair value in the consolidated balance sheets 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 as follows (in thousands):

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate caps

 

$

 

 

$

29

 

 

$

 

 

$

29

 

 

 

$

 

 

$

29

 

 

$

 

 

$

29

 

 

25


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate caps

 

$

 

 

$

9

 

 

$

 

 

$

9

 

 

 

$

 

 

$

9

 

 

$

 

 

$

9

 

 

Interest rate caps are included in prepaid expenses and other assets on the consolidated balance sheets.

The carrying amount and estimated fair value of the Company’s mortgage notes payable are as follows (in thousands):

 

 

 

September 30, 2020

 

 

December 31, 2019

 

 

 

Carrying Amount

 

 

Estimated Fair Value

 

 

Carrying Amount

 

 

Estimated Fair Value

 

Mortgage notes payable

 

$

546,016

 

 

$

543,638

 

 

$

552,074

 

 

$

545,249

 

 

The carrying amount of the mortgage notes payable presented is the outstanding borrowings excluding premium and deferred finance costs, net. The fair value of the mortgage notes payable was estimated using rates available to the Company for debt with similar terms and remaining maturities (Level 3).

NOTE 13 - 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 of the Company’s mortgage loans, 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.

Interest Rate Caps

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 interest rate caps that were designated as cash flow hedges. 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 nine months ended September 30, 2020, such derivatives were used to hedge the variable cash flows, indexed to London InterBank Offered Rate ("LIBOR"), associated with existing variable-rate loan agreements.

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. During the next 12 months, the Company estimates that an additional $153,633 will be reclassified as an increase to interest expense.

26


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

As of September 30, 2020, the Company had the following outstanding interest rate derivatives (dollars in thousands):

 

Interest Rate Derivatives

 

Number of Instruments

 

 

Notional Amount

 

 

Maturity Dates

Derivatives designated as hedging

   instruments:

 

 

 

 

 

 

 

 

 

 

Interest rate caps

 

 

11

 

 

$

405,909

 

 

November 1, 2020 through September 1, 2024

 

Tabular Disclosure of Fair Value of Derivative Instrument on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments on the consolidated balance sheets as of September 30, 2020 and December 31, 2019 (in thousands):

 

Asset Derivatives

 

 

Liabilities Derivatives

 

September 30, 2020

 

 

December 31, 2019

 

 

September 30, 2020

 

 

December 31, 2019

 

Balance Sheet

 

Fair Value

 

 

Balance Sheet

 

Fair Value

 

 

Balance Sheet

 

Fair Value

 

 

Balance Sheet

 

Fair Value

 

Derivatives designated as hedging instruments:

 

Interest rate caps

 

$

29

 

 

Interest rate caps

 

$

9

 

 

NA

 

$

 

 

NA

 

$

 

 

Interest rate caps are included in prepaid expenses and other assets on the consolidated balance sheets.

The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2020 and 2019 (in thousands):

 

Derivatives Designated as

 

Location of Gain (Loss) Recognized

 

Amount of Gain (Loss) Recognized in Income for the Three Months Ended

 

 

Amount of Gain (Loss) Recognized in

Income for the Nine Months Ended

 

Hedging Instruments

 

in Income

 

September 30, 2020

 

 

September 30, 2019

 

 

September 30, 2020

 

 

September 30, 2019

 

Interest rate caps

 

Interest expense

 

$

(21

)

 

$

(63

)

 

$

(82

)

 

$

(205

)

 

Derivatives in Cash Flow Hedging

 

Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) for the Three Months Ended

 

 

Location of Gain (Loss) Reclassified from Accumulated OCI into Income

 

Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) for the Three Months Ended

 

Relationships

 

September 30, 2020

 

 

September 30, 2019

 

 

(Effective Portion)

 

September 30, 2020

 

 

September 30, 2019

 

Interest rate products

 

$

(132

)

 

$

(48

)

 

Interest expense

 

$

21

 

 

$

(63

)

 

Derivatives in Cash

Flow Hedging

 

Amount of Gain (Loss) Recognized in

OCI on Derivative (Effective Portion)

for the Nine Months Ended

 

 

Location of

Gain (Loss)

Reclassified from

Accumulated

OCI into Income

 

Amount of Gain (Loss) Reclassified

from Accumulated OCI into Income

(Effective Portion) for the Nine

Months Ended

 

Relationships

 

September 30, 2020

 

 

September 30, 2019

 

 

(Effective Portion)

 

September 30, 2020

 

 

September 30, 2019

 

Interest rate products

 

$

117

 

 

$

(130

)

 

Interest expense

 

$

(82

)

 

$

(205

)

 

Credit-risk-related Contingent Features

The Company has agreements with its derivative counterparties that contain provisions where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. As of September 30, 2020, the Company has not posted any collateral related to these agreements.

NOTE 14 - OPERATING EXPENSE LIMITATION

Under its Charter, the Company must limit its total operating expenses to the greater of 2% of the 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

27


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

September 30, 2020

(unaudited)

 

factors. Operating expenses for the four quarters ended September 30, 2020 were in compliance with the charter-imposed limitation.

NOTE 15 - SUBSEQUENT EVENTS

The Company has evaluated subsequent events and determined that no additional events have occurred which would require an adjustment to or additional disclosure in the consolidated financial statements.

 

On November 2, 2020, the Company refinanced the mortgage on Arcadia Apartment Homes in Centennial, Colorado, resulting in net proceeds of $15.9 million.

 

On November 2, 2020, the Company refinanced the mortgage on Verdant Apartment Homes in Boulder, Colorado, resulting in net proceeds of $9.3 million.

On November 2, 2020, the Company filed an amendment to our Registration Statements on Form S-4 related to the Mergers.  On November 4, 2020, each registration statement was declared effective by the SEC.

On November 3, 2020, the Company refinanced the mortgage on 1000 Spalding in Sandy Springs, Georgia, resulting in net proceeds of $10.8 million

 

 

 

28


 

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 Real Estate Opportunity REIT II, 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, 2019. As used herein, the terms “we,” “our” and “us” refer to Resource Real Estate Opportunity REIT II, Inc., a Maryland corporation, and, as required by context, RRE Opportunity OP II, LP, a Delaware limited partnership, and to their subsidiaries.

Overview

We are a Maryland corporation that invests in multifamily assets across the entire spectrum of investments in order to provide investors with growing cash flow and increasing asset values. Our targeted portfolio consists of commercial real estate assets, principally underperforming multifamily rental properties which we will renovate and stabilize in order to increase rents, and to a lesser extent, real estate related debt. 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 Real Estate Opportunity Advisor II, LLC, our external advisor, or the Advisor, presents us with investment opportunities that allow us to meet the requirements to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code, and to maintain our exclusion from regulation as an investment company under the Investment Company Act of 1940, our portfolio composition may vary from what we initially expect.

We commenced the public offering of our common stock in February 2014 and terminated the primary portion of the offering in February 2016. We continue to offer shares pursuant to our distribution reinvestment plan. We describe this offering in “Liquidity and Capital Resources,” below.

Pending Mergers with Resource Real Estate Opportunity REIT, Inc. and Resource Apartment REIT III, Inc.

On September 8, 2020, we entered into merger agreements (as described herein) to acquire each of Resource Real Estate Opportunity REIT, Inc. (“REIT I”) and Resource Apartment REIT III, Inc. (“REIT III”). Both mergers are stock-for-stock transactions whereby each of REIT I and REIT III will be merged into our wholly owned subsidiary. The consummation of the merger with REIT I is not contingent upon the completion of the merger with REIT III, and the consummation of the merger with REIT III is not contingent upon completion of the merger with REIT I.  

REIT I Merger

On September 8, 2020, we, RRE Opportunity OP II, LP, our operating partnership (“OP II”), Revolution I Merger Sub, LLC, our wholly owned subsidiary (“Merger Sub I”), REIT I, and Resource Real Estate Opportunity OP, LP (“OP I”), entered into an Agreement and Plan of Merger (the “REIT I Merger Agreement”).

Subject to the terms and conditions of the REIT I Merger Agreement, (i) REIT I will merge with and into Merger Sub I, with Merger Sub I surviving as our direct, wholly owned subsidiary (the “REIT I Company Merger”) and (ii) OP I will merge with and into OP II (the “REIT I Partnership Merger” and, together with the REIT I Company Merger, the “REIT I Merger”), with OP II surviving the REIT I Partnership Merger. At such time, the separate existence of REIT I and OP I shall cease.

At the effective time of the REIT I Company Merger, each issued and outstanding share of REIT I’s common stock (or fraction thereof) will be converted into the right to receive 1.22423 shares of our common stock, and each issued and outstanding share of REIT I’s convertible stock will be converted into the right to receive $0.02 in cash (without interest).

At the effective time of the REIT I Partnership Merger, each common unit of partnership interests in OP I outstanding immediately prior to the effective time of the REIT I Partnership Merger will convert into the right to receive 1.22423 common units of partnership interest in OP II and each Series A Cumulative Participating Redeemable Preferred Unit in OP I issued and outstanding immediately prior to the effective time of the REIT I Partnership Merger will convert into the right to receive one Series A Cumulative Participating Redeemable Preferred Unit in OP II.

The obligations of each party to consummate the REIT I Merger are subject to a number of conditions, including receipt of the approval of the REIT III Merger and of an amendment to the REIT I charter to delete certain provisions regarding roll-up transactions by the holders of a majority of the outstanding shares of the REIT I common stock.  

29


 

 

REIT III Merger

On September 8, 2020, we, OP II, Revolution III Merger Sub, LLC (“Merger Sub III”), our wholly owned subsidiary, REIT III, and Resource Apartment OP III, LP (“OP III”), the operating partnership of REIT III, entered into an Agreement and Plan of Merger (the “REIT III Merger Agreement”).

Subject to the terms and conditions of the REIT III Merger Agreement, (i) REIT III will merge with and into Merger Sub III, with Merger Sub III surviving as our direct, wholly owned subsidiary (the “REIT III Company Merger”) and (ii) OP III will merge with and into OP II (the “REIT III Partnership Merger” and, together with the REIT III Company Merger, the “REIT III Merger”), with OP II surviving the REIT III Partnership Merger. At such time, the separate existence of REIT III and OP III shall cease.

At the effective time of the REIT III Company Merger, each issued and outstanding share of REIT III’s common stock (or fraction thereof) will be converted into the right to receive 0.925862 shares of our common stock.

At the effective time of the REIT III Partnership Merger, each unit of partnership interests in OP III outstanding immediately prior to the effective time of the REIT III Partnership Merger will be retired and will cease to exist. In addition, for each share of common stock of the Company issued in the REIT III Company Merger, a common partnership unit will be issued by OP II to the Company.

The obligations of each party to consummate the REIT III Merger are subject to a number of conditions, including receipt of the approval of the REIT III Merger and of an amendment to the REIT III charter to delete certain provisions regarding roll-up transactions by the holders of a majority of the outstanding shares of the REIT III common stock.

COVID-19 Pandemic and Portfolio Outlook

Since initially being reported in December 2019, COVID-19 has spread around the world, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the pandemic continues to evolve and many countries, including the United States, have reacted with various containment and mitigation efforts including quarantines, mandated business and school closures and travel restrictions. As a result, the COVID-19 pandemic is negatively impacting almost every industry, including the real estate industry, directly or indirectly. The fluidity of the COVID-19 pandemic continues to preclude any prediction as to the ultimate adverse impact the pandemic may have on our business, financial condition, results of operations and cash flows. Many of our tenants have suffered difficulties with their personal financial situations as a result of job loss or reduced income and, depending upon the duration of the measures put in place to mitigate or contain the spread of the virus and the corresponding economic slowdown, some of our tenants have or will seek rent deferrals or become unable to pay their rent. During the three months ended September 30, 2020, we had received July, August and September rent payments equal to approximately 96.8%, 96.7% , and 96.9%, respectively, of the billed rental income for the period as compared to pre-COVID March collections of 98.8%. As of October 31, 2020, our October collections were approximately 96.1% of the billed rental income for the period. In addition, we have approved short-term rent relief requests, most often in the form of rent deferral requests, or requests for further discussion. Executed short-term rent relief plans that are outstanding at September 30, 2020 are not significant in terms of either number of requests or dollar value. Not all tenant requests will ultimately result in modified agreements, nor are we forgoing our contractual rights under our lease agreements. Collections and rent relief requests to-date may not be indicative of collections or requests in any future period.  During the three months ended September 30, 2020, tenant receivables have increased by $142,791 from June 30, 2020. In addition, we have modified our provision for bad debts estimate to include a partial allowance for tenant receivables less than 90 days past due, which has contributed to an increase in the allowance for doubtful accounts balance of $247,387 during the quarter ended September 30, 2020. Many of our tenants may be the recipients of unemployment benefits or other economic stimulus under the CARES Act which will have aided in the payment of rent due.  The extent to which these benefits will be available going forward is uncertain.  To the extent our tenants do not have access to additional federal or state relief to mitigate the impact of the COVID-19 pandemic on their personal finances our ability to collect rent and our operations would be adversely affected. The impact of the COVID-19 pandemic on our rental revenue for the remainder of 2020 and thereafter cannot, however, be determined at present. In addition, we expect the economic disruptions caused by the COVID-19 pandemic will cause elevated credit losses and impede our ability to increase rental rates. . We continue to waive late fees, halt evictions where applicable federal, state or local restrictions are in effect, and offer a payment deferral plan to residents who have been adversely financially impacted by the COVID-19 pandemic. To help mitigate the impact on our operating results of the COVID-19 pandemic, we initiated various operational cost saving initiatives across our portfolio. In

30


 

addition, we have taken measures to preserve cash, which will help to offset any impact to our liquidity that may occur as a result of the COVID-19 pandemic.  These measures included the suspension of distributions as of April 1, 2020 as well as the partial suspension of our share redemption program effective March 20, 2020. Additionally, most of our value-add rehabilitation projects are being deferred temporarily.

The COVID-19 pandemic or a future pandemic, epidemic or outbreak of infectious disease affecting states or regions in which we operate and our multifamily tenants reside and work could have material and adverse effects on our business, financial condition, results of operations and cash flows due to, among other factors: reduced economic activity, general economic decline or recession, which may result in job loss or bankruptcy for residents at our properties and may cause our residents to be unable to make rent payments to us timely, or at all, or to otherwise seek modifications of lease obligations; health or other government authorities requiring the closure of offices or other businesses or instituting quarantines of personnel as the result of, or in order to avoid, exposure to a contagious disease; disruption in supply and delivery chains; a general decline in business activity and demand for real estate; difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions, which may affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis; and the potential negative impact on the health of personnel of our advisor, particularly if a significant number of our advisor’s employees are impacted, which would result in a deterioration in our ability to ensure business continuity and maintain our properties during a disruption.

The extent to which the COVID-19 pandemic or any other pandemic, epidemic or disease impacts our operations and those of our tenants remain uncertain and cannot be predicted with confidence and will depend on the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. However, notwithstanding the challenging economic circumstances created by the COVID-19 pandemic, we believe our focus on multifamily assets makes us better positioned relative to other classes of real estate to withstand many of the adverse impacts of the COVID-19 pandemic as housing is a basic need, rather than a discretionary expense.  In addition, we have taken several steps to offset any disruptions in rent that may occur as a result of the COVID-19 pandemic.  Further, we have no debt maturing until November 2021 and are conservatively leveraged with an aggregate portfolio leverage of 71% Nevertheless, the COVID-19 pandemic (or a future pandemic, epidemic or disease) presents material uncertainty and risk with respect to our business, financial condition, results of operations and cash flows.

Results of Operations

As of September 30, 2020, we owned 17 multifamily properties. As of September 30, 2020, we had sold one multifamily property.

Through September 30, 2020 COVID-19 pandemic has not significantly impacted our operating results; however, we have experienced some reductions in revenue during the quarter as a result of waiving late fees and the suspension of evictions at our properties. We expect, however, that as the impact of COVID-19 continues to be felt, the COVID-19 outbreak will adversely affect our business, financial condition, results of operations and cash flows going forward, including but not limited to, rental revenues and leasing activity, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous factors, many of which are outside of our control, as discussed above.

In addition, our results of operations will be significantly impacted if we consummate the REIT I Merger and or the REIT III Merger.

31


 

Three months ended September 30, 2020 Compared to the Three months ended September 30, 2019

The following table sets forth the results of our operations (in thousands):

 

 

Three Months Ended September 30,

 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

Rental income

 

$

21,411

 

 

$

21,312

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

Rental operating - expenses

 

 

3,769

 

 

 

3,800

 

Rental operating - payroll

 

 

1,969

 

 

 

1,915

 

Rental operating - real estate taxes

 

 

2,887

 

 

 

2,925

 

Subtotal - Rental operating expenses

 

 

8,625

 

 

 

8,640

 

Management fees

 

 

3,255

 

 

 

3,324

 

Transaction costs

 

 

2,759

 

 

 

-

 

General and administrative

 

 

2,058

 

 

 

1,897

 

Loss on disposal of assets

 

 

54

 

 

 

30

 

Depreciation and amortization expense

 

 

10,040

 

 

 

9,912

 

Total expenses

 

 

26,791

 

 

 

23,803

 

Loss before net gain on disposition

 

 

(5,380

)

 

 

(2,491

)

Net gain on disposition of property

 

 

-

 

 

 

-

 

Income (loss) before other income (expense)

 

 

(5,380

)

 

 

(2,491

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

 

60

 

Interest expense

 

 

(3,990

)

 

 

(6,257

)

Net loss

 

$

(9,369

)

 

$

(8,688

)

32


 

The following table presents the results of operations separated into three categories: the results of operations of the 17 properties we owned for the entirety of both periods presented, properties purchased or sold between either of the periods presented and Company level expenses for the three months ended September 30, 2020 and 2019 (in thousands):

 

For the three months ended September 30, 2020

 

 

For the three months ended September 30, 2019

 

 

 

Properties owned both periods

 

 

Properties purchased or sold since prior period

 

 

Company level

 

 

Total

 

 

Properties owned both periods

 

 

Properties purchased or sold since prior period

 

 

Company level

 

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

20,029

 

 

$

 

 

$

 

 

$

20,029

 

 

$

19,992

 

 

$

 

 

$

 

 

$

19,992

 

Utility income

 

 

1,131

 

 

 

 

 

 

 

 

 

1,131

 

 

 

1,100

 

 

 

 

 

 

 

 

 

1,100

 

Ancillary tenant fees

 

 

251

 

 

 

 

 

 

 

 

 

251

 

 

 

220

 

 

 

 

 

 

 

 

 

220

 

Rental income

 

 

21,411

 

 

 

 

 

 

 

 

 

21,411

 

 

 

21,312

 

 

 

 

 

 

 

 

 

21,312

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental operating - expenses

 

 

3,769

 

 

 

 

 

 

 

 

 

3,769

 

 

 

3,775

 

 

 

 

 

 

25

 

 

 

3,800

 

Rental operating - payroll

 

 

1,969

 

 

 

 

 

 

 

 

 

1,969

 

 

 

1,915

 

 

 

 

 

 

 

 

 

1,915

 

Rental operating - real estate

   taxes

 

 

2,887

 

 

 

 

 

 

 

 

 

2,887

 

 

 

2,925

 

 

 

 

 

 

 

 

 

2,925

 

Subtotal - Rental

   operating expenses

 

 

8,625

 

 

 

 

 

 

 

 

 

8,625

 

 

 

8,615

 

 

 

 

 

 

25

 

 

 

8,640

 

Acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

 

952

 

 

 

 

 

 

2,303

 

 

 

3,255

 

 

 

1,004

 

 

 

 

 

 

2,320

 

 

 

3,324

 

Transaction costs

 

 

 

 

 

 

 

 

2,759

 

 

 

2,759

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative (1)

 

 

557

 

 

 

 

 

 

1,501

 

 

 

2,058

 

 

 

546

 

 

 

 

 

 

1,351

 

 

 

1,897

 

Loss on disposal of assets

 

 

54

 

 

 

 

 

 

 

 

 

54

 

 

 

30

 

 

 

 

 

 

 

 

 

30

 

Depreciation and

   amortization expense

 

 

10,040

 

 

 

 

 

 

 

 

 

10,040

 

 

 

9,912

 

 

 

 

 

 

 

 

 

9,912

 

Total expenses

 

 

20,228

 

 

 

 

 

 

6,563

 

 

 

26,791

 

 

 

20,107

 

 

 

 

 

 

3,696

 

 

 

23,803

 

Income (loss) before other income (expense)

 

 

1,183

 

 

 

 

 

 

(6,563

)

 

 

(5,380

)

 

 

1,205

 

 

 

 

 

 

(3,696

)

 

 

(2,491

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

 

 

 

 

 

 

 

1

 

 

 

59

 

 

 

 

 

 

1

 

 

 

60

 

Interest expense

 

 

(3,990

)

 

 

 

 

 

 

 

 

(3,990

)

 

 

(6,260

)

 

 

 

 

 

3

 

 

 

(6,257

)

Net loss

 

$

(2,806

)

 

$

 

 

$

(6,563

)

 

$

(9,369

)

 

$

(4,996

)

 

$

 

 

$

(3,692

)

 

$

(8,688

)

 

(1) Includes approximately $28,730 in COVID-19 related expenses for the three months ended September 30, 2020

33


 

Revenues.  Minimum rental income on the 17 properties we owned both periods increased by $37,000 during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. The increase is primarily due to the implementation of our investment strategy to increase monthly rental income after renovating and stabilizing operations and was comprised of:

 

Multifamily Community

 

Rental Change (in thousands)

 

 

Change in Occupancy %

 

 

Change in Effective Monthly Revenue per Unit (in dollars)

 

Adair off Addison

 

$

(11

)

 

-2.2%

 

 

 

1

 

Uptown Buckhead

 

 

4

 

 

1.5%

 

 

 

(13

)

Crosstown at Chapel Hill

 

 

41

 

 

2.7%

 

 

 

6

 

The Brookwood

 

 

34

 

 

2.8%

 

 

 

16

 

Adair off Addison Apartment Homes

 

 

5

 

 

-1.1%

 

 

 

27

 

1000 Spalding Crossing

 

 

(13

)

 

-1.0%

 

 

 

(1

)

Montclair

 

 

(67

)

 

-5.2%

 

 

 

(29

)

Grand Reserve

 

 

(25

)

 

-1.1%

 

 

 

(3

)

Verdant Apartment Homes

 

 

(22

)

 

-0.3%

 

 

 

(24

)

Arcadia Apartment Homes

 

 

31

 

 

2.1%

 

 

 

7

 

Ravina Apartment Homes

 

 

103

 

 

-0.8%

 

 

 

84

 

81 Fifty at West Hills Apartment Homes

 

 

(11

)

 

1.8%

 

 

 

(35

)

The Palmer at Las Colinas

 

 

(53

)

 

-2.8%

 

 

 

5

 

Windbrooke Crossing

 

 

(13

)

 

4.0%

 

 

 

(91

)

Woods of Burnsville

 

 

(45

)

 

0.8%

 

 

 

(17

)

Indigo Creek

 

 

100

 

 

0.4%

 

 

 

102

 

Martin's Point

 

 

(21

)

 

3.6%

 

 

 

(87

)

 

 

$

37

 

 

 

 

 

 

 

 

 

 

The decreases in rental income were largely driven by decrease in occupancy related to factors affected by COVID-19.

 

Expenses.   Our operating expenses on the 17 properties we owned during both periods increased by $10,000 during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019, primarily as a result of an increase in payroll expenses of $54,000, offset by a decrease in real estate taxes of $38,000, as well as the continued implementation of our investment strategy.

Management fees remained relatively flat for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. The monthly asset management fee is equal to one-twelfth of 1.0% of the cost of each asset, without deduction for depreciation, bad debts or other non-cash reserves.

Transaction costs of $2.8 million were recorded in connection with the proposed mergers with REIT I and REIT III during the three months ended September 30, 2020.

General and administrative expenses increased by $161,000 during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. The increases were primarily the result of legal fees associated with tenant settlements, an increase in allocated expenses as well as COVID related expenses.

Loss on disposal of assets is related to the replacement of appliances at our rental properties in conjunction with unit upgrades.

Depreciation and amortization is comprised of the depreciation on our rental properties and amortization of intangible assets related to in-place leases, which are amortized over a period of approximately six to nine months after acquisition. The increases in the components of depreciation and amortization during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019, as follows (in thousands):

 

 

 

Properties owned

during both

periods

 

 

All other

 

 

Total

 

Depreciation

 

$

128

 

 

$

-

 

 

$

128

 

 

The overall increase in depreciation expense for all properties was due to continued capital improvements across the portfolio of properties in support of the implementation of our investment strategy. As of September 30, 2020, there are no

34


 

properties with a remaining unamortized intangible balance. There were no acquisitions during the three months ended September 30, 2020.

Interest expense decreased by $2.3 million during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. The overall decrease is primarily due to lower interest rates on variable debt.

Nine months ended September 30, 2020 Compared to the Nine months ended September 30, 2019

The following table sets forth the results of our operations (in thousands):

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

Rental income

 

$

64,171

 

 

$

64,391

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

Rental operating - expenses

 

 

11,398

 

 

 

10,169

 

Rental operating - payroll

 

 

5,515

 

 

 

5,831

 

Rental operating - real estate taxes

 

 

8,738

 

 

 

8,804

 

Subtotal - Rental operating expenses

 

 

25,651

 

 

 

24,804

 

Management fees

 

 

9,624

 

 

 

9,964

 

Transaction costs

 

 

2,759

 

 

 

-

 

General and administrative

 

 

6,169

 

 

 

5,759

 

Loss on disposal of assets

 

 

146

 

 

 

149

 

Depreciation and amortization expense

 

 

30,150

 

 

 

29,580

 

Total expenses

 

 

74,499

 

 

 

70,256

 

Loss before net gain on disposition

 

 

(10,328

)

 

 

(2,491

)

Net gain on disposition of property

 

 

-

 

 

 

20,619

 

Income (loss) before other income (expense)

 

 

(10,328

)

 

 

(2,491

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

14

 

 

 

188

 

Interest expense

 

 

(13,844

)

 

 

(20,042

)

Net loss

 

$

(24,158

)

 

$

(5,100

)

35


 

 

The following table presents the results of operations separated into three categories: the results of operations of the 17 properties we owned for the entirety of both periods presented, properties purchased or sold between either of the periods presented and Company level expenses for the nine months ended September 30, 2020 and 2019 (in thousands):

 

 

For the nine months ended September 30, 2020

 

For the nine months ended September 30, 2019

 

 

Properties owned both periods

 

Properties purchased or sold since prior period

 

Company level

 

Total

 

Properties owned both periods

 

Properties purchased or sold since prior period

 

Company level

 

Total

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum rents

 

$60,280

 

$-

 

$-

 

$60,280

 

$59,232

 

$955

 

$-

 

$60,187

Utility income

 

3,330

 

 

 

3,330

 

3,307

 

173

 

3

 

3,483

Ancillary tenant fees

 

561

 

 

 

561

 

706

 

15

 

 

721

Rental income

 

64,171

 

 

 

64,171

 

63,245

 

1,143

 

3

 

64,391

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental operating - expenses

 

11,398

 

 

 

11,398

 

10,175

 

130

 

(136)

 

10,169

Rental operating - payroll

 

5,515

 

 

 

5,515

 

5,666

 

154

 

11

 

5,831

Rental operating - real estate taxes

 

8,738

 

 

 

8,738

 

8,523

 

244

 

37

 

8,804

Subtotal - Rental

   operating expenses

 

25,651

 

 

-

 

25,651

 

24,364

 

528

 

(88)

 

24,804

Management fees

 

2,847

 

 

6,777

 

9,624

 

2,864

 

46

 

7,054

 

9,964

Transaction costs

 

 

 

2,759

 

2,759

 

 

 

 

General and administrative (1)

 

1,677

 

 

4,492

 

6,169

 

1,359

 

40

 

4,360

 

5,759

Loss on disposal of assets

 

146

 

 

 

146

 

149

 

 

 

149

Depreciation and amortization expense

 

30,150

 

 

 

30,150

 

29,580

 

 

 

29,580

Total expenses

 

60,471

 

 

14,028

 

74,499

 

58,316

 

614

 

11,326

 

70,256

Gain (loss) before net gain on disposition

 

3,700

 

 

(14,028)

 

(10,328)

 

4,929

 

529

 

(11,323)

 

(5,865)

Net gain on disposition of property

 

 

 

 

 

 

20,619

 

 

20,619

Income (loss) before other income (expense)

 

3,700

 

 

(14,028)

 

(10,328)

 

4,929

 

21,148

 

(11,323)

 

14,754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

12

 

 

2

 

14

 

185

 

 

3

 

188

Interest expense

 

(13,844)

 

 

 

(13,844)

 

(19,264)

 

(778)

 

 

(20,042)

Net income (loss)

 

$(10,132)

 

$-

 

$(14,026)

 

$(24,158)

 

$(14,150)

 

$20,370

 

$(11,320)

 

$(5,100)

 

(1) Includes approximately $79,435 in COVID-19 related expenses for the nine months ended September 30, 2020

 

36


 

Revenues.  Minimum rental income on the 17 properties we owned both periods increased by $1.0 million during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. The increase is primarily due to the implementation of our investment strategy to increase monthly rental income after renovating and stabilizing operations and was comprised of:

 

Multifamily Community

 

Rental Change (in thousands)

 

 

Change in Occupancy %

 

 

Change in Effective Monthly Revenue per Unit (in dollars)

 

Adair off Addison

 

$

3

 

 

-2.2%

 

 

 

29

 

Uptown Buckhead

 

 

20

 

 

1.5%

 

 

 

(9

)

Crosstown at Chapel Hill

 

 

190

 

 

2.7%

 

 

 

23

 

The Brookwood

 

 

168

 

 

2.8%

 

 

 

42

 

Adair off Addison Apartment Homes

 

 

49

 

 

-1.1%

 

 

 

45

 

1000 Spalding Crossing

 

 

(69

)

 

-1.0%

 

 

 

(17

)

Montclair

 

 

(62

)

 

-5.2%

 

 

 

47

 

Grand Reserve

 

 

3

 

 

-1.1%

 

 

 

22

 

Verdant Apartment Homes

 

 

(114

)

 

-0.3%

 

 

 

(55

)

Arcadia Apartment Homes

 

 

70

 

 

2.1%

 

 

 

(7

)

Ravina Apartment Homes

 

 

372

 

 

-0.8%

 

 

 

98

 

81 Fifty at West Hills Apartment Homes

 

 

90

 

 

1.8%

 

 

 

3

 

The Palmer at Las Colinas

 

 

192

 

 

-2.8%

 

 

 

93

 

Windbrooke Crossing

 

 

(117

)

 

4.0%

 

 

 

(133

)

Woods of Burnsville

 

 

89

 

 

0.8%

 

 

 

26

 

Indigo Creek

 

 

200

 

 

0.4%

 

 

 

60

 

Martin's Point

 

 

(36

)

 

3.6%

 

 

 

(75

)

 

 

$

1,048

 

 

 

 

 

 

 

 

 

 

The decreases in rental income were largely driven by decrease in occupancy related to factors affected by COVID-19.

 

Expenses.   Our operating expenses on the 17 properties we owned during both periods increased by $1.3 million  during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, primarily as a result of an increase in rental operating expenses of $1.2 million and an increase in real estate taxes of $215,000 related to updated assessments as well as the continued implementation of our investment strategy.

Management fees remained relatively flat during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. The monthly asset management fee is equal to one-twelfth of 1.0% of the cost of each asset, without deduction for depreciation, bad debts or other non-cash reserves.

Transaction costs of $2.8 million were recorded in connection with the proposed mergers with REIT I and REIT III during the nine months ended September 30, 2020.

General and administrative expenses increased by $410,000 during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. The increases were primarily the result of legal fees associated with tenant settlements, an increase in allocated expenses as well as COVID related expenses.

Loss on disposal of assets is related to the replacement of appliances at our rental properties in conjunction with unit upgrades.

Depreciation and amortization is comprised of the depreciation on our rental properties and amortization of intangible assets related to in-place leases, which are amortized over a period of approximately six to nine months after acquisition. The increases (decreases) in the components of depreciation and amortization during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019, as follows (in thousands):

 

 

 

Properties owned

during both

periods

 

 

All other

 

 

Total

 

Depreciation

 

$

570

 

 

$

-

 

 

$

570

 

 

37


 

The overall increase in depreciation expense for all properties was due to continued capital improvements across the portfolio of properties in support of the implementation of our investment strategy. As of September 30, 2020, there are no properties with a remaining unamortized intangible balance. There were no acquisitions during the nine months ended September 30, 2020.

Interest expense decreased by $6.2 million during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 primarily as a result of lower interest rates on variable debt.

Liquidity and Capital Resources

From February 2014 to February 2016, we offered in our public offering up to $1.0 billion in shares of common stock, $0.01 par value per share, at $10.00 per share. At the termination of the primary offering, we had raised $556.2 million in gross proceeds. We also continue to offer shares of our common stock pursuant to our distribution reinvestment plan (“DRIP”) under which our stockholders may elect to have distributions reinvested in additional shares at 95% of the estimated net asset value per share. In connection with our initial primary public offering, we registered $95 million in shares of our common stock to be issued pursuant to the DRIP. On January 20, 2020, we filed a Form S-3 with the SEC to register an additional 1.5 million shares under the DRIP. Purchases under our DRIP have been suspended as of April 1, 2020 when our board of directors determined to suspend distributions in order to offset any disruptions in rents that may occur as a result of the impact of COVID-19 on our operations.

We derive the capital required to purchase real estate investments and conduct our operations from secured or unsecured financings from banks or other lenders, from proceeds from the sale of assets and from any undistributed funds from our operations.

Our ability to derive the capital needed to conduct our operations may be adversely affected by the impact of the COVID-19 pandemic as discussed above.  

We allocate funds as necessary to a reserve to support the maintenance and viability of properties we acquire in the future in order to preserve value for our investors. If such allocations 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.

We may seek to obtain REIT-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. In addition to debt financing at the REIT-level, we have financed, and may continue to 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 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. Finally, we may also obtain seller financing with respect to specific assets that we acquire.

38


 

Capital Expenditures

We deployed a total of $4.0 million during the nine months ended September 30, 2020 for capital expenditures. We expect capital expenditures to be reduced in future periods as we have temporarily suspended certain capital improvement projects at our properties in order to both preserve cash and offset any impact to our liquidity that may occur as a result of the COVID-19 pandemic on our operations. The properties in which we deployed the most capital during the nine months ended September 30, 2020 are listed separately and the capital expenditures made on all other properties are aggregated in "All other properties" below (in thousands):

 

 

 

Capital deployed

during the nine

months ended

 

 

Remaining capital

 

 

 

September 30, 2020

 

 

budgeted

 

Crosstown at Chapel Hill

 

$

514

 

 

$

939

 

The Brookwood

 

 

356

 

 

 

1,817

 

Montclair Terrace

 

 

282

 

 

 

1,524

 

Ravina Apartment Homes

 

 

644

 

 

 

2,775

 

81 Fifty at West Hills Apartment Homes

 

 

258

 

 

 

901

 

Windbrooke Crossing

 

 

519

 

 

 

347

 

The Woods at Burnsville

 

 

263

 

 

 

266

 

Indigo Creek

 

 

735

 

 

 

269

 

All other properties

 

 

403

 

 

 

5,630

 

 

 

$

3,974

 

 

$

14,468

 


39


 

Common Stock

As of September 30, 2020, we had an aggregate of 60,206,977 shares of $0.01 par value common stock outstanding, including the Advisor's additional purchase of 117,778 shares of common stock for $1.1 million, as follows (dollars in thousands):

 

 

 

Shares Issued

 

 

Gross Proceeds

 

Shares issued through initial public offering

 

 

55,791,297

 

 

$

556,197

 

Shares issued through stock distributions

 

 

246,365

 

 

 

 

Shares issued through distribution reinvestment plan

 

 

10,197,719

 

 

 

88,479

 

Advisor's initial investment, net of 5,000 share conversion 1

 

 

15,000

 

 

 

150

 

Total

 

 

66,250,381

 

 

$

644,826

 

Shares redeemed and retired

 

 

(6,043,404

)

 

 

 

 

Total shares outstanding

 

 

60,206,977

 

 

 

 

 

1= As part of the self-management transaction on September 8, 2020, these shares were transferred by the Advisor.

Mortgage Debt

The following is a summary of our mortgage notes payable, net (in thousands):

 

 

 

Outstanding

borrowings

 

 

Premium,

net

 

 

Deferred

Finance

Costs, net

 

 

Carrying

Value

 

 

Outstanding

borrowings

 

 

Premium,

net

 

 

Deferred

Finance

Costs, net

 

 

Carrying

Value

 

Collateral

 

September 30, 2020

 

 

December 31, 2019

 

Uptown Buckhead

 

$

18,973

 

 

$

-

 

 

$

(153

)

 

$

18,820

 

 

$

19,264

 

 

$

-

 

 

$

(178

)

 

$

19,086

 

Crosstown at Chapel Hill

 

 

42,650

 

 

 

 

 

 

(279

)

 

 

42,371

 

 

 

42,650

 

 

 

 

 

 

(325

)

 

 

42,325

 

The Brookwood - Key Bank

 

 

16,743

 

 

 

109

 

 

 

(51

)

 

 

16,801

 

 

 

17,063

 

 

 

186

 

 

 

(88

)

 

 

17,161

 

The Brookwood - Capital One

 

 

2,530

 

 

 

8

 

 

 

(9

)

 

 

2,529

 

 

 

2,566

 

 

 

14

 

 

 

(15

)

 

 

2,565

 

Adair off Addison and Adair

   off Addison Apartment Homes

 

 

33,210

 

 

 

 

 

 

(333

)

 

 

32,877

 

 

 

33,210

 

 

 

 

 

 

(380

)

 

 

32,830

 

1000 Spalding Crossing

 

 

23,381

 

 

 

 

 

 

(70

)

 

 

23,311

 

 

 

23,737

 

 

 

 

 

 

(113

)

 

 

23,624

 

Montclair Terrace

 

 

19,612

 

 

 

 

 

 

(141

)

 

 

19,471

 

 

 

19,958

 

 

 

 

 

 

(182

)

 

 

19,776

 

Grand Reserve

 

 

47,845

 

 

 

 

 

 

(489

)

 

 

47,356

 

 

 

47,845

 

 

 

 

 

 

(539

)

 

 

47,306

 

Verdant Apartment Homes

 

 

36,402

 

 

 

 

 

 

(137

)

 

 

36,265

 

 

 

36,913

 

 

 

 

 

 

(178

)

 

 

36,735

 

Arcadia Apartment Homes

 

 

39,232

 

 

 

 

 

 

(150

)

 

 

39,082

 

 

 

39,782

 

 

 

 

 

 

(195

)

 

 

39,587

 

Ravina Apartment Homes

 

 

25,694

 

 

 

 

 

 

(111

)

 

 

25,583

 

 

 

26,241

 

 

 

 

 

 

(165

)

 

 

26,076

 

81 Fifty at West Hills Apartment

   Homes

 

 

51,022

 

 

 

 

 

 

(287

)

 

 

50,735

 

 

 

51,833

 

 

 

 

 

 

(368

)

 

 

51,465

 

The Palmer at Las Colinas

 

 

45,700

 

 

 

 

 

 

(387

)

 

 

45,313

 

 

 

45,700

 

 

 

 

 

 

(437

)

 

 

45,263

 

Windbrooke Crossing

 

 

36,657

 

 

 

 

 

 

(220

)

 

 

36,437

 

 

 

37,222

 

 

 

 

 

 

(272

)

 

 

36,950

 

Woods of Burnsville

 

 

37,148

 

 

 

 

 

 

(287

)

 

 

36,861

 

 

 

37,744

 

 

 

 

 

 

(355

)

 

 

37,389

 

Indigo Creek

 

 

39,750

 

 

 

 

 

 

(262

)

 

 

39,488

 

 

 

40,402

 

 

 

 

 

 

(320

)

 

 

40,082

 

Martin's Point

 

 

29,467

 

 

 

 

 

 

(242

)

 

 

29,225

 

 

 

29,944

 

 

 

 

 

 

(289

)

 

 

29,655

 

 

 

$

546,016

 

 

$

117

 

 

$

(3,608

)

 

$

542,525

 

 

$

552,074

 

 

$

200

 

 

$

(4,399

)

 

$

547,875

 

 

For maturity dates, related interest rates, monthly debt service, and monthly escrow payments, see Note 8 of the notes to our consolidated financial statements.

On August 21, 2015, we recorded a fair value adjustment, which represented the fair value of the debt assumed over its principal amount in connection with The Brookwood Apartment Homes acquisition. The fair value is being amortized to interest expense over the term of the related mortgage loans using the effective interest method. As of September 30, 2020, the net unamortized fair value of debt was $116,731 and was included as a component of mortgage loans payable in the accompanying consolidated balance sheets.

At September 30, 2020, the weighted average interest rate of all our outstanding indebtedness was 2.68%

Central banks and regulators in a number of major jurisdictions (including both the U.S. and the U.K.) have convened working groups to find, and implement the transition to, suitable replacements for Interbank Offered Rates (IBORs), including

40


 

LIBOR.  The Financial Conduct Authority of the U.K., which regulates LIBOR, has announced that it will not compel panel banks to contribute to LIBOR after 2021.

We have exposure to IBORs through floating rate mortgage debt with maturity dates beyond 2021 for which the interest rates are tied to LIBOR. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. Any changes in benchmark interest rates could increase our cost of capital, which could impact our results of operations, cash flows, and the market value of our real estate investments.

Operating Properties

As of September 30, 2020, our wholly-owned interests in multifamily properties were as follows:

 

Subsidiary

 

Apartment Complex

 

Number

of Units

 

 

Property

Location

RRE Bear Creek Holdings, LLC, or Bear Creek

 

Adair off Addison

 

152

 

 

Dallas, TX

RRE Buckhead Holdings, LLC, or Buckhead

 

Uptown Buckhead

 

216

 

 

Atlanta, GA

RRE Farrington Holdings, LLC, or Farrington

 

Crosstown at Chapel Hill

 

411

 

 

Chapel Hill, NC

RRE Mayfair Chateau Holdings, LLC, or Mayfair

   Chateau

 

The Brookwood

 

274

 

 

Homewood, AL

RRE Fairways of Bent Tree Holdings, LLC, or Fairways

   of Bent Tree

 

Adair off Addison Apartment

Homes

 

200

 

 

Dallas, TX

RRE Spalding Crossing Holdings, LLC, or Spalding

   Crossing

 

1000 Spalding Apartment Homes

 

252

 

 

Atlanta, GA

RRE Montclair Terrace Holdings, LLC, or Montclair

   Holdings

 

Montclair Terrace

 

188

 

 

Portland, OR

RRE Grand Reserve Holdings, LLC, or Grand Reserve

 

Grand Reserve

 

319

 

 

Naperville, IL

RRE Canterwood Holdings, LLC, or Canterwood

 

Verdant Apartment Homes

 

216

 

 

Boulder, CO

RRE Fox Ridge Holdings, LLC, or Fox Ridge

 

Arcadia Apartment Homes

 

300

 

 

Centennial, CO

RRE Riverlodge Holdings, LLC, or Riverlodge

 

Ravina Apartment Homes

 

498

 

 

Austin, TX

RRE Breckenridge Holdings, LLC, or Breckenridge

 

81 Fifty at West Hills Apartment

Homes

 

357

 

 

Portland, OR

RRE Santa Rosa Holdings, LLC, or Santa Rosa

 

The Palmer at Las Colinas

 

476

 

 

Irving, TX

RRE Windbrooke Holdings, LLC, or Windbrooke

   Crossing

 

Windbrooke Crossing

 

236

 

 

Buffalo Grove, IL

RRE Woods Holdings, LLC, or The Woods of

   Burnsville

 

The Woods of Burnsville

 

400

 

 

Burnsville, MN

RRE Indigo Creek Holdings, LLC

 

Indigo Creek

 

408

 

 

Glendale, AZ

RRE Martin's Point Holdings, LLC

 

Martin's Point

 

256

 

 

Lombard, IL

 

 

 

 

 

5,159

 

 

 

 

As three of our multifamily properties are located in the Dallas-Fort Worth area, three of our properties are located in the Chicago area, two of our properties are located in Portland, Oregon, two of our properties are located in the Atlanta area, and two of our properties are located in the Denver area, our portfolio is currently particularly susceptible to adverse economic developments in these real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, adverse weather events, pandemics, changing demographics and other factors, or any decrease in demand for multifamily rentals resulting from the local business climate, could negatively affect our liquidity and adversely affect our ability to fund our ongoing operations.

41


 

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 and its affiliates. During our acquisition stage, we made payments to our Advisor and its affiliates in connection with the acquisition of real estate investments. In addition, we continue to make payments to our Advisor and its affiliates for the management of our assets and costs incurred by our Advisor and its affiliates in providing services to us. We describe these payments in more detail in Note 10 of the notes to our consolidated financial statements.

Operating Costs

Under our charter, 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 has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expenses for the four quarters ended September 30, 2020 did not exceed the charter imposed limitation.

Distributions

For the nine months ended September 30, 2020, we paid aggregate distributions of $6.0 million, including $2.9 million of distributions paid in cash and $3.1 million of distributions reinvested in shares of common stock through our distribution reinvestment plan related to distributions paid in the first quarter of 2020. Distributions declared, distributions paid and cash flows provided by (used in) operating activities were as follows for the three months ended September 30, 2020 (in thousands, except per share data):

 

 

 

Distributions Paid

 

 

 

 

 

 

Distributions Declared

 

 

Sources of Distributions Paid

 

2020

 

Cash

 

 

Distributions Reinvested (DRIP)

 

 

Total

 

 

Cash Provided By Operating Activities - Quarter to Date

 

 

Total

 

 

Per Share

 

 

Amount Paid from Operating Activities/Percent of Total Distributions Paid

 

 

Amount Paid from Debt Financing/Percent of Total Distributions Paid

 

First Quarter

 

$

2,873

 

 

$

3,131

 

 

$

6,004

 

 

$

2,278

 

 

$

-

 

 

$

-

 

 

$2,278/38%

 

 

$3,726/62%

 

Second Quarter

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,339

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Third Quarter

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,621

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

$

2,873

 

 

$

3,131

 

 

$

6,004

 

 

$

8,238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash distributions paid since inception were as follows (in thousands, except per share data):

 

Fiscal Year

 

Per Common Share per day

 

 

Distributions reinvested in shares of Common Stock

 

 

Net Cash Distribution

 

 

Total Aggregate Distribution

 

2014

 

$

0.00071223

 

 

$

215

 

 

$

114

 

 

$

329

 

2015

 

 

0.00164384

 

 

 

8,424

 

 

 

5,654

 

 

 

14,078

 

2016

 

 

0.00164384

 

 

 

20,608

 

 

 

14,025

 

 

 

34,633

 

2017

 

 

0.00164384

 

 

 

20,685

 

 

 

15,095

 

 

 

35,780

 

2018

 

 

0.00164384

 

 

 

20,693

 

 

 

16,175

 

 

 

36,868

 

2019

 

 

0.00127854

 

 

 

14,724

 

 

 

12,519

 

 

 

27,243

 

2020

 

 

0.00109589

 

 

 

3,131

 

 

 

2,873

 

 

 

6,004

 

 

 

 

 

 

 

$

88,480

 

 

$

66,455

 

 

$

154,935

 

 

Our net loss for the nine months ended September 30, 2020 was $24.2 million and net cash provided by operating activities was $8.2 million. We have funded our cumulative distributions, which includes net cash distributions and distributions reinvested by stockholders, with cash flows from operating activities 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 and the overall return to our stockholders may be reduced.

 

We announced on March 30, 2020 that we were suspending distributions as of April 1, 2020 in order to preserve cash and offset any impact to our liquidity that may occur as a result of the COVID-19 pandemic on our operations.

 


42


 

Funds from Operations, Modified Funds from Operations and Adjusted 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, delays 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.  In addition, FFO will be affected by the types of investments in our targeted portfolio which will consist of, but are not limited to, commercial real estate assets, principally (i) underperforming multifamily rental properties which we will renovate and stabilize in order to increase rents, (ii) distressed real estate owned by financial institutions, usually as a result of foreclosure, and non-performing or distressed loans, including first- and second-priority mortgage loans and other loans which we will resolve, and (iii) performing loans, including first- and second-priority mortgage loans and other loans we originate or purchase either directly or with a co-investor or joint venture partner.

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 Investment Program Association, or IPA.  MFFO excludes from FFO the following items:

 

 

 

(1)

acquisition fees and expenses;

 

(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.

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 2017-01, and we anticipate that most property acquisitions will be treated as asset acquisitions and the related costs will be capitalized.  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.

43


 

 

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.  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 with the sustainability of the operating performance of other real estate companies that are affected by other MFFO adjustments. 

As an opportunity REIT, a core element of our investment strategy and operations is the acquisition of distressed and value-add properties and the rehabilitation and renovation of such properties in an effort to create additional value in such properties. As part of our operations, we intend to realize gains from such value-add efforts through the strategic disposition of such properties after we have added value through the execution of our business plan. As we do not intend to hold any of our properties for a specific amount of time, we intend to take advantage of opportunities to realize gains from our value-add efforts on a regular basis during the course of our operations as such opportunities become available, in all events subject to the rules regarding "prohibited transactions" of real estate investment trusts of the Internal Revenue Code. Therefore, we also use adjusted funds from operations attributable to common stockholders, or AFFO, in addition to FFO and MFFO when evaluating our operations. We calculate AFFO by adding/subtracting gains/losses realized on sales of our real properties from MFFO. We believe that AFFO presents useful information that assists investors and analysts in the assessment of our operating performance as it is reflective of the impact that regular, strategic property dispositions have on our continuing operations.

Neither FFO, MFFO nor AFFO should be considered as an alternative to net income (loss) attributable to common stockholders, nor as 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.  Accordingly, FFO, MFFO and AFFO should be reviewed in connection with other GAAP measurements.  Our FFO, MFFO and AFFO as presented may not be comparable to amounts calculated by other REITs. Further, during the current period of uncertainty and business disruptions as a result of the outbreak of COVID-19, FFO, MFFO and AFFO are much more limited measures of assessing our operating performance.  See “—Management’s Discussion and Analysis of Financial Condition and Results of Operations -- COVID-19 Pandemic and Portfolio Outlook” for a discussion of the impact of the outbreak of COVID-19 on our business.

 

44


 

The following section presents our calculation of FFO, MFFO and AFFO and provides additional information related to our operations (in thousands, except per share amounts). As a result of the timing of our active real estate operations and the general and administrative expenses incurred in connection with these events, FFO, MFFO and AFFO are not relevant to a discussion comparing operations for the two periods presented.

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net loss – GAAP

 

$

(9,369

)

 

$

(8,688

)

 

$

(24,158

)

 

$

(5,100

)

Net gain in disposition of property

 

 

 

 

 

 

 

 

 

 

 

(20,619

)

Depreciation expense

 

 

10,040

 

 

 

9,912

 

 

 

30,150

 

 

 

29,580

 

FFO

 

 

671

 

 

 

1,224

 

 

 

5,992

 

 

 

3,861

 

Adjustments for straight-line rents

 

 

(434

)

 

 

-

 

 

 

(397

)

 

 

233

 

Fair value adjustment for cancelable swap

 

 

 

 

 

 

 

 

 

 

 

 

Debt premium amortization

 

 

(28

)

 

 

 

 

 

(84

)

 

 

 

Acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

MFFO

 

 

209

 

 

 

1,224

 

 

 

5,511

 

 

 

4,094

 

Net gain on disposition of property

 

 

 

 

 

 

 

 

 

 

 

20,619

 

AFFO

 

$

209

 

 

$

1,224

 

 

$

5,511

 

 

$

24,713

 

Basic and diluted net income (loss) per common share - GAAP

 

$

(0.16

)

 

$

(0.14

)

 

$

(0.40

)

 

$

(0.08

)

FFO per share

 

$

0.01

 

 

$

0.02

 

 

$

0.10

 

 

$

0.06

 

MFFO per share

 

$

0.00

 

 

$

0.02

 

 

$

0.09

 

 

$

0.07

 

AFFO per share

 

$

0.00

 

 

$

0.02

 

 

$

0.09

 

 

$

0.41

 

Weighted average shares outstanding

 

 

60,207

 

 

 

60,237

 

 

 

60,243

 

 

 

61,015

 

 

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to certain accrued liabilities. We base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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, 2019 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies.”

Off-Balance Sheet Arrangements

As of September 30, 2020 and December 31, 2019, we did not have any off-balance sheet arrangements or obligations.

Subsequent Events

 

On November 2, 2020, we refinanced the mortgage on Arcadia Apartment Homes in Centennial, Colorado, resulting in net proceeds of $15.9 million.

 

On November 2, 2020, we refinanced the mortgage on Verdant Apartment Homes in Boulder, Colorado, resulting in net proceeds of $9.3 million.

 

On November 2, 2020, we filed an amendment to our Registration Statements on Form S-4 related to the Mergers. On November 4, 2020, each registration statement was declared effective by the SEC.

 

On November 3, 2020, we refinanced the mortgage on 1000 Spalding in Sandy Springs, Georgia, resulting in net proceeds of $10.8 million.

45


 

We have evaluated subsequent events and determined that no events have occurred, other than as disclosed above, which would require an adjustment to or additional disclosure in the consolidated financial statements.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 September 30, 2020.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred in the quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

46


 

PART II.

ITEM 1A.  Risk Factors.

The Annual Report on Form 10-K for the year ended December 31, 2019 for Resource Real Estate Opportunity REIT II, Inc. (the “Company”) includes detailed discussions of the Company’s risk factors under the heading “Risk Factors.” Set forth below are certain changes from the risk factors previously disclosed in the Annual Report on Form 10-K, which the Company is including in this Quarterly Report on Form 10-Q as a result of the execution of the REIT I Merger Agreement and the REIT III Merger Agreement, each on September 8, 2020.  

 

Risks Related to the Merger

The merger consideration for the REIT I Merger will not be adjusted in the event of any change in the relative values of REIT I or the Company.

Upon the consummation of the REIT I Merger, each outstanding share of our common stock (or fraction thereof) will be converted automatically into the right to receive 1.22423 shares of our common stock (or fraction thereof) and each outstanding share of REIT I convertible stock will be converted automatically into the right to receive $0.02 in cash (without interest). This exchange ratio will not be adjusted, other than in the limited circumstances as expressly contemplated in the REIT I Merger Agreement in connection with stock splits, combinations, reorganizations or other similar events affecting the outstanding REIT I common stock or our common stock. Except as expressly contemplated in the REIT I Merger Agreement, no change in the merger consideration will be made for any reason, including the following:

 

changes in the respective businesses, operations, assets, liabilities and prospects of REIT I and the Company;

 

the Company’s failure to complete the REIT III Merger;

 

changes in the estimated value per share of either the shares of the REIT I common stock or our common stock;

 

interest rates, general market and economic conditions and other factors generally affecting the businesses of REIT I and the Company;

 

federal, state and local legislation, governmental regulation and legal developments in the businesses in which REIT I and the Company operate;

 

dissident stockholder activity, including any stockholder litigation challenging the transaction; and

 

acquisitions, disposals or new development opportunities.

It is possible that the global COVID-19 pandemic has adversely affected the value of REIT I ‘s assets more than it has affected the value of the Company’s assets.

The merger consideration for the REIT III Merger will not be adjusted in the event of any change in the relative values of REIT III or the Company.

Upon the consummation of the REIT III Merger, each outstanding share of REIT III common stock (or fraction thereof) will be converted automatically into the right to receive 0.925862 shares of our common stock (or fraction thereof). This exchange ratio will not be adjusted, other than in the limited circumstances as expressly contemplated in the REIT III Merger Agreement in connection with stock splits, combinations, reorganizations or other similar events affecting the outstanding REIT III common stock or the Company common stock. Except as expressly contemplated in the REIT III Merger Agreement, no change in the merger consideration will be made for any reason, including the following:

 

changes in the respective businesses, operations, assets, liabilities and prospects of REIT III and the Company;

 

the Company’s failure to complete the REIT I Merger;

 

changes in the estimated value per share of either the shares of REIT III common stock or the Company’s common stock;

 

interest rates, general market and economic conditions and other factors generally affecting the businesses of REIT III and the Company;

47


 

 

federal, state and local legislation, governmental regulation and legal developments in the businesses in which REIT III and the Company operate;

 

dissident stockholder activity, including any stockholder litigation challenging the transaction;

 

other factors beyond the control of REIT III and the Company; and

 

acquisitions, disposals or new development opportunities.

It is possible that the global COVID-19 pandemic has adversely affected the value of REIT III’s assets more than it has affected the value of the Company’s assets.

Completion of the Mergers is subject to many conditions and if these conditions are not satisfied or waived, the mergers will not be completed, which could result in the expenditure of significant unrecoverable transaction costs.

Each respective merger agreement is subject to many conditions, which must be satisfied or waived in order to complete the Mergers. There can be no assurance that the conditions to closing either of the Mergers will be satisfied or waived or that the Mergers will be completed. Failure to consummate the Mergers may adversely affect the Company’s results of operations and business prospects for the following reasons, among others: (i) the Company has incurred and will continue to incur certain transaction costs, regardless of whether the Mergers closes, which could adversely affect the Company’s financial condition, results of operations and ability to make distributions to its stockholders; and (ii) the Mergesr, whether or not they close, will divert the attention of certain management and other key employees of the Company from ongoing business activities, including the pursuit of other opportunities that could be beneficial to the Company. In addition, the Company may terminate the merger agreements under certain circumstances, including, among other reasons, if the Mergers are not completed by June 8, 2021. If the Mergers are not consummated, the ongoing business of the Company could be adversely affected.

Failure to complete the Mergers could negatively impact the future business and financial results of the Company.

If the Mergers are not completed, the ongoing business of the Company could be materially and adversely affected and the Company will be subject to a variety of risks associated with the failure to complete the Mergers, including the following:

 

the Company being required, under certain circumstances, to pay to REIT I a termination fee of $22.990 million and up to $2 million as reimbursement for REIT I’s expenses;

 

the Company being required, under certain circumstances, to pay to REIT III a termination fee of $3.12 million and up to $1 million as reimbursement for REIT III’s expenses

 

the Company having to pay certain costs relating to the Mergers, such as legal, accounting, financial advisor, filing, printing and mailing fees; and

 

the diversion of the Company management focus and resources from operational matters and other strategic opportunities while working to implement the Mergers.

If the Mergers are not completed, these risks could materially affect the business and financial results of the Company.

The pendency of the Mergers, including as a result of the restrictions on the operation of the Company’s business during the period between signing the Merger Agreements and the completion of the Mergers, could adversely affect the business and operations of the Company.

In connection with the pending Mergers, some business partners or vendors of Company may delay or defer decisions, which could negatively impact the revenues, earnings, cash flows and expenses of the Company, regardless of whether the Mergers are completed. In addition, due to operating covenants in the Merger Agreements, the Company may be unable, during the pendency of the Mergers, to pursue certain strategic transactions, undertake certain significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions that are not in the ordinary course of business, even if such actions would prove beneficial.

The Company expects to incur substantial expenses related to the Mergers.

The Company expects to incur substantial expenses in connection with completing the Mergers and integrating the properties and operations of the Company with REIT I and REIT III. Although the Company has assumed that a certain level of transaction expenses would be incurred, there are a number of factors beyond the control of the Company that could affect the

48


 

total amount or the timing of such expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. As a result, the transaction expenses associated with the Merger could, particularly in the near term, exceed the savings that the Company expects to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings following the completion of the Mergers and the resulting self-managed structure.

The ownership positions of the stockholders will be diluted by the Mergers.

The Mergers will result in the stockholders having an ownership stake in the Fully Combined Company that is smaller than their current stake in the Company. Upon completion of the Mergers, based on the number of shares of the Company common stock, the REIT I common stock and the REIT III common stock outstanding on June 30, 2020, continuing Company stockholders will own approximately 38.14% of the issued and outstanding shares of common stock of the Fully Combined Company.  Consequently, the stockholders, as a general matter, will have less influence over the management and policies of the Fully Combined Company following the Mergers than they currently exercise over the management and policies of the Company.

Risks Related to the Fully Combined Company Following the Mergers

The Fully Combined Company will be newly self-managed.

The Self-Management Transaction was consummated on September 8, 2020, and assuming the Mergers are consummated, the Fully Combined Company will be a self-managed REIT. The Fully Combined Company will no longer bear the costs of the various fees and expense reimbursements previously paid to the former external advisors of the Company, REIT I, REIT III and their affiliates; however, the Fully Combined Company’s expenses will include the compensation and benefits of the Fully Combined Company’s officers, employees and consultants, as well as overhead previously paid by the former external advisors of the Company, REIT I and REIT III and their affiliates. The Fully Combined Company’s employees will provide services historically provided by the external advisors and their affiliates. The Fully Combined Company will be subject to potential liabilities that are commonly faced by employers, such as workers’ disability and compensation claims, potential labor disputes, and other employee-related liabilities and grievances, and the Fully Combined Company will bear the cost of the establishment and maintenance of any employee compensation plans. In addition, the Fully Combined Company has not previously operated as a self-managed REIT and may encounter unforeseen costs, expenses and difficulties associated with providing these services on a self-advised basis. If the Fully Combined Company incurs unexpected expenses as a result of its self-management, its results of operations could be lower than they otherwise would have been.

The Combined Company will have substantial indebtedness upon completion of the Mergers.

In connection with the Mergers, the Combined Company will assume and/or refinance certain indebtedness of REIT I and REIT III and will be subject to risks associated with debt financing, including a risk that the Combined Company’s cash flow could be insufficient to meet required payments on its debt. As of June 30, 2020, the Company had approximately $548.2 million of outstanding debt, substantially comprised of $544.5 million of mortgage notes payable, net. After giving effect to the Mergers, the Fully Combined Company’s total pro forma consolidated indebtedness will increase. Taking into account the Company’s existing indebtedness, transaction expenses and the assumption and/or refinancing of indebtedness in the Merger, the Combined Company’s pro forma consolidated indebtedness as of June 30, 2020, after giving effect to the Merger, would be approximately $1.35 billion. Taking into account both the Company’s and REIT III’s existing indebtedness, transaction expenses, and the assumption and/or refinancing of indebtedness in the Mergers, the Fully Combined Company’s pro forma consolidated indebtedness as of June 30, 2020, after giving effect to the Mergers, would be approximately $1.5 billion. The Combined Company is expected to have limited near-term debt maturities with approximately 52% leverage based on appraised values. The Fully Combined Company is expected to have limited near-term debt maturities with approximately 53% leverage based on appraised values.

The Combined Company’s indebtedness could have important consequences to holders of its common stock and preferred stock, if any, including the stockholders who receive our common stock in the Merger, including:

 

vulnerability of the Combined Company to general adverse economic and industry conditions;

 

limiting the Combined Company’s ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements;

49


 

 

requiring the use of a substantial portion of the Combined Company’s cash flow from operations for the payment of principal and interest on its indebtedness, thereby reducing its ability to use its cash flow to fund working capital, acquisitions, capital expenditures and general corporate requirements;

 

limiting the Combined Company’s flexibility in planning for, or reacting to, changes in its business and its industry;

 

putting the Combined Company at a disadvantage compared to its competitors with less indebtedness; and

 

limiting the Combined Company’s ability to access capital markets.

The Combined Company may need to incur additional indebtedness in the future.

It is possible that the Combined Company may increase its outstanding debt from current levels. The amount of such indebtedness could have material adverse consequences for the Combined Company, including hindering the Combined Company’s ability to adjust to changing market, industry or economic conditions; limiting the Combined Company’s ability to access the capital markets to refinance maturing debt or to fund acquisitions, development or emerging businesses and limiting the possibility of a listing on a securities exchange; limiting the amount of free cash flow available for future operations, acquisitions, distributions, stock redemptions or other uses; making the Combined Company more vulnerable to economic or industry downturns, including interest rate increases; and placing the Combined Company at a competitive disadvantage compared to less leveraged competitors.

Following the consummation of the Mergers, the Combined Company may assume certain potential and unknown liabilities relating to REIT I and REIT III.

Following the consummation of the Mergers, the Combined Company will have assumed certain potential and unknown liabilities relating to the Company and REIT III. These liabilities could be significant and have a material adverse effect on the Combined Company’s business to the extent the Combined Company has not identified such liabilities or has underestimated the amount of such liabilities.

The Combined Company will depend on key personnel for its future success and the loss of key personnel or inability to attract and retain personnel could harm the Combined Company’s business.

The future success of the Combined Company will depend in large part on the ability of the Combined Company to attract and retain a sufficient number of qualified personnel. The future success of the Combined Company also depends upon the service of the Combined Company’s executive officers, who have extensive market knowledge and relationships and will exercise substantial influence over the Combined Company’s operational, financing, acquisition and disposition activity. Among the reasons that they are important to the Combined Company’s success is that each has a national or regional industry reputation that is expected to attract business and investment opportunities and assist the Combined Company in negotiations with lenders, existing and potential residents and industry personnel.

Many of the Combined Company’s other key executive personnel, particularly its senior managers, also have extensive experience and strong reputations in the industry. In particular, the extent and nature of the relationships that these individuals have developed with financial institutions and existing and prospective residents is critically important to the success of the Combined Company’s business. The loss of services of one or more members of the Combined Company’s senior management team, or the Combined Company’s inability to attract and retain highly qualified personnel, could adversely affect the Combined Company’s business, diminish the Combined Company’s investment opportunities and weaken its relationships with lenders, business partners, existing and potential residents and industry personnel, which could materially and adversely affect the Combined Company.

Key employees may depart either before or after the Mergers because of a desire not to remain with the Combined Company following the Mergers. Accordingly, no assurance can be given that the Combined Company will be able to retain key employees.

50


 

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

All securities sold by us during the three months ended September 30, 2020 were sold in an offering registered under the Securities Act of 1933, as amended (the "Securities Act").

Redemption of Securities

Our board of directors has adopted a share redemption program that may enable stockholders to sell their shares to us after they have held them for at least one year, subject to the significant conditions and limitations of the program. In its sole discretion, our board of directors could choose to amend, suspend or terminate the program upon 30 days’ notice without stockholder approval. Except for redemptions sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility (collectively, “special redemptions”), the price at which shares are redeemed under our share redemption program is equal to 95% of the current estimated value per share.

We will not redeem in excess of 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective date of redemption.  Generally, the cash available for redemption will be limited to proceeds from our distribution reinvestment plan plus, if we had positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous fiscal year.  These limitations apply to all redemptions, including redemptions sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility.      

Effective March 20, 2020, the share redemption program was suspended except for special redemptions. September 8, 2020, the share redemption program was fully suspended in connection with signing the merger agreements with respect to the REIT I Merger and the REIT III Merger and subsequently resumed with respect to special redemptions on October 22, 2020.  While the partial suspension of the share redemption program is in effect, we will only accept requests for special redemptions and all other pending or new requests will not be honored or retained, but will be cancelled with the ability to resubmit when, if ever, the share redemption program is fully resumed.

During the nine months ended September 30, 2020, we redeemed shares as follows (in thousands, except per share data):

 

Month

 

Total Number of Shares Redeemed

 

 

Average Price Paid per Share

 

 

Cumulative Number of Shares Purchased as Part of a Publicly Announced Plan or Program (1)

 

 

Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program

January 2020

 

 

 

 

$

 

 

 

 

 

(2)

February 2020

 

 

 

 

$

 

 

 

 

 

(2)

March 2020

 

 

140

 

 

$

8.77

 

 

 

140

 

 

(2)

April 2020

 

 

 

 

$

 

 

 

 

 

(2)

May 2020

 

 

 

 

$

 

 

 

 

 

(2)

June 2020

 

 

120

 

 

$

9.08

 

 

 

260

 

 

(2)

July 2020

 

 

 

 

$

 

 

 

 

 

(2)

August 2020

 

 

 

 

$

 

 

 

 

 

(2)

September 2020

 

 

 

 

$

 

 

 

 

 

(2)

 

(1)

All purchases of equity securities by us in the nine months ended September 30, 2020 were made pursuant to our share redemption program.

(2)

We currently limit the dollar value and number of shares that may be repurchased under the program, as discussed above. During the three months ended September 30, 2020 we did not redeem any shares pursuant to our share redemption program as the program was suspended effective September 8, 2020 in connection with the proposed mergers with REIT I and REIT III. The program was resumed with respect to special redemptions effective October 22, 2020.

51


 

ITEM 6.    EXHIBITS  

 

 

 

 

 

Exhibit No.

 

Description

2.1

 

Agreement and Plan of Merger, dated as of September 8, 2020, by and among the Company, RRE Opportunity OP II, LP, Revolution III Merger Sub, LLC, Resource Apartment OP III, LP and Resource Apartment REIT III, Inc., incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed September 11, 2020

2.2

 

Agreement and Plan of Merger, dated as of September 8, 2020, by and among the Company, RRE Opportunity OP II, LP, Revolution I Merger Sub, LLC, Resource Real Estate Opportunity OP, LP and Resource Real Estate Opportunity REIT, Inc., incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed September 11, 2020

3.1

 

Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Pre-Effective Amendment No. 3 to the Registration Statement on Form S-11 (No. 333-184476) filed December 20, 2013)

3.2

 

Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-11 (No. 333-184476) filed October 17, 2012)

4.1

 

Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to the Company’s Registration Statement on Form S-11 (No. 333-184476) filed October 17, 2012)

4.2

 

Amended and Restated Distribution Reinvestment Plan (incorporated by reference to Appendix A to the prospectus included in the Company’s Post-Effective Amendment no. 9 to the Registration Statement on Form S-11 on Form S-3 (No. 333-184476) filed February 16, 2016)

10.1

 

Voting Agreement dated September 8, 2020, between the Company and Resource Real Estate, incorporated by reference to Exhibit 10.1 on the Company’s Current Report on Form 8-K filed on September 11, 2020,

10.2

 

Voting Agreement dated September 8, 2020, between the Company and Alan Feldman, incorporated by reference to Exhibit 10.1 on the Company’s Current Report on Form 8-K filed on September 11, 2020

10.3

 

Form of Amended and Restated Limited Partnership Agreement of RRE Opportunity OP II, LP, incorporated by reference to Exhibit 10.3 on the Company’s Current Report on Form 8-K filed on September 11, 2020

 

10.4

 

Second Amended and Restated Advisory Agreement dated September 8, 2020 between the Company and the Resource Real Estate Opportunity Advisor, incorporated by reference to Exhibit 10.4 on the Company’s Current Report on Form 8-K filed on September 11, 2020

10.5

 

Resource Real Estate Opportunity REIT, Inc. Long-Term Incentive Plan, incorporated by reference to Exhibit 10.5 on the Company’s Current Report on Form 8-K filed on September 11, 2020

10.6

 

Form of Restricted Stock Agreement, incorporated by reference to Exhibit 10.6 on the Company’s Current Report on Form 8-K filed on September 11, 2020

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

 

Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

 

Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.1

 

Fourth Amended and Restated Share Redemption Program (incorporated by reference to Exhibit 99.2 to the Company’s Annual Report on Form 10-K filed March 22, 2019)

101.1

 

The following information from the Company's Quarterly Report on Form 10-Q for the quarter September 30, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations and Comprehensive (Loss) Income; (iii) Consolidated Statement of Changes in Stockholders' Equity; and (iv) Consolidated Statements of Cash Flows

 

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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 REAL ESTATE OPPORTUNITY REIT II, INC.

 

 

 

 

November 10, 2020

 

By:

/s/ Alan F. Feldman

 

 

 

Alan F. Feldman

 

 

 

Chief Executive Officer, President and Director

 

 

 

(Principal Executive Officer)

 

 

 

 

 

November 10, 2020

 

By:

/s/ Thomas C. Elliott

 

 

 

Thomas C. Elliott

 

 

 

Chief Financial Officer, Executive Vice President and Treasurer

 

 

 

(Principal Financial Officer)

 

 

 

 

 

November 10, 2020

 

By:

/s/ Steven R. Saltzman

 

 

 

Steven R. Saltzman

 

 

 

Chief Accounting Officer and Vice President

 

 

 

(Principal Accounting Officer)

 

 

53