S-11/A 1 d435155ds11a.htm FORM S-11/A Form S-11/A
Table of Contents

As filed with the Securities and Exchange Commission on May 7, 2013

Registration No. 333-185936

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

Amendment No. 6 to

FORM S-11

FOR REGISTRATION UNDER THE

SECURITIES ACT OF

1933 OF SECURITIES

OF CERTAIN REAL ESTATE COMPANIES

 

 

Trade Street Residential, Inc.

(Exact name of registrant as specified in governing instruments)

 

 

19950 West Country Club Drive, Suite 800

Aventura, Florida 33180

(786) 248-5200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Michael D. Baumann

Chairman and Chief Executive Officer

19950 West Country Club Drive, Suite 800

Aventura, Florida 33180

(786) 248-5200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

John A. Good, Esq.

Amanda R. Poe, Esq.

Bass, Berry & Sims PLC

The Tower at Peabody Place, Suite 900

Memphis, Tennessee 38103

Phone: (901) 543-5900

Facsimile: (888) 543-4644

 

Daniel M. LeBey, Esq.

David S. Freed, Esq.

Hunton & Williams LLP

Riverfront Tower, East Plaza

951 E. Byrd Street

Richmond, Virginia 23919

Phone: (804) 788-8200

Facsimile: (804) 788-8218

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of this prospectus is expected to be made pursuant to Rule 434, check the following box.  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, Dated May 7, 2013

PRELIMINARY PROSPECTUS

6,250,000 Shares

 

LOGO

Common Stock

 

 

We are a full service, vertically integrated, self-administered and self-managed Maryland corporation focused on acquiring, owning, operating and managing conveniently located, garden-style and mid-rise apartment communities in mid-sized cities and suburban submarkets of larger cities primarily in the southeastern United States, including Texas.

We have elected to be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes. Shares of our capital stock are subject to restrictions on ownership and transfer that are intended to assist us in maintaining our qualification as a REIT. See “Description of Stock—Restrictions on Ownership and Transfer.”

We are offering 6,250,000 shares of our common stock. We expect the public offering price to be between $11.00 and $13.00 per share. Our common stock currently trades on the OTC Pink market under the symbol “TSRE.” On April 8, 2013, the most recent day on which our common stock traded on the OTC Pink market, the closing price of our common stock was $16.00 per share.

Our common stock has been approved for listing, subject to official notice of issuance, on the NASDAQ Global Market, or the NASDAQ, under the symbol “TSRE.”

We are an “emerging growth company” under the federal securities laws and as such we have elected to comply with certain reduced public company reporting requirements in this prospectus and in future filings.

 

 

Investing in our common stock involves risks. Before investing, you should carefully read the section entitled “Risk Factors” beginning on page 18 of this prospectus.

 

     Per Share      Total  

Public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $                    $                

Proceeds, before expenses, to us

   $                    $                

 

(1) See “Underwriting” for additional disclosure regarding the underwriting discounts and expenses payable to the underwriters by us.

We have granted the underwriters a 30-day option to purchase up to an additional 937,500 shares of common stock from us on the same terms and conditions as set forth above to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock sold to purchasers on or about                    , 2013.

 

 

Book-runner

 

Sandler O’Neill + Partners, L.P.

Co-managers

BB&T Capital Markets

                    Janney Montgomery Scott

Ladenburg Thalmann & Co. Inc.

                                                                                              Oppenheimer & Co.

                                                                                                                       Wunderlich Securities

 

 

The date of this prospectus is                     , 2013.


Table of Contents

 

LOGO


Table of Contents

Table of Contents

 

     Page  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     18   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     48   

USE OF PROCEEDS

     50   

DISTRIBUTION POLICY

     52   

MARKET FOR COMMON STOCK

     59   

DILUTION

     61   

CAPITALIZATION

     63   

OUR RECAPITALIZATION AND STRUCTURE

     65   

SELECTED FINANCIAL AND OTHER DATA

     73   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     75   

OUR INDUSTRY AND MARKET OPPORTUNITY

     96   

BUSINESS AND PROPERTIES

     102   

MANAGEMENT

     122   

EXECUTIVE COMPENSATION

     129   

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

     136   

PRINCIPAL STOCKHOLDERS

     141   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     143   

DESCRIPTION OF STOCK

     145   

CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS

     151   

OUR OPERATING PARTNERSHIP AND THE OPERATING PARTNERSHIP AGREEMENT

     156   

SHARES ELIGIBLE FOR FUTURE SALE

     163   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     165   

ERISA CONSIDERATIONS

     187   

UNDERWRITING

     190   

LEGAL MATTERS

     193   

EXPERTS

     193   

WHERE YOU CAN FIND MORE INFORMATION

     194   

INDEX TO FINANCIAL STATEMENTS

     F-1   

You should rely only upon the information contained in this prospectus and any free writing prospectus prepared by us in connection with this offering. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely upon it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front cover of this prospectus, as our business, financial condition, liquidity, results of operations, funds from operations or prospects may have changed since such date.

Until             , 2013 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

i


Table of Contents

PROSPECTUS SUMMARY

This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including the section entitled “Risk Factors” and the financial statements, including the related notes thereto, appearing elsewhere in this prospectus before making an investment decision.

Until June 1, 2012, the registrant conducted business as Feldman Mall Properties, Inc. Immediately prior to the recapitalization transaction described below, the registrant held a single land asset having minimal value and conducted no operations. On June 1, 2012, the registrant completed a reverse recapitalization transaction, or the recapitalization, more fully described below under “—Recapitalization and Other Related Transactions” and elsewhere in this prospectus under the caption “Our Recapitalization and Structure.” In the recapitalization, the registrant acquired certain assets from Trade Street Property Fund I, LP and BCOM Real Estate Fund, LLC, which we collectively refer to as the “Trade Street Funds,” and Trade Street Capital, LLC, or Trade Street Capital, in exchange for shares of the registrant’s common and preferred stock and common and preferred units of limited partnership interest in a newly formed operating partnership known as Trade Street Operating Partnership, LP. The registrant also changed its name to “Trade Street Residential, Inc.” and the registrant’s current senior management took over day-to-day management of our company. The registrant’s business is a continuation of the multifamily residential real estate investment and management businesses of the Trade Street Funds and Trade Street Capital, which we collectively refer to as Trade Street Company. References to “Trade Street Company” do not refer to a legal entity, but instead refer to a combination of certain real estate entities and management operations based on common ownership and control by the Trade Street Funds and Trade Street Capital. For accounting purposes, Trade Street Investment Adviser, LLLP, or TSIA, one of the entities contributed as part of the recapitalization, is the accounting acquirer in the recapitalization.

Except where the context indicates otherwise, references in this prospectus to the “registrant,” “we,” “us,” “our” and “our company” refer to Trade Street Residential, Inc. together with its consolidated subsidiaries, including our operating partnership, after the date of the recapitalization. References to “Feldman” refer to Feldman Mall Properties, Inc. and its consolidated subsidiaries prior to the date of the recapitalization. Except where the context otherwise requires, the description of our business prior to the date of the recapitalization refers to the multifamily residential real estate investment and management business and platform that was contributed to our operating partnership in the recapitalization.

On January 17, 2013, we effected a 1-for-150 reverse stock split of our common stock and the common units of limited partnership interest in our operating partnership, or common units. On or after the first anniversary of issuance, each common unit may be redeemed for cash equal to the value of one share of our common stock or, at our election, for one share of common stock. Except where the context indicates otherwise, all common stock and common unit numbers and per common share data in this prospectus have been adjusted to give effect to the 1-for-150 reverse stock split. In addition, our board of directors has approved the grant to certain of our officers and employees, effective at the time of the offering, of $3,018,750 of shares of restricted common stock under our 2013 Equity Incentive Plan, with the number of shares granted to be determined by dividing $3,018,750 by the offering price. Moreover, each of our six non-employee directors has elected to receive his $35,000 annual retainer for 2013 in shares of our common stock, to be issued at the time of the offering, with the aggregate number of shares to be determined by dividing $210,000 by the offering price. Unless otherwise indicated, the information in this prospectus assumes no exercise by the underwriters of the over-allotment option described on the front cover page of this prospectus and that the shares of common stock to be sold in this offering, issued to our non-employee directors as payment of their 2013 annual retainer and issued to our officers and employees as restricted stock at the time of the offering are sold or issued at $12.00 per share, which is the midpoint of the price range set forth on the front cover of this prospectus.

 

 

1


Table of Contents

Overview

We are a full service, vertically integrated, self-administered and self-managed Maryland corporation focused on acquiring, owning, operating and managing conveniently located, garden-style and mid-rise apartment communities in mid-sized cities and suburban submarkets of larger cities primarily in the southeastern United States, including Texas. We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2004. We seek to own and operate apartment communities in cities that have:

 

   

a stable work force comprised of a large number of “echo boomers,” which is typically understood to include people born after 1977 and before 1997, combined with positive net population migration;

 

   

well-paying jobs provided by a diverse mix of employers across the education, government, healthcare, insurance, manufacturing and tourist sectors;

 

   

a favorable cost of living;

 

   

reduced competition from larger multifamily REITs and large institutional real estate investors who tend to focus on select coastal and gateway markets; and

 

   

a limited supply of new housing and new apartment construction.

We currently own and operate 14 apartment communities containing 3,183 apartment units in Alabama, Florida, Georgia, Kentucky, North Carolina, Tennessee and Texas. We refer to these apartment communities throughout this prospectus as our “Operating Properties.” For the three months ended March 31, 2013, the weighted average occupancy rate for our Operating Properties owned as of March 31, 2013 was 93.9% and the weighted average monthly effective rent per occupied apartment unit at those Operating Properties was $817. Our apartment communities are characterized by attractive features including substantial landscaping, well-maintained exteriors and high quality interior finishes, and amenities such as swimming pools, clubhouses, fitness facilities and controlled-access gated entrances.

In addition, we own four parcels of land that are zoned for multifamily development, which we refer to throughout this prospectus as our “Land Investments.” Our Land Investments have undergone varying degrees of pre-construction development, such as partial completion of grading, installation of streets and partial development of site and architectural plans; however, we have not begun construction of apartment units on any of the Land Investments. We intend primarily to complete development of our Land Investments in unconsolidated joint ventures with highly-qualified regional and/or national third party developers when market and demographic trends favor the delivery of additional multifamily units in the markets where our Land Investments are located. However, in certain limited instances where our board of directors determines that the benefits significantly outweigh the risks, we may develop additional apartment units ourselves utilizing our debt and equity capital resources. We may also sell one or more of our Land Investments if our board of directors determines such sale is in our best interests. We intend to add scale in our current markets through acquisitions and selective development of new apartment communities. We may also opportunistically pursue acquisitions and selective development of apartment communities in other geographic regions and markets that possess economic, demographic and other characteristics similar to our existing markets.

We currently have 90 employees who provide property management, maintenance, landscaping, construction management and accounting services. Our senior management team consists of Michael D. Baumann, our Chairman and Chief Executive Officer, Bert Lopez, our Chief Financial Officer and Chief Operating Officer, and Ryan Hanks, our Chief Investment Officer. Each member of our senior management team was a principal at Trade Street Capital prior to our recapitalization. Mr. Baumann has developed and/or acquired in excess of $1.0 billion of multifamily residential and commercial properties over his 25-year career. Mr. Hanks has overseen the acquisition of in excess of 11,600 apartment units with an aggregate value of approximately $1.4 billion over his 10-year career. We intend to take advantage of Mr. Baumann’s and Mr. Hanks’s substantial experience and extensive network of relationships in the multifamily real estate sector to execute our growth strategy.

 

 

2


Table of Contents

Our Business Opportunity

We believe that economic and demographic drivers for multifamily housing in our markets will remain strong for the foreseeable future. Since 2008, the multifamily housing market has experienced high demand, strong occupancies and rising rental rates. New household formations, stricter mortgage underwriting standards, population growth and a changing attitude away from home ownership continue to drive growth in the multifamily housing market.

Multifamily building permits are currently being issued at levels substantially below historical levels. According to the United States Census Bureau, or the Census Bureau, in 2011, the number of multifamily permits was approximately 45% of the number in 2005 (the peak year over the past decade), while trends over the past three years continue to fall well below this decade’s average of 332,000 permits per year. Furthermore, the continued tightening of new construction financing will likely result in a limited supply of new apartment units in our target markets. Reduced levels of new apartment construction, coupled with increased demand for rental apartment units, should permit us to maintain high occupancy rates at our apartment communities and to increase our rental rates.

We believe that changing attitudes regarding home ownership and changing underwriting standards imposed by mortgage lenders will continue to drive Americans to rent apartments rather than purchase homes. Following the housing crisis and resulting economic downturn of 2008 and 2009, home values in the United States declined precipitously, resulting in many Americans no longer viewing their homes as stable, appreciating assets tantamount to savings and leading many of them to choose to rent rather than own homes. The decline in home values has been coupled with a substantial tightening of lending standards by mortgage lenders in the United States. According to the Office of the Comptroller of the Currency, 25% of banks surveyed tightened their lending standards in 2012 over the previous year, versus 10% who reported easing lending standards. Since 2008, mortgage lenders have more stringently scrutinized the incomes and employment status of prospective home buyers and have required larger down payments and more ongoing scrutiny of borrowers.

Furthermore, certain demographic factors should continue to positively influence demand for existing apartment units. According to the Census Bureau, there are currently approximately 80 million echo boomers (those born after 1977 and before 1997) in the United States. In 2010, echo boomers surpassed baby boomers (those born after 1946 and before 1965) to become the United States’ largest generation and currently account for one-quarter of the United States’ population. Echo boomers are generally well educated, career-oriented and mobile, and many echo boomers carry significant amounts of student loan debt. These factors contribute to the high propensity of echo boomers to rent apartments rather than buy homes.

According to the Census Bureau, Texas, Florida and North Carolina were the three states experiencing the highest positive net population migration between 2010 and 2011, with Tennessee and Georgia ranking seventh and eighth, respectively. Furthermore, for the ten year period from 2001 to 2009, Florida and Texas were the two states experiencing the highest net population migration with North Carolina, Georgia and Tennessee ranking fourth, fifth and eighth, respectively. These states are generally recognized as having a lower cost of living, better climates and higher quality of life as compared to other markets. All but one of our Operating Properties are located in these five states, and we believe the net migration to these states should continue to drive apartment demand in our markets.

Finally, the trend among institutional apartment owners and the public multifamily REITs toward increasing their exposure to select coastal and gateway markets should create a significant opportunity for us to purchase apartment communities at attractive prices in mid-sized cities and suburban submarkets of larger cities. Thus, as a public multifamily REIT with an experienced management team and a lower cost of capital, we believe we can compete effectively with the private owners and operators in such markets, who we believe are more likely to be fragmented and less capitalized.

 

 

3


Table of Contents

Our Strengths

 

   

Experienced Management Team. Our senior management team, led by Mr. Baumann, our Chairman and Chief Executive Officer, Mr. Lopez, our Chief Financial Officer and Chief Operating Officer, and Mr. Hanks, our Chief Investment Officer, has significant experience in acquiring, owning, operating and managing commercial real estate, specifically apartment communities. Over the last 10 years our senior management team has had the primary responsibility of overseeing the acquisition, ownership and management of 25 multifamily communities consisting of more than 10,000 apartment units in our target markets, including our Operating Properties, since their acquisitions by the Trade Street Funds. Mr. Baumann has developed and/or acquired in excess of $1.0 billion of multifamily residential and other commercial real estate projects over his 25-year career. Mr. Hanks has overseen the acquisition of in excess of 11,600 apartment units with aggregate value of approximately $1.4 billion over his 10-year career. Mr. Lopez has over 10 years of experience serving as the chief financial officer of a public company.

 

   

Strategic Focus on Markets with Strong Multifamily Housing Fundamentals. Our Operating Properties are located in mid-sized cities and suburban submarkets of larger cities primarily in the southeastern United States, including Texas. Our existing and target markets are characterized by low unemployment, a diversified base of employers, prospects for continued job growth, lower cost of living and positive net population migration from other states. Our strategic focus on acquiring apartment communities in mid-sized markets with strong economic and demographic drivers differentiates us from the majority of multifamily REITs, who we believe are more focused on select coastal and gateway markets.

 

   

Attractive Acquisition Opportunities Provided by Extensive Relationships Across the Multifamily Industry. Over the course of their careers, Messrs. Baumann and Hanks have developed an extensive network of relationships with institutional investment managers and private operators and developers throughout the multifamily industry. These relationships provide us access to an ongoing pipeline of acquisition opportunities in our target markets, many of which are “off-market” transactions that do not involve an open competitive bidding process, thereby allowing us to achieve lower acquisition costs. We acquired approximately 90% of our Operating Properties in such off-market transactions.

 

   

Stable Portfolio of High Quality Properties. Our Operating Properties consist of conveniently located, garden-style and mid-rise apartment communities in mid-sized cities and suburban submarkets of larger cities that typically offer attractive amenities such as swimming pools, clubhouses, fitness facilities and controlled-access gated entrances.

 

   

Strong Acquisition Pipeline. We continue to see significant selling activity in our targeted sector of the multifamily industry. We have entered into definitive agreements to acquire two apartment communities containing a total of 500 units for an aggregate purchase price of approximately $63 million and two apartment communities currently under construction that are anticipated to contain approximately 496 units for an aggregate purchase price of approximately $71.3 million. Each of these proposed acquisitions is subject to customary closing conditions and we cannot assure you that we will acquire any of the apartment communities we have under contract. See “—Recent Developments—Construction Properties Under Contract.” We are currently evaluating and discussing the potential acquisition of apartment communities containing approximately 2,300 units with an estimated aggregate purchase price of approximately $315 million. We currently do not have binding contracts to acquire any of these properties and can provide no assurance that we will acquire the properties that we are evaluating. We believe that our track record of apartment acquisitions, when combined with a greater access to capital due to our being a listed REIT and our ability to acquire properties on a tax-deferred basis in exchange for common units in our operating partnership, will provide us with numerous additional quality acquisition opportunities in the near term.

 

 

4


Table of Contents

Our Business Objectives and Strategies

Our primary business objective is to maximize stockholder value by increasing cash flows at our existing properties, acquiring additional properties in our existing markets and in other strategic markets, and selectively pursuing development opportunities. We intend to achieve this objective by executing the following strategies:

 

   

Maintain Disciplined Focus on Mid-Sized Markets. We intend to maintain a disciplined investment focus on mid-sized cities and suburban submarkets of larger cities with strong economic and demographic drivers, reduced competition from larger multifamily REITs and limited supply of new housing and apartment construction. We conduct a top down demographic analysis of our target markets that includes review of near-term prospects for job growth given expansion or relocation of major employers, and evaluation of positive net migration trends or recent population increases. We also evaluate new multifamily building permits and construction starts to determine new supply trends.

 

   

Intensely Manage Our Apartment Communities to Maintain Market Competitiveness and Cost Efficiency. Upon the closing of this offering, we will manage all of our Operating Properties. Our senior management team has a “hands-on” approach to property management, which includes real-time communication with resident managers, frequent property visits, substantial investment in aesthetics and amenities and attention to operating costs. Our senior management team has overseen significant improvements at our Operating Properties that have added landscaping, exterior facelifts, renovation of common areas such as clubhouses and refurbishment of apartment interiors. We believe that by presenting attractive, aesthetically pleasing interiors and exteriors combined with modern amenities, our apartment communities have a competitive edge in our markets compared to other apartment communities owned by lesser capitalized operators.

 

   

Utilize Our Relationships and Industry Knowledge to Acquire High Yielding Properties in Our Target Markets. We will seek to acquire additional apartment communities in our existing markets in order to build scale by utilizing our acquisition experience and leveraging our local management resources in those markets. We believe adding scale in our existing markets will increase our operating efficiency, produce cost savings, enhance our market knowledge and strengthen our ability to be a market leader in each of our markets.

 

   

Selectively Dispose of Fully Stabilized Assets to Redeploy Capital in Higher Growth Investments. We will actively manage our portfolio to increase cash flow through the sale of fully stabilized assets to redeploy capital into higher yielding investments. We will also actively seek to improve our average age and asset quality in our target markets or exit markets that we deem as non-strategic going forward.

 

   

Selectively Acquire Development Sites and Utilize Our Current Land Investments for the Future Development of Multifamily Communities in Our Target Markets. Our senior management team has extensive experience in developing multifamily properties. We intend to continue utilizing our management team’s knowledge, experience and relationships to increase stockholder value by selectively pursuing development opportunities in our target markets. Primarily, we will seek development opportunities through unconsolidated joint ventures with highly-qualified regional and/or national third party developers in markets where demographic trends favor the delivery of additional multifamily units. However, in certain limited instances where our board determines that the benefits significantly outweigh the risks, we may develop additional apartment units ourselves utilizing our debt and equity capital resources. Our Land Investments were acquired by the Trade Street Funds in anticipation of their future development by the Trade Street Funds and contributed to our operating partnership in the recapitalization.

 

 

5


Table of Contents

Our Properties

Currently, our Operating Properties consist of 14 apartment communities. The following table provides certain information, as of March 31, 2013, with respect to our current Operating Properties.

 

Property Name

 

Location

  Primary
Employers(1)
  Year Built/
Renovated(2)
  Date
Acquired
  Number
of Units
    Average
Unit
Size

(Sq. Ft.)
    Average
Physical
Occupancy(3)
    Monthly
Effective
Rent per
Occupied
Unit(4)
 

Arbors River Oaks

  Memphis, TN   FedEx   1990/2010   06/09/2010     191        1,136        97.4   $ 1,021   

Estates at Millenia(5)

  Orlando, FL   Walt Disney Company   2012   12/03/2012     297        952        84.0   $ 1,192   

Lakeshore on the Hill

  Chattanooga, TN   BlueCross/BlueShield   1969/2005   12/14/2010     123        1,168        86.4   $ 876   

Mercé Apartments

  Addison, TX   Bearing Point Inc.   1991/2007   10/31/2011     114        653        96.1   $ 758   

Oak Reserve at Winter Park(6)

  Winter Park, FL   Walt Disney Company   1972/2007   09/21/2008     142        834        93.5   $ 832   

Park at Fox Trails

  Plano, TX   Bearing Point Inc.   1981   12/06/2011     286        960        95.8   $ 779   

Post Oak

  Louisville, KY   United Parcel Service   1982/2005   07/28/2011     126        847        97.2   $ 712   

Terrace at River Oaks

  San Antonio, TX   USAA   PI: 1982 PII:
1983
  12/21/2011     314        1,015        93.6   $ 731   

The Beckanna on Glenwood(6)

  Raleigh, NC   State of NC Government   1963/2006   10/31/2011     254        729        96.6   $ 734   

The Estates at Perimeter(7)

  Augusta, GA   U.S. Army   2007   09/01/2010     240        1,109        92.4   $ 942   

The Pointe at Canyon Ridge

  Sandy Springs, GA   Delta Airlines   1986/2007   09/18/2008     494        1,065        96.6   $ 660   

The Trails of Signal Mountain

  Chattanooga, TN   BlueCross/BlueShield   1975   05/26/2011     172        1,185        93.5   $ 781   

Vintage at Madison Crossing(8)

  Huntsville, AL   U.S. Army/Redstone
Arsenal U.S. Military
  2002   03/04/2013     178        1,047        96.3   $ 668   

Westmont Commons

  Asheville, NC   Mission Valley Health
System & Hospital
  2003 & 2008   12/12/2012     252        1,009        94.3   $ 811   
         

 

 

   

 

 

   

 

 

   

 

 

 

Total/Weighted Average

            3,183        992        93.9   $ 817   
         

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents significant employers within a 25 mile radius of where the apartment community is located.
(2) The extent of the renovations included within the term “renovated” depends on the individual apartment community, but “renovated” generally refers to the replacement of siding, roof, wood, windows or boilers, updating of gutter systems, renovation of leasing centers and interior rehabilitation, including updated appliances, countertops, vinyl plank flooring, fixtures, fans and lighting, or some combination thereof.
(3) Average physical occupancy represents the average for the three months ended March 31, 2013 of the total number of units occupied at each apartment community during the period divided by the total number of units at each apartment community.
(4) Monthly effective rent per occupied unit is equal to the average of (i) gross monthly rent minus any leasing discounts offered for our tenants for each month in the three months ended March 31, 2013 (ii) divided by the total number of occupied units during each month included in such period. Discounts include concessions, discounted employee units and model units. These discounts may be offered from time-to-time for various reasons, including to assist with the initial lease-up of a newly developed apartment community or as a response to a property’s local market economics. Total concessions for our current Operating Properties for the three months ended March 31, 2013 amounted to approximately $0.5 million. For the three months ended March 31, 2013, excluding discounted employee and model units, the average discount per unit as a percentage of market rent was 6.60%.
(5) We acquired this newly constructed apartment community in December 2012, and it continues to be in the lease-up phase.
(6) We are in the process of evaluating third party proposals for the disposition of this property. We currently do not have a binding contract to dispose of this property and, as such, can provide no assurance that we will be able to do so.
(7) We own a 50% interest in this apartment community through an unconsolidated joint venture. On April 3, 2013, we entered into a contract to purchase the remaining 50% equity interest from our joint venture partner with proceeds from this offering. See “Use Of Proceeds.”
(8) We acquired this apartment community on March 4, 2013. Physical occupancy and monthly effective rent per occupied unit has been calculated as of and for the month ended March 31, 2013.

 

 

6


Table of Contents

In addition, our Land Investments consist of the parcels described in the table below, upon which we anticipate developing apartment communities in the future, when market and demographic trends favor the delivery of additional multifamily units to the markets where the respective Land Investments are located.

 

Property Name

   Location    Potential Use      Number of Planned Units      Acreage

Venetian(1)

   Fort Myers, FL      Apartments         436       23.0 acres

Midlothian Town Center—East(2)

   Midlothian, VA      Apartments         238       8.4 acres

The Estates at Maitland(3)

   Maitland, FL      Apartments         421       6.1 acres

Estates at Millenia—Phase II(4)

   Orlando, FL      Apartments         403       7.0 acres

 

(1) Venetian was acquired from an insolvent developer after construction began. The site currently has improvements, including a partially completed clubhouse, building pads, roads and utilities on Phase I of the development. Costs, including the cost of the land, incurred to date as of December 31, 2012 for the property were approximately $11.0 million.
(2) Midlothian Town Center—East is currently approved for 246 apartment units and 10,800 square feet of retail space, including a parking deck structure. The project is currently going through a site plan modification process in Chesterfield County, Virginia that will allow the development of 238 apartment units, 10,800 square feet of retail space and the elimination of the parking deck structure. Costs, including the cost of the land, incurred to date as of December 31, 2012 for the property were approximately $8.2 million.
(3) The Estates at Maitland is currently approved for a maximum of 300 apartment units and 20,000 square feet of retail space. The City of Maitland, Florida changed its zoning code allowing a higher density in May 2012. The municipal development agreement is currently being modified to include 421 units and 10,000 square feet of retail space. Costs, including the cost of the land, incurred to date as of December 31, 2012 for the property were approximately $10.4 million.
(4) Estates at Millenia—Phase II is currently approved for 403 apartment units and 10,000 square feet of retail space. The site currently has all utilities. Costs, including the cost of the land, incurred to date as of December 31, 2012 for the property were approximately $12.9 million.

Acquisition Criteria

The acquisitions we choose to pursue are based on a series of strict and concise criteria that discourage us from pursuing investments in properties that do not coincide with our overall business plan and strategy. These criteria include generally investing in properties that:

 

   

are garden-style or mid-rise apartments;

 

   

fall within our target size of 150 to 500 units and are valued, either individually or as a portfolio acquisition, between $10 million and $50 million;

 

   

are located within close proximity to large and stable employment bases within our target markets and have a high degree of visibility;

 

   

produce an attractive cash on cash yield that is accretive to funds from operations per share; and

 

   

are less than ten years old, or can justify an older age based on differentiating and value-added characteristics.

Recent Developments

Sale of Fontaine Woods

On March 1, 2013, we sold our 70% ownership interest in Fontaine Woods, a 263-unit apartment community located in Chattanooga, Tennessee, to our joint venture partner for total consideration of $10.5 million, including $4.0 million of cash. The sale resulted in a gain to the company of approximately $1.6 million. The proceeds of this sale were primarily used to acquire Vintage at Madison Crossing, as described below.

 

 

7


Table of Contents

Acquisition of Vintage at Madison Crossing

On March 4, 2013, we acquired Vintage at Madison Crossing, a 178-unit apartment community located in Huntsville, Alabama, for $15.3 million. The purchase price was funded with proceeds from a new mortgage loan in the amount of $11.4 million and $3.9 million in cash. On-site amenities include an executive business center, concierge services, jogging trails and pool pavilion with sundeck. The mortgage loan bears interest at a fixed rate of 4.19% per annum and matures on March 1, 2023.

Pending Acquisitions

On November 16, 2012, we entered into an agreement to purchase Woodfield Creekstone, a 256-unit apartment community located in Durham, North Carolina, for $35.8 million. The property began leasing in August 2012 and remains in the lease-up phase. The acquisition is expected to close, subject to the satisfaction of customary closing conditions, prior to the end of the second quarter of 2013. We have received a lender commitment for mortgage financing to partially finance the acquisition of the property in the amount of $23.3 million with a 10-year term and a fixed interest rate of 3.88%. Payment is expected to be interest only for the first three years, with principal and interest payments based on a 30-year amortization thereafter.

On January 30, 2013, we entered into an agreement to purchase Woodfield St. James, a 244-unit apartment community located in Charleston (Goose Creek), South Carolina for $27.2 million. The acquisition is expected to close, subject to the satisfaction of customary closing conditions, prior to the end of the second quarter of 2013.

There can be no assurance that we will complete any of these acquisitions or that they will close within the timeframes set forth above.

Construction Properties Under Contract

We have entered into binding contracts to acquire the following properties that are currently under construction. The net proceeds from this offering are not sufficient to fully finance the acquisition of these properties. We are seeking permanent financing to finance all or a portion of the purchase prices of these properties but we currently do not have lender commitments in place. There can be no assurance that we will obtain financing for the acquisition of these properties. If we are unsuccessful in procuring financing, we may be unable to close the purchase of either or both properties pursuant to their respective purchase contracts. See “Risk Factors—If we do not complete the purchase of the apartment communities that we currently have under contract, we will have incurred substantial expenses without our stockholders realizing the expected benefits.”

On October 29, 2012, we entered into an agreement to purchase the Estates at Wakefield, an apartment community that is currently under construction, for a purchase price of $37.3 million. The property is located in Wake Forest, North Carolina and is expected to have 288 units. The purchase contract provides for closing, subject to the satisfaction of customary closing conditions, upon completion of the property, which is expected to occur during the fourth quarter of 2013.

On December 20, 2012, we entered into an agreement to purchase Fountains at New Bern, an apartment community that is currently under construction, for a purchase price of $34.0 million. The property is located in Charlotte, North Carolina and is expected to have 208 units. The purchase contract provides for closing, subject to the satisfaction of customary closing conditions, upon completion of the property, which is expected to occur in the third quarter of 2013.

Declaration of Dividends

On January 25, 2013, we declared a dividend for the fourth quarter of 2012, of $0.0855 per share, which was paid on March 15, 2013 to stockholders of record on February 5, 2013. On April 15, 2013, we declared a dividend for the first quarter of 2013 of $0.0855 per share, payable on May 31, 2013 to stockholders of record on

 

 

8


Table of Contents

April 25, 2013. On April 22, 2013, we declared a dividend for the second quarter of 2013 of $0.1575 per share, payable on July 12, 2013 to stockholders of record on June 14, 2013, including purchasers of common stock in this offering.

Reverse Stock Split

On January 17, 2013, we effected a 1-for-150 reverse stock split of our common stock and the common units of limited partnership interest in our operating partnership. The reverse stock split was announced and became effective on the OTC Pink market on January 25, 2013. All trading after January 25, 2013 reflects the reverse stock split.

Revolving Credit Facility

On January 31, 2013, our operating partnership entered into a $14.0 million senior secured revolving credit facility for which BMO Harris Bank N.A. is serving as sole lead arranger and administrative agent. We have guaranteed the obligations of the operating partnership as borrower under the credit facility. The credit facility has a term of three years and allows for immediate borrowings of up to $14.0 million, with an accordion feature that will allow us to increase the availability thereunder by $66.0 million to an aggregate of $80.0 million under certain conditions as additional properties are included in the borrowing base. The Arbors River Oaks property is currently the only property included in the borrowing base. We intend to use the credit facility to refinance existing indebtedness, finance additional real estate investments and for general corporate purposes, including capital expenditures and working capital. On January 31, 2013, we borrowed $9.0 million on the credit facility to repay in full the mortgage loan on the Arbors River Oaks property and $1.5 million to fund prepayment penalties, closing costs, other related fees and working capital needs. We borrowed an additional $2.5 million on the credit facility for general corporate purposes. As of March 31, 2013, we had outstanding borrowings of approximately $13.0 million drawn on our credit facility and approximately $1.0 million available under the credit facility.

Our Recapitalization and Structure

Until June 1, 2012, we conducted business as Feldman Mall Properties, Inc., a Maryland corporation that elected to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2004, and which immediately prior to the recapitalization transaction held a single land asset having minimal value and conducted no operations. Feldman was formed and completed its initial public offering in 2004. In connection with Feldman’s initial public offering, it completed a simultaneous series of formation transactions that resulted in its acquisition of three regional malls and related assets. After the initial public offering and formation transactions, Feldman acquired additional mall properties outright and through joint ventures with institutional investors. Due to the deep recession that began in late 2007, the financial performance of these mall properties was significantly adversely affected. In 2008, Feldman’s common stock was delisted by the New York Stock Exchange, Feldman ceased being a reporting company with the Securities and Exchange Commission, or the SEC, and Feldman’s entire senior management team left the company, after which the then-current Feldman board of directors engaged Brandywine Financial Services Corporation, or Brandywine, as a third party manager of the company. From 2008 until June 1, 2012, Feldman sold or otherwise disposed of all of its mall properties except a single parcel of land having minimal value.

In April 2012, Feldman entered into the contribution agreement with the Trade Street Funds and Trade Street Capital providing for the recapitalization. The recapitalization was completed on June 1, 2012, at which time the board of directors of Feldman was reconstituted, Feldman changed its name to “Trade Street Residential, Inc.,” the external management arrangement with Brandywine was terminated and our current senior management team took over day-to-day management of the company from Brandywine. After the recapitalization, our business is a continuation of the multifamily residential real estate investment and management business of the Trade Street Funds and Trade Street Capital that were contributed to the company in the recapitalization. For a discussion of the recapitalization, the contribution agreement and its material terms and subsequent transactions effected by us and related to the recapitalization, see “Our Recapitalization and Structure.”

 

 

9


Table of Contents

The following table summarizes the equity securities issued by us and our operating partnership in connection with the recapitalization and termination of the Brandywine management services agreement, as adjusted by the 1-for-150 reverse stock split and, with respect to Class B contingent units, subsequent amendments and restatement of the Agreement of Limited Partnership of the operating partnership, or the operating partnership agreement, prior to the date of this prospectus:

 

Issuance/Recipient

   Number of
Shares/Units/
Warrants

Transferred
     Value of
Consideration
(Per Share/
Unit/
Warrant)
     Aggregate
Value of
Consideration
at the Time of
Issuance
 

Issuances of common stock for Contributed Properties(1)(2)

        

Trade Street Funds

     3,396,976       $ 18.00       $ 61,145,568   

Post Oak Partners, LLC

     52,868       $ 18.00       $ 951,627   

Issuance of common stock (termination fee under management services agreement with Brandywine)(1)

        

Brandywine Financial Services Corporation

     5,000       $ 18.00       $ 90,000   

Issuance of common stock as special distribution(1)

        

Feldman stockholders of record on May 17, 2012

     42,340       $ 7.50       $ 317,550   
  

 

 

       

 

 

 

Total common stock

     3,497,184          $ 62,504,745   

Issuance of warrants to purchase common stock(3)(4)

        

Feldman stockholders of record on May 17, 2012

     139,215       $ 2.10       $ 292,352   
  

 

 

       

 

 

 

Total common stock and warrants

     3,636,399          $ 62,797,097   
  

 

 

       

 

 

 

Issuances of Class A preferred stock for Contributed Land Investments(2)(5)(7)

        

Trade Street Funds

     173,326       $ 100.00       $ 17,332,600   

Issuances of Class B contingent units for ownership interests in TSIA and TS Manager LLC(6)(7)

        

Trade Street Capital, LLC

     70,298       $ 100.00       $ 7,029,800   

Trade Street Adviser GP, Inc.

     1,413       $ 100.00       $ 141,300   

Michael and Heidi Baumann

     139,204       $ 100.00       $ 13,920,400   
  

 

 

       

 

 

 

Total Class B contingent units

     210,915          $ 21,091,500   

 

(1) The number of shares of common stock issued gives effect to the 1-for-150 reverse stock split we effected on January 17, 2013. There were 3,556,460 shares of common stock outstanding immediately after the recapitalization. As discussed in this prospectus under the caption “Our Recapitalization and Structure,” the parties to the recapitalization engaged in extensive arm’s length negotiations regarding the per share price of Feldman’s common stock in order to determine the number of shares of common stock, and the value of the preferred stock and preferred units, to be issued in the recapitalization.
(2) On December 3, 2012, we issued 940,241 shares of common stock and 100,000 shares of our Class A preferred stock to BREF/BUSF Millenia Associates, LLC as consideration for the contribution of the Estates at Millenia and the development parcel adjacent thereto. On March 14, 2013, we issued 35,804 additional shares of our Class A preferred stock as a reimbursement to BREF/BUSF Millenia Associates, LLC of certain development costs incurred in connection with the development of such development parcel. These shares of common stock and Class A preferred stock were issued in a separate transaction that was not part of the recapitalization; accordingly these shares are not reflected in this table. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Acquisition and Disposition Activity—Estates at Millenia” for more information.
(3) The number of warrants to purchase shares of common stock gives effect to the 1-for-150 reverse stock split we effected on January 17, 2013. The warrants have an exercise price of $21.60 per share.
(4) Value of warrants was determined using the Black Scholes valuation model.
(5) The per share/unit value and the aggregate value reflects the liquidation preference per share of Class A preferred stock.
(6)

The ownership interests in TSIA and TS Manager LLC were contributed in exchange for 546,132 common units, 98,304 Class B preferred units and 98,304 Class C preferred units. By amendment and restatement of

 

 

10


Table of Contents
  the operating partnership agreement on February 8, 2013 and March 26, 2013, the Class B preferred units and Class C preferred units were combined into 196,608 Class B contingent units having an agreed upon base value of $100 per unit and the 546,132 common units were exchanged for 14,307 additional Class B contingent units. See “Our Recapitalization and Structure—Terms of the Contribution Agreement and Other Ancillary Agreements” and “Our Operating Partnership and the Operating Partnership Agreement— Operating Partnership Units—Class B Contingent Units.”
(7) The Class A preferred stock is convertible into shares of commons stock upon the occurrence of certain contingencies described in “Description of Stock—Class A Preferred Stock.” The Class B contingent units are convertible into common units of the operating partnership upon the occurrence of certain contingencies described in “Our Operating Partnership and the Operating Partnership Agreement— Operating Partnership Units—Class B Contingent Units.”

Following our recapitalization, we are a full service, vertically integrated, self-administered and self-managed corporation operating as a REIT for U.S. federal income tax purposes. All of our employees are employed by, and all of our operations are conducted through, our operating partnership. As of the date of this prospectus, we own 100% of the common units in our operating partnership. The following diagram depicts the expected ownership of our common stock and our operating partnership’s common units upon completion of this offering.

 

LOGO

 

(1) Includes 4,717,375 shares of common stock held by common stockholders prior to this offering.
(2) Two liquidating trusts formed in connection with the impending liquidation of the Trade Street Funds also own 100% of the shares of Class A preferred stock issued to the Trade Street Funds in the recapitalization and to BREF/BUSF Millenia Associates, LLC in December 2012 as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Acquisition and Disposition Activity—Estates at Millenia.”
(3) Trade Street Residential, Inc. also owns 100% of the Class A preferred units and no Class B contingent units of Trade Street Operating Partnership, LP.
(4) Trade Street Capital, LLC also owns approximately 33.33% of the Class B contingent units of Trade Street Operating Partnership, LP.
(5) Trade Street Adviser GP, Inc. also owns approximately 0.67% of the Class B contingent units of Trade Street Operating Partnership, LP.

 

 

11


Table of Contents
(6) Michael and Heidi Baumann also own approximately 66.0% of the Class B contingent units of Trade Street Operating Partnership, LP.
(7) Includes shares of restricted stock to be granted to our executive officers upon completion of this offering, which are subject to vesting over a four-year period, and shares of our common stock to be granted to our non-employee directors in lieu of cash for the annual retainer fee. See “Management—Director Compensation” and “Executive Compensation—Equity Incentive Plan—Initial Awards.”

Summary Risk Factors

An investment in our common stock involves various risks, and prospective investors are urged to carefully consider the matters discussed under “Risk Factors” prior to making an investment in our shares of common stock. These risks include, but are not limited to:

 

   

Our portfolio of properties consists primarily of apartment communities concentrated in certain markets and any adverse developments in local economic conditions or the demand for apartment units in these markets may negatively impact our operating results.

 

   

Adverse economic conditions may negatively affect our returns and profitability and, as a result, our ability to make distributions to our stockholders.

 

   

Our independent registered public accounting firm identified and reported internal control deficiencies that constituted material weaknesses in our internal control over financial reporting. If one or more material weaknesses recur or if we fail to remediate the identified material weaknesses, and establish and maintain effective internal control over financial reporting, our ability to accurately report our financial results could be adversely affected.

 

   

Our senior management team has limited experience managing a REIT and no experience managing a publicly traded company.

 

   

We depend on key personnel and the loss of their full service could adversely affect us.

 

   

Our growth will depend upon future acquisitions of multifamily apartment communities, and we may be unable to complete acquisitions on advantageous terms or acquisitions may not perform as we expect.

 

   

A component of our strategy is to selectively develop or redevelop properties, including our Land Investments, which could expose us to various risks associates with development activities that could adversely affect our profitability.

 

   

Increased competition and increased affordability of residential homes could limit our ability to retain our residents, lease apartment units or increase or maintain rents.

 

   

We depend on residents for revenue, and vacancies, resident defaults or lease terminations may adversely affect our operations and cause the value of your investment to decline.

 

   

A change in the United States government policy with regard to Fannie Mae and Freddie Mac could impact our financial condition.

 

   

The cash available for distribution to our stockholders may not be sufficient to pay distributions at expected levels, and we cannot assure you of our ability to make or increase distributions in the future.

 

   

Differences between the book value of the assets acquired in our recapitalization and the price paid for our common stock could result in an immediate and material dilution in the book value of our common stock.

 

   

Our charter and bylaws, the partnership agreement of our operating partnership and Maryland law contain provisions that may delay, defer or prevent a change of control transaction.

 

   

Our debt obligations outstanding upon completion of this offering will reduce our cash available for distribution and may expose us to the risk of default.

 

   

If we fail to maintain our qualification as a REIT, our operations and distributions to stockholders would be adversely impacted.

 

 

12


Table of Contents

Our REIT Status

We have elected to be treated as a REIT for U.S. federal income tax purposes. To maintain our REIT qualification, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. As a REIT, we generally are not subject to federal income tax on our REIT taxable income that we currently distribute to our stockholders. If we fail to maintain our status as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to federal, state and local taxes on all or a portion of our income, and we will be subject to state and local taxes on our property. In addition, the income of any taxable REIT subsidiary that we own will be subject to taxation at regular corporate rates. See “Material U.S. Federal Income Tax Considerations.”

Restrictions on Ownership and Transfer of Our Capital Stock

With certain exceptions, our charter authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Due to the limitations on the concentration of ownership of stock imposed by the Internal Revenue Code of 1986, as amended, or the Code, our charter generally prohibits any person (unless exempted by our board of directors) from actually, beneficially or constructively owning more than 9.8% (in value or in number of shares of common stock, whichever is more restrictive) of our outstanding shares of common stock or more than 9.8% (in value or in number of shares of capital stock, whichever is more restrictive) of our outstanding shares of capital stock. See “Description of Stock—Restrictions on Ownership and Transfer.” These restrictions on transfer and ownership will not apply if our board of directors determines that it is no longer in our best interests to maintain our qualification as a REIT or that compliance with the restrictions is no longer required in order for us to qualify as a REIT. Our board of directors has granted a waiver to the Trade Street Funds of the common stock and capital stock ownership limitations in our charter, but is not obligated to grant waivers in the future.

Our Distribution Policy

On December 14, 2012, we declared a dividend for the third quarter of 2012 of $0.07605 per share, which was paid on December 31, 2012 to stockholders of record as of December 26, 2012. On January 25, 2013, we declared a dividend for the fourth quarter of 2012, of $0.0855 per share, which was paid on March 15, 2013 to stockholders of record on February 5, 2013. On April 15, 2013, we declared a dividend for the first quarter of 2013 of $0.0855 per share, payable on May 31, 2013 to stockholders of record on April 25, 2013. On April 22, 2013, we declared a dividend for the second quarter of 2013 of $0.1575 per share, payable on July 12, 2013 to stockholders of record on June 14, 2013, including purchasers of common stock in this offering. Our board of directors has not yet determined the rate for our future dividends. We intend to continue to pay quarterly dividends so as to satisfy the distribution requirements applicable to REITs and to eliminate or minimize our obligation to pay income or excise taxes. All dividends will be determined by our board of directors in its sole discretion out of funds legally available therefor and will be based on a variety of factors including our operating results and financial condition, internal cash flow projections, requirements of Maryland law, requirements for qualification as a REIT for U.S. federal income tax purposes and such other factors as our board of directors deems to be relevant.

Our Financing Policy

We expect to fund property acquisitions initially through a combination of any cash available from offering proceeds and debt financing, including borrowings under our credit facility and traditional mortgage loans. Where possible, we also anticipate using common units issued by our operating partnership to acquire properties from

 

 

13


Table of Contents

existing owners seeking tax-deferred transactions. In addition, we may use a number of different sources to finance our acquisitions and operations, including cash provided by operations, secured and unsecured debt, issuance of debt securities, perpetual and non-perpetual preferred stock, additional common equity issuances, letters of credit or any combination of these sources, to the extent available to us, or other sources that may become available from time to time. We also may take advantage of joint venture or other partnering opportunities as such opportunities arise in order to acquire properties that would otherwise be unavailable to us. We may use the proceeds of our borrowings to acquire assets, to refinance existing debt or for general corporate purposes.

We do not have a policy limiting the amount of debt that we may incur, although we target a ratio of average long-term debt-to-market capitalization of 40% to 50%, although we may exceed these levels from time to time as we complete acquisitions. Our charter and bylaws do not limit the amount or percentage of indebtedness that we may incur. Our board of directors may from time to time modify our debt policy in light of then-current economic conditions, relative costs of debt and equity capital, market values of our properties, general conditions in the market for debt and equity securities, fluctuations in the market price of our common stock, growth and acquisition opportunities and other factors. Accordingly, our board of directors may increase our indebtedness beyond the policy limits described above. If these policies were changed, we could become more highly leveraged, resulting in an increased risk of default on our obligations and a related increase in debt service requirements that could adversely affect our financial condition and results of operations and our ability to pay dividends to our stockholders.

As of December 31, 2012, on a pro forma basis after giving effect to this offering and the use of the net proceeds therefrom, our outstanding indebtedness was $216.2 million with a weighted average debt maturity of approximately 5.6 years and a weighted average interest rate of 4.60% per annum. Our overall leverage will depend on our investments and the cost of leverage.

Our Corporate Information

Our principal executive office is located at 19950 West Country Club Drive, Suite 800, Aventura, Florida 33180. Our telephone number is (786) 248-5200. We maintain an Internet site at www.tradestreetresidential.com. The information located on, or accessible from, our website is not, and shall not be deemed to be, a part of this prospectus or incorporated into any other filings that we make with the SEC.

Our Status as an Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. We will remain an emerging growth company until the earlier of:

 

   

the last day of the fiscal year (i) following the fifth anniversary of the completion of this offering, (ii) in which we have total annual gross revenue of at least $1.0 billion, or (iii) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th; and

 

   

the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

 

14


Table of Contents

THE OFFERING

 

Common stock offered by us

6,250,000 shares of common stock(1)

 

Common stock to be outstanding after this offering

11,236,438 shares of common stock(1)(2)

 

Use of proceeds

We estimate that the net proceeds of this offering will be approximately $68.0 million, or approximately $78.5 million if the underwriters’ over-allotment option is exercised in full, assuming a public offering price of $12.00 per share, which is the midpoint of the price range set forth on the front cover of this prospectus and after deducting the underwriting discounts and commissions and estimated expenses payable by us of $3.3 million, of which $2.1 million remains unpaid. We intend to use the net proceeds of this offering as follows:

 

•   approximately $12.4 million to repurchase equity interests in certain of our subsidiaries from our joint venture partners pursuant to the governing documents of such subsidiaries;

 

•   approximately $39.7 million to fund pending acquisitions; and

 

•   approximately $15.9 million, the remainder of the net proceeds, to be used for general corporate and working capital purposes, which may include future acquisitions, the repayment of indebtedness and the funding of capital improvements at our apartment communities.

 

Risk factors

An investment in our common stock involves risks. You should carefully read and consider the risks discussed under the caption “Risk Factors” and all other information in this prospectus before investing in shares of our common stock.

 

Proposed NASDAQ symbol

“TSRE”

 

(1) Excludes up to 937,500 shares of common stock that may be issued by us upon exercise of the underwriters’ over-allotment option.
(2) Share numbers reflect the 1-for-150 reverse stock split that was effected on January 17, 2013. Includes (i) 251,563 shares of restricted common stock estimated to be issued to certain of our officers and employees, assuming our offering price is $12.00 per share (the midpoint of the range set forth on the cover of this prospectus), and (ii) 17,500 shares of our common stock estimated to be issued to our non-employee directors as their 2013 annual retainer, assuming the same offering price as the shares of restricted stock. Excludes (a) an unknown number of shares of our common stock into which 309,130 shares of our Class A preferred stock may be converted at such time and as described under “Description of Stock—Preferred Stock,” (b) an unknown number of shares of our common stock that may be issued upon redemption of common units into which 210,915 Class B contingent units may be converted as described under “Our Operating Partnership and the Operating Partnership Agreement—Operating Partnership Units—Class B Contingent Units”, and “—Common Units,” (c) 139,215 shares of our common stock that may be issued upon the exercise of warrants issued in connection with our recapitalization and (d) a number of shares of our common stock available for issuance in the future under the Trade Street Residential, Inc. Equity Incentive Plan, or our Equity Incentive Plan, equal to $2,156,250 divided by the public offering price per share. See “Shares Eligible for Future Sale—Conversion Rights” and “Executive Compensation—Equity Incentive Plan.” Since December 31, 2012 to the date of this prospectus, there has been no change to the number of shares of our common stock outstanding.

 

 

15


Table of Contents

SUMMARY SELECTED FINANCIAL AND OTHER DATA

The following table sets forth summary selected financial and other data of Trade Street Residential, Inc. The historical financial statements of Trade Street Residential, Inc. included in this prospectus for the periods prior to June 1, 2012 reflect the assets, liabilities and operations of Trade Street Company retroactively adjusted to reflect the legal capital of Trade Street Residential, Inc. Trade Street Company is not a legal entity, but instead represents a combination of certain real estate entities and management operations based on common ownership and control by the Trade Street Funds and Trade Street Capital.

The summary selected balance sheet data as of December 31, 2012 and 2011 and the summary selected statement of operations data for the years ended December 31, 2012 and 2011 have been derived from the audited historical financial statements of Trade Street Residential, Inc., appearing elsewhere in this prospectus.

Our unaudited summary selected pro forma financial and other data as of and for the year ended December 31, 2012 have been adjusted to give effect to this offering and our intended use of proceeds of this offering and certain other transactions as described in the pro forma condensed consolidated financial statements included elsewhere in this prospectus.

You should read the following summary selected financial, operating and other data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes appearing elsewhere in this prospectus. All per share data set forth below has been adjusted to give effect to the 1-for-150 reverse stock split of our common stock that was effected on January 17, 2013.

 

     Year ended December 31,  
     Pro Forma     Historical  
     2012     2012     2011  

Statement of operations data:

      

Total revenue

   $ 31,928,517      $ 21,410,982      $ 11,949,569   

Total operating expenses (1)

     38,500,388        25,658,975        12,038,235   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (6,571,871     (4,247,993     (88,666
  

 

 

   

 

 

   

 

 

 

Total other expense, net

     (9,593,149     (6,553,778     (2,594,123
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income from unconsolidated joint venture

     (16,165,020     (10,801,771     (2,682,789

Income from unconsolidated joint venture

     —          45,739        43,381   

Income (loss) from discontinued operations

     —          2,204,772        (1,158,848
  

 

 

   

 

 

   

 

 

 

Net loss

     (16,165,020     (8,551,260     (3,798,256

Loss allocated to noncontrolling interests

     1,570,411        1,708,734        377,330   

Accretion of preferred stock and preferred units

     (375,482     (375,482     —     
  

 

 

   

 

 

   

 

 

 

Loss attributable to common stockholders of Trade Street Residential, Inc.

   $ (14,970,091   $ (7,218,008   $ (3,420,926
  

 

 

   

 

 

   

 

 

 

Earnings per common share - basic and diluted

      

Continuing operations

   $ (1.98   $ (4.14   $ (23.49

Discontinued operations

     —          0.97        (12.04
  

 

 

   

 

 

   

 

 

 
   $ (1.98   $ (3.17   $ (35.53
  

 

 

   

 

 

   

 

 

 

 

(1) Total operating expenses for the year ended December 31, 2012 include approximately $1.9 million of expenses in connection with our recapitalization.

 

 

16


Table of Contents
     Year ended December 31,  
     Pro Forma     Historical  
     2012     2012     2011  

Balance sheet data (at end of period):

      

Investment in operating properties before accumulated depreciation and amortization

   $ 327,443,069      $ 224,172,470      $ 159,133,834   

Land held for future development

   $ 42,622,330      $ 42,622,330      $ 18,170,949   

Real estate held for sale

     —        $ 12,308,368      $ 38,176,079   

Total assets

   $ 395,317,201      $ 291,909,724      $ 235,199,632   

Mortgage notes payable(1)

   $ 216,210,338      $ 163,626,814      $ 112,097,662   

Total stockholders’ equity(2)

   $ 164,903,744      $ 46,238,691      $ 84,337,100   

Cash flows data (in thousands):

      

Operating activities

     $ (1,428,243   $ 3,044,087   

Investing activities

     $ 2,873,320      $ (30,488,194

Financing activities

     $ 2,787,668      $ 26,531,632   

Other data (dollars in thousands):

      

FFO(3)

   $ (995,820   $ (2,165,452   $ 2,934,240   

Core FFO(3)

   $ 1,500,600      $ 815,559      $ 4,855,770   

NOI(4)

   $ 18,810,035      $ 13,623,021      $ 8,971,105   

Number of properties at end of the period

     18        14        13   

 

(1) Excludes liabilities of approximately $9.1 million related to real estate held for sale (Fontaine Woods) included in discontinued operations as of December 31, 2012.
(2) In addition, redeemable preferred stock of approximately $26.8 million is recorded as temporary equity as of December 31, 2012.
(3) FFO for the year ended December 31, 2012 includes recapitalization costs of approximately $1.9 million. For a definition and reconciliation of FFO and Core FFO and a statement disclosing the reasons why our management believes that the presentation of FFO and Core FFO provides useful information to investors and, to the extent material, any additional purposes for which our management uses FFO and Core FFO, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures—Funds from Operations and Core FFO.”
(4) For a definition and reconciliation of NOI and a statement disclosing the reasons why our management believes that the presentation of NOI provides useful information to investors and, to the extent material, any additional purposes for which our management uses NOI, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures—Net Operating Income.”

 

 

17


Table of Contents

RISK FACTORS

An investment in our common stock involves risks. In addition to other information in this prospectus, you should carefully consider the following risks before investing in our common stock. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations and our ability to make cash distributions to our stockholders, which could cause you to lose all or a significant portion of your investment in our common stock. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”

Risks Related to Our Business and Operations

Our portfolio of properties consists primarily of apartment communities concentrated in certain markets and any adverse developments in local economic conditions or the demand for apartment units in these markets may negatively impact our operating results.

Our portfolio of properties consists primarily of apartment communities geographically concentrated in the Southeastern United States. Alabama, Florida, Georgia, Kentucky, North Carolina, Tennessee and Texas comprised 1.8%, 18.7%, 21.9%, 3.4%, 16.1%, 16.7% and 21.4%, respectively, of our rental revenue for the three months ended March 31, 2013. As such, we are susceptible to local economic conditions and the supply of and demand for apartment units in these markets. If there is a downturn in the economy or an oversupply of or decrease in demand for apartment units in these markets, our business could be materially adversely affected to a greater extent than if we owned a real estate portfolio that was more diversified in terms of both geography and industry focus.

Adverse economic conditions may negatively affect our returns and profitability and, as a result, our ability to make distributions to our stockholders.

Our operating results may be affected by market and economic challenges, which may negatively affect our returns and profitability and, as a result, our ability to make distributions to our stockholders. These market and economic challenges include, but are not limited to, the following:

 

   

any future downturn in the U.S. economy and the related reduction in spending, reduced home prices and high unemployment may result in tenant defaults under leases, vacancies at our apartment communities and concessions or reduced rental rates under new leases due to reduced demand;

 

   

the rate of household formation or population growth in our markets or a continued or exacerbated economic slow-down experienced by the local economies where our properties are located or by the real estate industry generally may result in changes in supply of or demand for apartment units in our markets; and

 

   

the failure of the real estate market to attract the same level of capital investment in the future that it attracts at the time of our purchases or a reduction in the number of companies seeking to acquire properties may result in the value of our investments not appreciating or decreasing significantly below the amount we pay for these investments.

The length and severity of any economic slow-down or downturn cannot be predicted. Our operations and, as a result, our ability to make distributions to our stockholders could be negatively affected to the extent that an economic slow-down or downturn is prolonged or becomes severe.

We depend on residents for revenue, and vacancies, resident defaults or lease terminations may adversely affect our operations and cause the value of your investment to decline.

The success of our investments depends upon the occupancy levels, rental revenue and operating expenses of our apartment communities. Our revenues may be adversely affected by the general or local economic climate, local real estate considerations (such as oversupply of or reduced demand for apartment units), the perception by

 

18


Table of Contents

prospective residents of the safety, convenience and attractiveness of the areas in which our apartment communities are located (including the quality of local schools and other amenities) and increased operating costs (including real estate taxes and utilities).

Occupancy rates and rents at a community, including apartment communities that are newly constructed or in the lease-up phase, may fail to meet our original expectations for a number of reasons, including changes in market and economic conditions beyond our control and the development by competitors of competing communities and we may be unable to complete lease-up of a community on schedule, resulting in increased construction and financing costs and a decrease in expected rental revenues.

Vacancy rates may increase in the future and we may be unable to lease vacant units or renew expiring leases on attractive terms, or at all, and we may be required to offer reduced rental rates or other concessions to residents. Our revenues may be lower as a result of lower occupancy rates, increased turnover, reduced rental rates, increased economic concessions and potential increases in uncollectible rent. In addition, we will continue to incur expenses, including maintenance costs, insurance costs and property taxes, even though a property maintains a high vacancy rate. Our financial performance will suffer if our revenues decrease or our costs increase as a result of this trend.

The underlying value of our properties and our ability to make distributions to you will depend upon our ability to lease our available apartment units and the ability of our residents to generate enough income to pay their rents in a timely manner. Our residents’ inability to pay rents may be impacted by employment and other constraints on their personal finances, including debts, purchases and other factors. Upon a resident default, we will attempt to remove the resident from the premises and re-lease the unit as promptly as possible. Our ability and the time required to evict a resident, however, will depend on applicable law. Substantially all of the leases for our properties are short-term leases (generally, one year or less in duration). As a result, our rental income and our cash flow are impacted by declines in market conditions more quickly than if our leases were for longer terms.

A change in the United States government policy with regard to Fannie Mae and Freddie Mac could impact our financial condition.

Fannie Mae and Freddie Mac are a major source of financing for the multifamily residential real estate sector. We and other multifamily companies depend heavily on Fannie Mae and Freddie Mac to finance growth by purchasing or guarantying apartment loans. In February 2011, the Obama Administration released a report to Congress which included options, among others, to gradually shrink and eventually shut down Fannie Mae and Freddie Mac. We do not know when or if Fannie Mae or Freddie Mac will restrict their support of lending to the multifamily industry or to us in particular. A final decision by the government to eliminate Fannie Mae or Freddie Mac, or reduce their acquisitions or guarantees of multifamily residential mortgage loans, may adversely affect interest rates, capital availability and our ability to refinance our existing mortgage obligations as they come due and obtain additional long-term financing for the acquisition of additional multifamily apartment communities on favorable terms or at all.

If we are unable to timely complete the purchase of the certain identified apartment communities, we will have no designated use for a significant portion of the net proceeds of this offering.

We intend to use a portion of the net proceeds from this offering to purchase apartment communities identified under the heading “Use of Proceeds.” However, we cannot assure you that we will acquire any of these apartment communities because the acquisitions are subject to a variety of factors, such as the satisfaction of closing conditions and the receipt of third party consents. If we are unable to complete the purchase of the identified apartment communities, we will have no specific designated use for a significant portion of the net proceeds from this offering and investors will be unable to evaluate in advance the manner in which we invest, or the economic merits of the properties we may ultimately acquire with, the net proceeds.

 

19


Table of Contents

If we do not complete the purchase of the apartment communities that we currently have under contract, we will have incurred substantial expenses without our stockholders realizing the expected benefits.

If we are unable to complete the purchase of our pending acquisitions or the construction properties that we have under contract, we may forfeit substantial deposits provided to the sellers under the terms of the purchase agreement. We also have incurred or expect to incur acquisitions costs in connection with these acquisitions and may incur additional acquisition costs prior to such acquisitions. Failure to complete these acquisitions may have an impact on future results of operations.

In addition to our pending acquisitions that we intend to fund in part with proceeds from this offering, we have entered into binding contracts to purchase the Estates at Wakefield and Fountains at New Bern, both of which are currently under construction, for an aggregate purchase price of $71.3 million. Each purchase contract provides for closing, subject to the satisfaction of customary closing conditions, upon completion of the property, which, in the case of the Estates at Wakefield, is expected to occur during the fourth quarter of 2013 and, in the case of Fountains at New Bern, during the third quarter of 2013. The net proceeds from this offering are not sufficient to fully finance the acquisition of these properties. We are currently seeking permanent mortgage financing for all or a part of the purchase prices of these acquisitions, and while we believe that we will have adequate financing in place by the time we are obligated to close the purchase of these properties, there can be no assurance that we will be able to obtain such financing on acceptable terms, or at all. If we are unable to complete these acquisition we could lose up to $1.5 million in earnest money, which could negatively impact our future results of operations.

If we are not able to cost-effectively maximize the life of our properties, we may incur greater than anticipated capital expenditure costs, which may adversely affect our ability to make distributions to our stockholders.

As of December 31, 2012, the average age of our apartment communities was approximately 26 years, not accounting for renovations. While the majority of our properties have undergone substantial renovations by prior owners since they were constructed, older properties may carry certain risks including unanticipated repair costs associated with older properties, increased maintenance costs as older properties continue to age, and cost overruns due to the need for special materials and/or fixtures specific to older properties. Although we take a proactive approach to property preservation, utilizing a preventative maintenance plan, and selective improvements that mitigate the cost impact of maintaining exterior building features and aging building components, if we are not able to cost-effectively maximize the life of our properties, we may incur greater than anticipated capital expenditure costs which may adversely affect our ability to make distributions to our stockholders.

Our senior management team has limited experience managing a REIT and no experience managing a publicly traded company.

Prior to our recapitalization, our senior management team had not managed a REIT, and the experience of our senior management team in managing a REIT is limited to the time since June 1, 2012. Moreover, Messrs. Baumann and Hanks have no experience managing a publicly traded company, and Mr. Lopez has no experience managing a publicly traded REIT. We cannot assure you that the past experience of our senior management team will be sufficient to successfully operate our company as a REIT or a publicly traded company, including the requirements to timely meet disclosure requirements of the SEC, and comply with the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act.

 

20


Table of Contents

Because we are a relatively small company, the requirements of being a public company, including compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, and the requirements of the Sarbanes-Oxley Act of 2002, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

As a public company with listed equity securities, we will need to comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC, including compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the requirements of the NASDAQ, with which we were not required to comply as a private company. Complying with these statutes, regulations and requirements will occupy a significant amount of time of our board of directors and management and will significantly increase our costs and expenses. We will need to:

 

   

institute a more comprehensive compliance function;

 

   

design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board, or the PCAOB;

 

   

comply with rules promulgated by the NASDAQ;

 

   

prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;

 

   

establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;

 

   

involve and retain to a greater degree outside counsel and accountants in the above activities; and

 

   

establish an investor relations function.

If our profitability is adversely affected because of these additional costs, it could have a negative effect on the trading price of our common stock.

For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

In April 2012, President Obama signed into law the JOBS Act. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to accounting standards and compensation disclosure. We are classified as an emerging growth company. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to:

 

   

provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act;

 

   

comply with any new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies;

 

   

comply with any new requirements adopted by the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

   

comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise;

 

   

provide certain disclosure regarding executive compensation required of larger public companies; or

 

   

hold stockholder advisory votes on executive compensation.

 

21


Table of Contents

Our independent registered public accounting firm identified and reported internal control deficiencies that constituted a material weaknesses in our internal control over financial reporting. If one or more material weaknesses recur or if we fail to remediate the identified material weaknesses, and establish and maintain effective internal control over financial reporting, our ability to accurately report our financial results could be adversely affected.

Prior to the completion of this offering, we were not a public reporting company and had limited accounting personnel and systems to adequately execute accounting processes and limited other supervisory resources with which to address internal control over financial reporting. As such, our internal controls may not be sufficient to ensure that (1) all transactions are recorded as necessary to permit the preparation of financial statements in conformity with GAAP, and (2) the design and execution of our controls has consistently resulted in effective review of our financial statements and supervision by individuals with financial reporting oversight roles. In the past, lack of adequate staffing levels resulted in insufficient time spent on review and approval of certain information used to prepare our financial statements. The lack of adequate accounting systems prevented us from capturing all transactions and related journal entries, which prevented us from preparing timely and accurate financial reporting and analysis. We and our independent registered accounting firm concluded that these control deficiencies constituted a material weakness in the internal controls over financial reporting as of December 31, 2011. Further, in connection with the review of our financial statements as of and for the period ended September 30, 2012, we and our independent registered accounting firm concluded that additional material weaknesses existed with the company’s process of: (i) identifying, tracking, evaluating, recording, disclosing and communicating to those charged with corporate governance, related party transactions; and (ii) capturing rent concessions granted to tenants as consideration for entering into lease agreements. In connection with the audit of our financial statements as of and for the year ended December 31, 2012, we and our independent registered accounting firm concluded that a material weakness still existed with the company’s process of identifying, tracking, recording and communicating related party transactions. Additionally, after issuing interim financial statements as of and for the six and nine months ended June 30, 2012 and September 30, 2012, respectively, we identified two accounting errors: (1) expenses incurred in connection with the recapitalization on June 1, 2012 that should have been recorded as expense and included in our statement of operations for the six months ended June 30, 2012 were incorrectly recorded as a direct reduction to equity in those financial statements; and (2) certain capital expenditures occurring from January 1, 2012 through September 30, 2012 were inappropriately recorded as operating expenses but should have been capitalized. We have revised and restated our previously issued financial statements as of and for the six and nine months ended June 30, 2012 and September 30, 2012, respectively. In connection with our restatement of our interim financial statements, we and our independent public registered accounting firm concluded that an additional material weakness existed with the company’s process of identifying, tracking and recording capital asset additions.

A material weakness is a control deficiency, or a combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The control deficiencies described above, at varying degrees of severity, contributed to the material weakness in the control environment as further described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Controls and Procedures.”

We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act and are, therefore, not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public reporting company, we will be required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. We will not be required to make our first assessment of our internal control over financial reporting until the year following the first annual report required to be filed with the SEC after the completion of this offering. To comply with the requirements of being a public reporting company, we may need to implement additional financial and management controls, reporting systems and procedures and hire additional accounting and finance staff. Further,

 

22


Table of Contents

we could be subject to legal claims by investors, regulators or others as a result of any future issuance of financial statements that subsequently have to be restated. Any such restatements could be costly and time consuming, could divert management’s attention from other business concerns and may have a material impact on our business, results of operations, and financial position.

Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future and comply with the applicable certification and reporting obligations under Sections 302 and 404 of the Sarbanes-Oxley Act. Further, our remediation efforts may not enable us to remedy or avoid material weaknesses or significant deficiencies in the future. Any failure to remediate deficiencies and to develop or maintain effective controls, or any difficulties encountered in our implementation or improvement of our internal controls over financial reporting could result in material misstatements that are not prevented or detected on a timely basis, which could potentially subject us to sanctions or investigations by the SEC, the securities exchange on which our securities are listed or other regulatory authorities. Ineffective internal controls could also cause investors to lose confidence in our reported financial information. As a result, the market value of our common stock could decline and you could lose some or all of your investment.

We depend on key personnel and the loss of their full service could adversely affect us.

Our success depends to a significant degree upon the continued contributions of certain key personnel including, but not limited to, Messrs. Baumann, Lopez and Hanks, whose continued service is not guaranteed, and each of whom would be difficult to replace. Prior to the completion of this offering, we will enter into employment agreements with Messrs. Baumann, Lopez and Hanks, they may nevertheless cease to provide services to us at any time. If any of our key personnel were to cease employment with us, our operating results could suffer.

Our ability to retain members of our management team or to attract suitable replacements should any members of our management team leave is dependent on the competitive nature of the employment market. The loss of services from key members of our management team or a limitation in their availability to provide their full service to us could adversely impact our financial condition and cash flows. Further, such a loss could be negatively perceived in the capital markets.

We also believe that, as we expand, our future success depends, in large part, upon our ability to hire and retain highly skilled managerial, investment, financing, operational and marketing personnel. Competition for such personnel may be intense, and we cannot assure you that we will be successful in attracting and retaining such skilled personnel.

Our growth will depend upon future acquisitions of multifamily apartment communities, and we may be unable to complete acquisitions on advantageous terms or acquisitions may not perform as we expect.

Our growth will depend upon future acquisitions of multifamily apartment communities, which entails various risks, including risks that our investments may not perform as we expect. Further, we will face competition for attractive investment opportunities from other real estate investors, including local real estate investors and developers, as well as other multifamily REITs, income-oriented non-traded REITs, and private real estate fund managers, and these competitors may have greater financial resources than us and a greater ability to borrow funds to acquire properties. This competition will increase as investments in real estate become increasingly attractive relative to other forms of investment. As a result of competition, we may be unable to acquire additional properties as we desire or the purchase price may be significantly elevated. In addition, our acquisition activities pose the following risks to our ongoing operations:

 

   

we may not achieve the increased occupancy, cost savings and operational efficiencies projected at the time of acquiring a property;

 

23


Table of Contents
   

management may incur significant costs and expend significant resources evaluating and negotiating potential acquisitions, including those that we subsequently are unable to complete;

 

   

we may acquire properties that are not initially accretive to our results upon acquisition, and we may not successfully manage and operate those properties to meet our expectations;

 

   

we may acquire properties outside of our existing markets where we are less familiar with local economic and market conditions;

 

   

some properties may be worth less or may generate less revenue than, or simply not perform as well as, we believed at the time of the acquisition;

 

   

we may be unable to assume mortgage indebtedness with respect to properties we seek to acquire or obtain financing for acquisitions on favorable terms or at all;

 

   

we may forfeit earnest money deposits with respect to acquisitions we are unable to complete due to lack of financing, failure to satisfy closing conditions or certain other reasons;

 

   

we may spend more than budgeted to make necessary improvements or renovations to acquired properties; and

 

   

we may acquire properties without any recourse, or with only limited recourse, for liabilities, whether known or unknown, such as clean-up of environmental contamination, claims by tenants, vendors or other persons against the former owners of the properties, and claims for indemnification by general partners, trustees, officers, and others indemnified by the former owners of the properties.

Our growth depends on external sources of capital that are outside of our control, which may affect our ability to take advantage of strategic opportunities, satisfy debt obligations and make distributions to our stockholders.

In order to maintain our qualification as a REIT, we are generally required under the Code to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we may rely on third-party sources to fund our capital needs. We may not be able to obtain financing on favorable terms or at all. Any additional debt we incur will increase our leverage. Our access to third-party sources of capital depends, in part, on:

 

   

general market conditions;

 

   

the market’s perception of our growth potential;

 

   

our current debt levels;

 

   

our current and expected future earnings;

 

   

our cash flow and cash distributions; and

 

   

the market price per share of our common stock.

If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties or satisfy our debt service obligations. Further, in order to meet the REIT distribution requirements and maintain our REIT status and to avoid the payment of income and excise taxes, we may need to borrow funds on a short-term basis even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for U.S. federal income tax purposes or the effect of non-deductible capital expenditures, the creation of reserves, certain restrictions on distributions under loan documents or required debt or amortization payments.

 

24


Table of Contents

To the extent that capital is not available to acquire properties, profits may not be realized or their realization may be delayed, which could result in an earnings stream that is less predictable than some of our competitors and result in us not meeting our projected earnings and distributable cash flow levels in a particular reporting period. Failure to meet our projected earnings and distributable cash flow levels in a particular reporting period could have an adverse effect on our financial condition and on the market price of our common stock.

Increased competition and increased affordability of residential homes could limit our ability to retain our residents, lease apartment units or increase or maintain rents.

Our apartment communities compete with numerous housing alternatives in attracting residents, including other multifamily apartment communities and single-family rental homes, as well as owner-occupied single-family and multifamily homes. Competitive housing in a particular area and an increase in the affordability of owner-occupied single-family and multifamily homes due to, among other things, declining housing prices, mortgage interest rates and tax incentives and government programs to promote home ownership, could adversely affect our ability to retain residents, lease apartment units and increase or maintain rents. As a result, our financial condition, results of operations and cash flows could be adversely affected.

We may be subject to contingent or unknown liabilities related to properties or business that we have acquired or may acquire for which we may have limited or no recourse against the sellers.

The properties or businesses that we have acquired or may acquire, including our Operating Properties and the Land Investments, may be subject to unknown or contingent liabilities for which we have limited or no recourse against the sellers. Unknown liabilities might include liabilities for, among other things, cleanup or remediation of undisclosed environmental conditions, liabilities under the Employee Retirement Income Security Act of 1974, as amended, or ERISA, claims of residents, vendors or other persons dealing with the entities prior to the acquisition of such property, tax liabilities, and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. Because many liabilities, including tax liabilities, may not be identified within the applicable contractual indemnification period, we may have no recourse against any of the owners from whom we acquire such properties for these liabilities. The existence of such liabilities could significantly adversely affect the value of the property subject to such liability. As a result, if a liability were asserted against us based on ownership of any of such properties, then we might have to pay substantial sums to settle it, which could adversely affect our cash flows.

The cash available for distribution to our stockholders may not be sufficient to pay distributions at expected levels, and we cannot assure you of our ability to make or increase distributions in the future.

As a REIT, we are required to distribute annually at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our REIT qualification and other factors as our board of directors may deem relevant from time to time. For the second quarter of 2013, we declared a dividend of $0.1575 per share, which on an annualized basis is a dividend rate of $0.63 per share of common stock. Assuming a $0.63 per share dividend rate is in effect for the entire year ending December 31, 2013, we estimate that our dividend will exceed our estimated cash available for distribution for that period by approximately $5.0 million. Any excess of dividends declared by our board of directors over our cash available for distribution will be required to be funded by borrowings under our revolving credit facility to the extent we have available borrowing capacity, from proceeds of equity offerings, which may include proceeds from this offering, or from other sources of available cash. If we borrow on our revolving credit facility or use proceeds from this offering or other equity offerings to pay dividends, we will have less funding for our acquisitions, which could adversely affect our ability to implement our growth strategy and our operating results and the market trading price of our common stock could be negatively impacted. Additionally, we may not be able to make or increase distributions in the future. See “Distribution Policy” for a description of our distribution policy.

 

25


Table of Contents

There can be no assurance that we will be able to pay or maintain cash distributions or that distributions will increase over time.

All distributions will be at the sole discretion of our board of directors and will depend upon our actual and projected financial condition, results of operations, cash flows, liquidity and funds from operations, or FFO, maintenance of our REIT qualification and such other matters as our board of directors may deem relevant from time to time. We may not be able to maintain our current distribution rate or make distributions in the future or may need to fund such distributions from external sources, as to which no assurances can be given. In addition, we may choose to retain operating cash flow for investment purposes, working capital reserves or other purposes, and these retained funds, although increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock. Our failure to meet the market’s expectations with regard to future cash distributions likely would adversely affect the market price of our common stock.

To the extent that our distributions represent a return of capital for tax purposes, stockholders could recognize an increased gain or a reduced loss upon subsequent sales of common stock.

Distributions in excess of our current and accumulated earnings and profits and not treated by us as a dividend will not be taxable to a U.S. stockholder to the extent those distributions do not exceed the stockholder’s adjusted tax basis in its common stock but instead will constitute a return of capital and will reduce the stockholder’s adjusted tax basis in its common stock. If distributions result in a reduction of a stockholder’s adjusted basis in such holder’s common stock, subsequent sales of such holder’s common stock potentially will result in recognition of an increased gain or reduced loss due to the reduction in such adjusted basis.

We face risks associated with land holdings and related activities.

We hold the Land Investments for future development and may in the future acquire additional land holdings. The risks inherent in purchasing, owning, and developing land increase as demand for apartments, or rental rates, decrease. Real estate markets are highly uncertain and, as a result, the value of undeveloped land has fluctuated significantly and may continue to fluctuate. In addition, carrying costs can be significant and can result in losses or reduced profitability. As a result, we hold the Land Investments, and may in the future acquire additional land, in our development pipeline at a cost we may not be able to fully recover or at a cost which precludes our developing a profitable multifamily apartment community. If there are subsequent changes in the fair value of our land holdings which we determine is less than the carrying basis of our land holdings reflected in our financial statements plus estimated costs to sell, we may be required to take future impairment charges which would reduce our net income and negatively impact the per share trading price of our common stock. Moreover, we may in the future elect to sell one or more of our Land Investments if our board of directors determines that doing so is in the best interests or our stockholders. Such sales may be at less than the carrying values of such Land Investments.

Our participation in joint ventures would create additional risks as compared to direct real estate investments, and the actions of our joint venture partners could adversely affect our operations or performance.

We may purchase properties jointly with other entities, including limited partnerships and limited liability companies, some of which may be unaffiliated with us. There are additional risks involved in these types of transactions as compared to other types of real estate investments, including, but not limited to, the risks that:

 

   

our joint venture partner in an investment might become bankrupt, which would mean that we and any other remaining joint venture partners would bear an unexpectedly large portion of the economic responsibilities associated with the joint venture;

 

   

our joint venture partner may at any time have economic or business interests or goals that are or which become inconsistent with our business interests or goals;

 

   

our joint venture partner may take action contrary to our instructions, our policies or our objectives, including our policy with respect to maintaining our qualification as a REIT;

 

26


Table of Contents
   

joint venture agreements may restrict our ability to transfer our joint venture interest when we desire or on advantageous terms;

 

   

our joint venture partner may exercise buy-sell, put-call and other similar liquidity mechanisms that could require us to fund additional capital to buy out our joint venture partner’s interests or sell our interest to our joint venture partner at a price that we would consider to be less than optimal; and

 

   

we may in certain circumstances be liable for the actions of our joint venture partners.

Such investments could also have the potential risk of impasses on decisions, such as a sale, because, in certain situations, neither we nor our joint venture partner may have full control over the partnership or joint venture. Disputes between us and our joint venture partner may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with joint venture partners might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may owe a fiduciary obligation to our partner in a joint venture transaction, which may make it more difficult to enforce our rights. We generally will seek to maintain sufficient control of our joint venture partnerships to permit us to achieve our business objectives; however, we may not be able to do so. Any of the above risks could adversely affect our financial condition, results of operations, cash flows, ability to pay distributions, and the market price of our shares of common stock.

Failure to succeed in new markets may have adverse consequences on our performance.

We may make acquisitions outside of our existing market areas if appropriate opportunities arise. We may be exposed to a variety of risks if we choose to enter new markets, including an inability to accurately evaluate local market conditions, to identify appropriate acquisition opportunities, to hire and retain key personnel, and a lack of familiarity with local governmental and permitting procedures. In addition, we may abandon opportunities to enter new markets that we have begun to explore for any reason and may, as a result, fail to recover expenses already incurred.

We may become subject to litigation or threatened litigation, which may divert management time and attention, require us to pay damages and expenses or restrict the operation of our business.

We may become subject to litigation as a result of our recapitalization if prior investors dispute the valuation of their respective interests, the adequacy of the consideration received by them in the recapitalization or the interpretation of the agreements implementing the recapitalization. Any such litigation could detract from management’s ability to operate our business or affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.

Uninsured losses or losses in excess of insurance coverage could adversely affect our financial condition.

We carry comprehensive general liability and property (including fire, extended coverage and rental loss) insurance covering all of the properties in our portfolio under a blanket insurance policy. We consider the policy specifications and insured limits to be in line with coverage customarily obtained by owners of similar properties and appropriate given the relative risk of loss and the cost of the coverage. However, our insurance coverage may not be sufficient to fully cover all of our losses. There are certain types of losses, such as lease and other contract claims, acts of war or terrorism, acts of God, and in some cases, earthquakes, hurricanes and flooding that generally are not insured because such coverage is not available or it is not available at commercially reasonable rates. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in the damaged property, as well as the anticipated future revenue from the property. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it impractical or undesirable to use insurance proceeds to replace a property after it has been damaged or destroyed. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. Furthermore, we may not be able to obtain adequate insurance coverage at reasonable costs in the future, as the costs associated with property and casualty renewals may be higher than anticipated.

 

27


Table of Contents

Underlying demographic characteristics and trends in our markets, which we expect will increase demand for apartments, may not result in higher rental rates and reduced vacancies.

Over the long term, we believe strong underlying demographic characteristics and trends in our markets as described in this prospectus under the section “Our Industry and Market Opportunity” will increase demand for our apartment units resulting in higher rental rates and reduced vacancies. In the event that this is not the case, our ability to effect our growth strategies could be adversely affected.

A component of our strategy is to selectively develop or redevelop properties, including our Land Investments, which could expose us to various risks associated with development activities that could adversely affect our profitability.

A component of our strategy is to selectively pursue development opportunities in our target markets, including developing our Land Investments. Primarily, we intend to develop apartment communities through unconsolidated joint ventures. To a limited extent, we may pursue development opportunities directly. Our development and redevelopment activities generally entail certain risks, including the following risks, the occurrence of which may reduce the funds available for distribution to our stockholders:

 

   

funds may be expended and management’s time devoted to projects that may not be completed due to a variety of factors including, without limitation, the inability to obtain necessary governmental approvals;

 

   

construction costs of a development project may exceed original estimates, possibly making the project economically unfeasible or the economic return on a property less than anticipated;

 

   

increased material and labor costs, problems with subcontractors, or other costs due to errors and omissions which occur in the development process;

 

   

projects may be delayed due to required governmental approvals, adverse weather conditions, labor shortages or other unforeseen complications;

 

   

occupancy rates and rents at a developed or redeveloped property may be less than anticipated; and

 

   

the operating expenses at a developed or redeveloped property may be higher than anticipated.

We may sell one or more of our Land Investments if our board of directors determines such sale is in the best interests of our stockholders, which sales could be at prices less than the carrying values of such assets.

In general, we will have greater exposure to these risks to the extent we pursue development projects directly rather than through an unconsolidated joint venture.

Short-term leases expose us to the effects of declining market conditions.

Substantially all of the leases for our properties are short-term leases (generally, one year or less in duration). Our residents can leave after the end of their lease term without any penalty. As a result, our rental revenues may be impacted by declines in market conditions more quickly than if our leases were for longer terms. Moreover, high turnover in our resident base due to short term leases could result in higher turnover expense, which could adversely affect our results of operations and cash available for distribution.

Inflation or deflation may adversely affect our financial condition and results of operations.

Increased inflation could have an adverse impact on our general and administrative expenses, as these costs could increase at a rate higher than our rental revenue. In addition, if we incur variable rate debt in the future, inflation could have a negative impact on our mortgage and debt interest. Conversely, deflation could lead to downward pressure on rents and other sources of income.

 

28


Table of Contents

Breaches of our data security could materially harm our business and reputation.

We collect and retain certain personal information provided by our tenants and employees. While we have implemented a variety of security measures to protect the confidentiality of this information and periodically review and improve our security measures, there can be no assurance that we will be able to prevent unauthorized access to this information. Any breach of our data security measures and loss of this information may result in legal liability and costs (including damages and penalties), as well as damage to our reputation, that could materially and adversely affect our business and financial performance.

Risks Related to Our Organization and Structure

As the parent of the sole general partner of our operating partnership, we have fiduciary duties which may result in conflicts of interest in representing your interests as stockholders of our company.

Upon completion of this offering, conflicts of interest could arise in the future as a result of the relationship between us, on one hand, and our operating partnership or any partner thereof, on the other. The sole general partner of our operating partnership is our wholly owned subsidiary, Trade Street OP GP, LLC. The general partner has fiduciary duties to the other limited partners in our operating partnership under Delaware law. At the same time, our directors and officers have duties to our company under Maryland law in connection with their management of our company. Our duties as the parent of the sole general partner of our operating partnership may come in conflict with the duties of our directors and officers to our company. In the event that a conflict of interest exists between the interests of our stockholders, on one hand, and the interests of the limited partners, on the other, we will endeavor in good faith to resolve the conflict in a manner not adverse to either our stockholders or the limited partners. The limited partnership agreement expressly provides that in the event of such a determination by us, as the parent of the sole general partner of our operating partnership, we shall not be liable to our operating partnership or any of the limited partners for monetary damages for losses sustained, liabilities incurred or benefits not derived by a limited partner in connection with such a decision as long as we, in our capacity as the parent of the sole general partner, acted in good faith.

Our common stock is subordinate as to distributions and payments upon liquidation to our Class A preferred stock, and quarterly distributions in respect of common units of the operating partnership are subordinate to declaration and payment of quarterly distributions in respect of Class B contingent units of the operating partnership.

The rights of the holders of shares of our Class A preferred stock rank senior to the rights of the holders of shares of our common stock as to distributions and payments upon liquidation. Unless full cumulative distributions on our shares of Class A preferred stock for all past distribution periods have been declared and paid (or set apart for payment), we will not declare and pay or set apart for payment distributions with respect to any shares of our common stock for any period. In addition, no distributions in respect of common units of the operating partnership may be paid until cumulative distributions in respect of Class A preferred units and non-cumulative quarterly distributions in respect of Class B contingent units of the operating partnership shall have been paid or reserved by the operating partnership. These provisions may limit our ability to pay distributions on our common stock. Upon liquidation, dissolution or winding up of our company (but excluding a merger, change of control, sale of substantially all assets or bankruptcy of our company, upon the occurrence of any of which all shares of Class A preferred stock will be automatically converted), the holders of shares of our Class A preferred stock are entitled to receive a liquidation preference of $100 per share, subject to a downward adjustment upon certain events (an aggregate liquidation preference of $27.3 million), plus all accrued but unpaid distributions, prior and in preference to any distribution to the holders of shares of our common stock or any other class of our equity securities. Additionally, due to our UPREIT structure, our ability to make distributions is dependent upon our receipt of distributions from our operating partnership in accordance with our ownership of common units of our operating partnership. See “—Because of our UPREIT structure, we depend on our operating partnership and its subsidiaries for cash flow and we will be structurally subordinated in right of payment to the obligations of such operating partnership and its subsidiaries.” for further discussion of our UPREIT structure.

 

29


Table of Contents

Our charter and bylaws, the partnership agreement of our operating partnership and Maryland law contain provisions that may delay, defer or prevent a change of control transaction.

Our charter contains a 9.8% ownership limit. Our charter, subject to certain exceptions, authorizes our board of directors to take such actions as are necessary and desirable to limit any person to beneficial or constructive ownership of no more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our capital stock or the outstanding shares of our common stock. Our board of directors, in its sole discretion, may exempt (prospectively or retroactively) a proposed transferee from the ownership limit. However, our board of directors may not grant an exemption from the ownership limit to any proposed transferee whose ownership of more than 9.8% of the value or number of the outstanding shares of our capital stock or the outstanding shares of our common stock could jeopardize our status as a REIT. The ownership limit contained in our charter and the restrictions on ownership of our stock may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders. See “Description of Stock—Restrictions on Ownership and Transfer.”

Our board of directors may create and issue additional classes or series of preferred stock without stockholder approval. Our board of directors is empowered under our charter to amend our charter from time to time to increase or decrease the aggregate number of shares of our stock or the number of shares of stock of any class or series that we have authority to issue, to designate and issue from time to time one or more classes or series of preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock into other classes or series of stock without stockholder approval. Our board of directors may determine the preferences conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms and conditions of redemption of any class or series of preferred stock issued. As a result, subject to the rights of holders of our Class A preferred stock, we may issue preferred stock with preferences, distributions, powers and rights, voting or otherwise, senior to the rights of holders of our common stock. The issuance of preferred stock could also have the effect of delaying or preventing a change of control transaction that might otherwise be in the best interests of our stockholders.

Certain provisions in the partnership agreement of our operating partnership may delay or prevent unsolicited acquisitions of us. Provisions in the partnership agreement of our operating partnership may delay or make more difficult unsolicited acquisitions of us or changes in our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made, desirable. These provisions include, among others:

 

   

redemption rights of qualifying parties;

 

   

transfer restrictions on our operating partnership units;

 

   

the ability of the general partner in some cases to amend the partnership agreement without the consent of the limited partners; and

 

   

the right of the limited partners to consent to transfers of the general partnership interest and mergers under specified circumstances.

Certain provisions of Maryland law could inhibit changes in control. Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock, including:

 

   

“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose special appraisal rights and supermajority stockholder voting requirements on these combinations; and

 

30


Table of Contents
   

“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

We have elected to opt out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL, by resolution of our board of directors and provided that the business combination is first approved by our board of directors (including a majority of disinterested directors), and in the case of the control share provisions of the MGCL, pursuant to a provision in our bylaws. Our board of directors may by resolution elect to repeal the foregoing opt-outs from the business combination provisions of the MGCL and we may by amendment to our bylaws opt in to the control share provisions of the MGCL in the future.

Additionally, Title 8, Subtitle 3 of the MGCL permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors, without stockholder approval and regardless of what is currently provided in its charter or bylaws, to implement takeover defenses, some of which (for example, a classified board) we do not currently have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a change in control of our company under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-current market price.

Our board of directors can take many actions without stockholder approval.

Our board of directors has overall authority to oversee our operations and determine our major corporate policies. This authority includes significant flexibility. For example, our board of directors can do the following without stockholder approval:

 

   

amend or revise at any time and from time to time our investment, financing, borrowing and distribution policies and our policies with respect to all other activities, including growth, debt, capitalization and operations;

 

   

amend our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements;

 

 

   

within the limits provided in our charter, prevent the ownership, transfer and/or accumulation of shares in order to preserve our status as a REIT or for any other reason deemed to be in the best interests of us and our stockholders;

 

   

issue additional shares, which could dilute the ownership of our then-current stockholders;

 

   

amend our charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series;

 

   

classify or reclassify any unissued shares of our common stock or preferred stock into other classes or series of shares and set the preferences, rights and other terms of such classified or reclassified shares;

 

   

employ and compensate affiliates;

 

   

direct our resources toward investments that fail to ultimately appreciate over time;

 

   

offer purchase money financing in connection with the sale of properties or make loans to joint-development projects in which we may participate in the future; and

 

   

determine that it is no longer in our best interests to maintain our qualification as a REIT.

 

31


Table of Contents

Any of these actions could increase our operating expenses, impact our ability to make distributions or reduce the value of our assets without giving you, as a stockholder, the right to vote.

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter eliminates our directors’ and officers’ liability to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our bylaws require us to indemnify our directors and officers to the maximum extent permitted by Maryland law for liability actually incurred in connection with any proceeding to which they may be made, or threatened to be made, a party, except to the extent that the act or omission of the director or officer was material to the matter giving rise to the proceeding and was either committed in bad faith or was the result of active and deliberate dishonesty, the director or officer actually received an improper personal benefit in money, property or services, or, in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors and officers. Finally, we have entered into agreements with our directors and officers pursuant to which we have agreed to indemnify them to the maximum extent permitted by Maryland law. See “Certain Provisions of Maryland Law and of Our Charter and Bylaws—Indemnification and Limitation of Directors’ and Officers’ Liability.”

Because of our UPREIT structure, we depend on our operating partnership and its subsidiaries for cash flow and we will be structurally subordinated in right of payment to the obligations of such operating partnership and its subsidiaries.

We are an umbrella partnership REIT, referred to as an UPREIT, and conduct substantially all of our operations through our operating partnership. We do not have, apart from our ownership of our operating partnership, any independent operations. As a result, we will rely on distributions from our operating partnership to pay any distributions we might declare on our common stock. We will also rely on distributions from our operating partnership to meet our debt service and other obligations, including our obligations to make distributions required to maintain our REIT qualification. The ability of subsidiaries of our operating partnership to make distributions to the operating partnership, and the ability of our operating partnership to make distributions to us in turn, will depend on their operating results and on the terms of any loans that encumber the properties owned by them. Such loans may contain lockbox arrangements, reserve requirements, financial covenants and other provisions that restrict the distribution of funds. In the event of a default under these loans, the defaulting subsidiary would be prohibited from distributing cash. As a result, a default under any of these loans by the borrower subsidiaries could cause us to have insufficient cash to make distributions on our common stock required to maintain our REIT qualification. In addition, because we are a holding company, your claim as a stockholder will be structurally subordinated to all existing and future liabilities and obligations of our operating partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our operating partnership and its subsidiaries will be able to satisfy your claim as a stockholder only after all of our and our operating partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.

 

32


Table of Contents

Our operating partnership may issue additional common units to third parties without the consent of our stockholders, which would reduce our ownership percentage in our operating partnership and would have a dilutive effect on the amount of distributions made to us by our operating partnership and, therefore, the amount of distributions we can make to our stockholders.

We may, in connection with our acquisition of properties or otherwise, issue additional common units to third parties. Such issuances would reduce our ownership percentage in our operating partnership and affect the amount of distributions made to us by our operating partnership and, therefore, the amount of distributions we can make to our stockholders. Because you will not directly own common units, you will not have any voting rights with respect to any such issuances or other partnership level activities of our operating partnership.

Risks Associated with Real Estate

We face numerous risks associated with the real estate industry that could adversely affect our results of operations through decreased revenues or increased costs.

As a real estate company, we are subject to various changes in real estate conditions and any negative trends in such real estate conditions may adversely affect our results of operations through decreased revenues or increased costs. These conditions include:

 

   

changes in national, regional and local economic conditions, which may be negatively impacted by concerns about inflation, deflation, government deficits, high unemployment rates, decreased consumer confidence and liquidity concerns, particularly in markets in which we have a high concentration of properties;

 

   

fluctuations in interest rates, which could adversely affect our ability to obtain financing on favorable terms or at all;

 

   

the inability of residents to pay rent;

 

   

the existence and quality of the competition, such as the attractiveness of our properties as compared to our competitors’ properties based on considerations such as convenience of location, rental rates, amenities and safety record;

 

   

increased operating costs, including increased real property taxes, maintenance, insurance and utilities costs;

 

   

weather conditions that may increase or decrease energy costs and other weather-related expenses;

 

   

civil unrest, acts of God, including earthquakes, floods, hurricanes and other natural disasters, which may result in uninsured losses, and acts of war or terrorism;

 

   

oversupply of multifamily housing or a reduction in demand for real estate in the markets in which our properties are located;

 

   

a favorable interest rate environment that may result in a significant number of potential residents of our multifamily apartment communities deciding to purchase homes instead of renting;

 

   

changes in, or increased costs of compliance with, laws and/or governmental regulations, including those governing usage, zoning, the environment and taxes; and

 

   

rent control or stabilization laws, or other laws regulating rental housing, which could prevent us from raising rents to offset increases in operating costs.

Moreover, other factors may adversely affect our results of operations, including potential liability under environmental and other laws and other unforeseen events, many of which are discussed elsewhere in the following risk factors. Any or all of these factors could materially adversely affect our results of operations through decreased revenues or increased costs.

 

33


Table of Contents

The illiquidity of real estate investments may significantly impede our ability to respond to changes in economic or market conditions, which could adversely affect our results of operations or financial condition.

Real estate investments are relatively illiquid generally, and may become even more illiquid during periods of economic downturn. As a result, we may not be able to sell a property or properties quickly or on favorable terms in response to changes in the economy or other conditions when it otherwise may be prudent to do so. This inability to respond quickly to changes in the performance of our properties could adversely affect our results of operations if we cannot sell an unprofitable property. Our financial condition could also be adversely affected if we were, for example, unable to sell one or more of our properties in order to meet our debt obligations upon maturity. In addition, as a result of the 100% prohibited transactions tax applicable to REITs, we intend to hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forgo or defer sales of properties that otherwise would be in our best interest. Mortgage financing on a property may also prohibit prepayment and/or impose a prepayment penalty upon the sale of a mortgaged property, which may decrease the proceeds from a sale or refinancing or make the sale or refinancing impractical. Therefore, we may be unable to vary our portfolio promptly in response to economic, market or other conditions, which could adversely affect our results of operations and financial position.

We are subject to significant regulations, which could adversely affect our results of operations through increased costs and/or an inability to pursue business opportunities.

Local zoning and use laws, environmental statutes and other governmental requirements may restrict or increase the costs of our development, expansion, renovation and reconstruction activities and thus may prevent or delay us from taking advantage of business opportunities. Failure to comply with these requirements could result in the imposition of fines, awards to private litigants of damages against us, substantial litigation costs and substantial costs of remediation or compliance. In addition, we cannot predict what requirements may be enacted in the future or that such requirements will not increase our costs of regulatory compliance or prohibit us from pursuing business opportunities that could be profitable to us, which could adversely affect our results of operations.

The costs of compliance with environmental laws and regulations may adversely affect our income and the cash available for any distributions.

All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Examples of federal laws include: the National Environmental Policy Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning and Community Right to Know Act and the Hazard Communication Act. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and aboveground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal.

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be substantial. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent the property or to use the property as collateral for future borrowing.

 

34


Table of Contents

Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles govern the presence, maintenance, removal and disposal of certain building materials, including asbestos and lead-based paint. Such hazardous substances could be released into the air and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances.

In addition, if any property in our portfolio is not properly connected to a water or sewer system, or if the integrity of such systems is breached, microbial matter or other contamination can develop. If this were to occur, we could incur significant remedial costs and we may also be subject to private damage claims and awards, which could be material. If we become subject to claims in this regard, it could materially and adversely affect us.

Property values may also be affected by the proximity of such properties to electric transmission lines. Electric transmission lines are one of many sources of electro-magnetic fields, or EMFs, to which people may be exposed. Research completed regarding potential health concerns associated with exposure to EMFs has produced inconclusive results. Notwithstanding the lack of conclusive scientific evidence, some states now regulate the strength of electric and magnetic fields emanating from electric transmission lines and other states have required transmission facilities to measure for levels of EMFs. On occasion, lawsuits have been filed (primarily against electric utilities) that allege personal injuries from exposure to transmission lines and EMFs, as well as from fear of adverse health effects due to such exposure. This fear of adverse health effects from transmission lines may be considered both when property values are determined to obtain financing and in condemnation proceedings. We may not, in certain circumstances, search for electric transmission lines near our properties, but are aware of the potential exposure to damage claims by persons exposed to EMFs.

The cost of defending against such claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to you.

We cannot assure you that properties which we acquire will not have any material environmental conditions, liabilities or compliance concerns. Accordingly, we have no way of determining at this time the magnitude of any potential liability to which we may be subject arising out of environmental conditions or violations with respect to the properties we own.

Costs associated with addressing indoor air quality issues, moisture infiltration and resulting mold remediation may be costly.

As a general matter, concern about indoor exposure to mold or other air contaminants has been increasing as such exposure has been alleged to have a variety of adverse effects on health. As a result, there have been a number of lawsuits in our industry against owners and managers of apartment communities relating to indoor air quality, moisture infiltration and resulting mold. Some of our properties may contain microbial matter such as mold and mildew. The terms of our property and general liability policies generally exclude certain mold-related claims. Should an uninsured loss arise against us, we would be required to use our funds to resolve the issue, including litigation costs. We make no assurance that liabilities resulting from indoor air quality, moisture infiltration and the presence of or exposure to mold will not have a future impact on our business, results of operations and financial condition.

As the owner or operator of real property, we could become subject to liability for asbestos-containing building materials in the buildings on our properties.

Some of our properties may contain asbestos-containing materials. Environmental laws typically require that owners or operators of buildings with asbestos-containing building materials properly manage and maintain

 

35


Table of Contents

these materials, adequately inform or train those who may come in contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators for failure to comply with these requirements. In addition, third parties may be entitled to seek recovery from owners or operators for personal injury associated with exposure to asbestos-containing building materials.

In addition, many insurance carriers are excluding asbestos-related claims from standard policies, pricing asbestos endorsements at prohibitively high rates or adding significant restrictions to this coverage. Because of our inability to obtain specialized coverage at rates that correspond to the perceived level of risk, we may not obtain insurance for asbestos-related claims. We will continue to evaluate the availability and cost of additional insurance coverage from the insurance market. If we decide in the future to purchase insurance for asbestos, the cost could have a negative impact on our results of operations.

Compliance or failure to comply with the Americans with Disabilities Act of 1990 and Fair Housing Amendment Act of 1988 could result in substantial costs.

Under the Americans with Disabilities Act of 1990, as amended, or the ADA, and the Fair Housing Amendment Act of 1988, or the FHAA, and various state and local laws, all public accommodations and commercial facilities must meet certain federal requirements related to access and use by disabled persons. Compliance with these requirements could involve removal of structural barriers from certain disabled persons’ entrances. Other federal, state and local laws may require modifications to or restrict further renovations of our properties with respect to such means of access. Noncompliance with the ADA, the FHAA or related laws or regulations could result in the imposition of fines by government authorities, awards to private litigants of damages against us, substantial litigation costs and the incurrence of additional costs associated with bringing the properties into compliance, any of which could adversely affect our financial condition, results of operations and cash flows.

Risks Related to Our Debt Financings

Dislocations in the credit markets and real estate markets could have a material adverse effect on our results of operations, financial condition and ability to pay distributions to you.

If credit markets continue to be constrained, our ability to borrow to finance the purchase of, or other activities related to, real estate assets will be negatively impacted. If we are unable to borrow on terms and conditions that we find acceptable, we likely will have to reduce the number of properties we can purchase, and the return on the properties we do purchase may be lower. Also, if the values of our properties decline we may be unable to refinance all of our debt as it matures. As of December 31, 2012, on a pro forma basis after giving effect to this offering and the use of the net proceeds therefrom, our outstanding indebtedness was $216.2 million with maturity dates ranging from May 2013 to April 2023. All of these events would have a material adverse effect on our results of operations, financial condition and ability to pay distributions.

Our debt obligations outstanding upon completion of this offering will reduce our cash available for distribution and may expose us to the risk of default.

Our charter does not contain any limitation on the amount or percentage of indebtedness we may incur. Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our properties or to pay the distributions currently contemplated or necessary to maintain our REIT qualification. Our level of debt and the limitations imposed on us by our financing agreements could have significant adverse consequences on us, including the following:

 

   

our cash flow may be insufficient to meet our debt service requirements and repay our debt, operate our properties, make distributions to our stockholders and successfully execute our growth strategy;

 

   

we may be unable to borrow additional funds on favorable terms, or at all, when needed, including to fund acquisitions or make distributions required to maintain our qualification as a REIT;

 

36


Table of Contents
   

we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

 

   

to the extent we borrow debt that bears interest at variable rates, increases in interest rates could materially increase our interest expense;

 

   

we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms;

 

   

we may default on our obligations or violate restrictive covenants, in which case the lenders or mortgagees may accelerate our debt obligations, foreclose on the properties that secure their loans and/or take control of our properties that secure their loans and collect rents and other property income; and

 

   

our default under any future loan with cross default provisions could result in a default on other indebtedness.

If any one of these events were to occur, our financial condition, results of operations, cash flow, per share trading price of our common stock and our ability to satisfy our principal and interest obligations and to make distributions to our stockholders could be adversely affected.

Higher levels of debt or increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders.

We expect that we will incur additional indebtedness in the future. Interest we pay reduces our cash available for distributions. In addition, if we incur variable rate debt in the future, increases in interest rates could raise our interest costs, which would reduce our cash flows and our ability to make distributions to you. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flows and our financial condition would be adversely affected, and we may lose the property securing such indebtedness. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments.

Our board of directors may change our financing policies without stockholder approval and we may become more highly leveraged, which may increase our risk of default under our debt obligations.

Our financing policies are exclusively determined by our board of directors. Accordingly, our stockholders do not control these policies. Further, our charter and bylaws contain no limitations on the amount or percentage of indebtedness that we may incur. Our board of directors could alter the balance between our total outstanding indebtedness and the value of our portfolio or our market capitalization at any time. If we become more leveraged in the future, the resulting increase in debt service requirements could materially and adversely affect us.

Our secured revolving credit facility restricts our ability to engage in some business activities, including our ability to incur additional indebtedness, make capital expenditures and make certain investments, which could adversely affect our financial condition, results of operations and cash flow and the trading price of our common stock.

Our secured revolving credit facility contains customary negative covenants and other financial and operating covenants that, among other things:

 

   

restrict our ability to incur additional indebtedness;

 

   

restrict our ability to incur additional liens;

 

   

restrict our ability to make certain investments;

 

   

restrict our ability to merge with another company;

 

37


Table of Contents
   

restrict our ability to make distributions to stockholders in excess of 95% of FFO; and

 

   

require us to satisfy minimum financial coverage ratios, minimum tangible net worth requirements and maximum leverage ratios.

These limitations will restrict our ability to engage in some business activities, which could adversely affect our financial condition, results of operations and cash flow and the trading price of our common stock. In addition, it will constitute an event of default under the credit facility if we default on any of our indebtedness that equals or exceeds $10.0 million for non-recourse debt or $5.0 million for recourse debt, including any indebtedness we have guaranteed. These cross-default provisions may require us to repay or restructure the facility in addition to any mortgage or other debt that is in default. If our properties were foreclosed upon, or if we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flows and our financial condition would be adversely affected.

There is refinancing risk associated with our debt.

Certain of our outstanding debt contains, and we may in the future acquire or finance properties with debt containing, limited principal amortization, which would require that the principal be repaid at the maturity of the loan in a so-called “balloon payment.” As of December 31, 2012, the financing arrangements for approximately $189.3 million of our outstanding pro forma indebtedness could require us to make lump-sum or “balloon” payments at maturity dates that range from May 31, 2013 to July 31, 2023 (including a $26.4 million mortgage loan on The Pointe at Canyon Ridge which matures on May 31, 2013). At the maturity of these loans, assuming we do not have sufficient funds to repay the debt, we will need to refinance the debt. If the credit environment is constrained at the time of our debt maturities, we would have a very difficult time refinancing debt. In addition, for certain loans, we locked in our fixed-rate debt at a point in time when we were able to obtain favorable interest rate, principal payments and other terms. When we refinance our debt, prevailing interest rates and other factors may result in paying a greater amount of debt service, which will adversely affect our cash flow, and, consequently, our cash available for distribution to our stockholders. If we are unable to refinance our debt on acceptable terms, we may be forced to choose from a number of unfavorable options, including agreeing to otherwise unfavorable financing terms on one or more of our unencumbered assets, selling one or more properties at disadvantageous terms, including unattractive prices, or defaulting on the mortgage and permitting the lender to foreclose. Any one of these options could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.

We were required to become a co-guarantor (and, with respect to certain properties, a co-environmental indemnitor) on certain outstanding mortgage indebtedness related to our properties in connection with our recapitalization, which, in the event of certain prohibited actions, could trigger partial or full recourse to our company.

In connection with our recapitalization, as a condition to closing, we, along with our operating partnership, were required to become co-guarantors (and, with respect to certain properties, co-environmental indemnitors) on certain outstanding mortgage indebtedness related to our properties in order to replace, and cause the release of, the Trade Street Funds as the guarantors and indemnitors under the existing guarantees and environmental indemnity agreements, as applicable. Our position as a co-guarantor and co-indemnitor with respect to our properties could result in partial or full recourse liability to us or our operating partnership in the event of the occurrence of certain prohibited acts set forth in such agreements.

Some of our outstanding mortgage indebtedness contains, and we may in the future acquire or finance properties with, lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.

A lock-out provision is a provision that prohibits the prepayment of a loan during a specified period of time. Lock-out provisions may include terms that provide strong financial disincentives for borrowers to prepay their outstanding loan balance and exist in order to protect the yield expectations of lenders. Some of our outstanding

 

38


Table of Contents

mortgage indebtedness is, and we expect that many of our properties will be, subject to lock-out provisions. Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties when we may desire to do so. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our shares relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.

If mortgage debt is unavailable at reasonable rates, we may not be able to finance or refinance our properties, which could reduce the amount of cash distributions we can make.

If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. In addition, we run the risk of being unable to refinance mortgage debt when the loans come due or of being unable to refinance such debt on favorable terms. If interest rates are higher when we refinance such debt, our income could be reduced. We may be unable to refinance such debt at appropriate times, which may require us to sell properties on terms that are not advantageous to us or could result in the foreclosure of such properties. If any of these events occur, our cash flows would be reduced. This, in turn, would reduce cash available for distribution to you and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.

Some of our mortgage loans have “due on sale” provisions.

Some of our outstanding mortgage indebtedness currently does contain, and we may in the future finance our property acquisitions using financing with, “due-on-sale” and/or “due-on-encumbrance” clauses. Due-on-sale clauses in mortgages allow a mortgage lender to demand full repayment of the mortgage loan if the borrower sells the mortgaged property. Similarly, due-on-encumbrance clauses allow a mortgage lender to demand full repayment if the borrower uses the real estate securing the mortgage loan as security for another loan.

These clauses may cause the maturity date of such mortgage loans to be accelerated and such financing to become due. In such event, we may be required to sell our properties on an all-cash basis, to acquire new financing in connection with the sale, or to provide seller financing. It is not our intent to provide seller financing, although it may be necessary or advisable for us to do so in order to facilitate the sale of a property. It is unknown whether the holders of mortgages encumbering our properties will require such acceleration or whether other mortgage financing will be available. Such factors will depend on the mortgage market and on financial and economic conditions existing at the time of such sale or refinancing.

Hedging strategies may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on your investment.

In the future we may use various derivative financial instruments to provide a level of protection against interest rate risks. These instruments involve risks, such as the risk that the counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes and that a court could rule that such agreements are not legally enforceable. In addition, we may be limited in the type and amount of hedging transactions that we may use in the future by our need to satisfy the REIT gross income tests under the Code. In addition, the nature and timing of hedging transactions may influence the effectiveness of our hedging strategies. Poorly designed strategies or improperly executed transactions could actually increase our risk and losses. Moreover, hedging strategies involve transaction and other costs. We cannot assure you that any future hedging strategy and the derivatives that we may use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses that may reduce the overall return on your investment.

 

39


Table of Contents

Risks Related to this Offering

The purchase price per share of our common stock may not accurately reflect the future value of our company.

The purchase price per share of our common stock offered pursuant to this prospectus reflects the result of negotiations between us and the representative of the underwriters. The purchase price may not accurately reflect the future value of our company, and the offering price may not be realized upon any subsequent disposition of the shares.

Future offerings of debt securities, which would rank senior to our common stock upon liquidation, and future offerings of equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of liquidating and nonliquidating distributions, may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by making offerings of debt or additional offerings of equity securities, including shares of preferred stock or common stock. Upon liquidation, holders of our debt securities and shares of preferred stock, if any, and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Preferred stock, if issued in addition to the Class A preferred stock already issued, could have a preferences on liquidating and nonliquidating distributions that could limit our ability to make distributions to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us.

The number of shares of our common stock available for future sale, including those issued in connection with the recapitalization, could adversely affect the market price of our common stock, and future sales by us of shares of our common stock may be dilutive to existing stockholders.

Sales of substantial amounts of shares of our common stock in the public market, or upon exchange of common units of our operating partnership, conversion of any Class A preferred stock or exercise of any warrants or options, or the perception that such sales might occur could adversely affect the market price of our common stock. The exchange of common units for common stock, the exercise of any stock options or the vesting of any securities granted under our Equity Incentive Plan, the issuance of our common stock or common units in connection with property, portfolio or business acquisitions and other issuances of our common stock or common units could have an adverse effect on the market price of the shares of our common stock. The existence of shares of our common stock reserved for issuance as restricted shares or upon exchange of common units or exercise of any options may adversely affect the terms upon which we may be able to obtain additional capital through the sale of equity securities. In addition, future sales by us of our common stock may be dilutive to existing stockholders.

Lock-up agreements may not limit the number of shares of common stock that will be available for sale into the market, which could reduce the market price for our common stock.

Our executive officers and our directors and certain of our stockholders have agreed to enter into lock-up agreements that, subject to exceptions, prohibit them from selling, pledging, transferring or otherwise disposing of our common stock or securities convertible into our common stock for a period of 180 days after the date of this prospectus. The representative of the underwriters may, in its discretion, release all or any portion of the common stock subject to the lock-up agreements with these persons at any time without notice or stockholder approval. If the restrictions under the lock-up agreements are waived or terminated, additional shares of common stock, including securities convertible into our common stock, will be available for sale into the market, subject only to applicable securities rules and regulations and, in some cases, vesting requirements, which could reduce the market price for our common stock. See “Principal Stockholders” for the ownership of our securities by our executive officers and directors.

 

40


Table of Contents

Our common stock currently trades at a low average daily volume and broad market fluctuations could negatively impact the market price of our stock.

Currently, our common stock trades on the OTC Pink market. Prior to this offering, our common stock traded infrequently and there was little or no public market for our common stock. Our common stock has been approved for listing, subject to official notice of issuance, on the NASDAQ under the symbol “TSRE.” We cannot assure you that an active trading market on the NASDAQ for our common stock will develop after the offering or, if one does develop, that it will be sustained.

Even if an active trading market develops, the market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines, you may be unable to resell your shares at or above the public offering price. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could affect our stock price or result in fluctuations in the price or trading volume of our common stock include:

 

   

actual or anticipated variations in our quarterly operating results;

 

   

changes in our operations or earnings estimates or publication of research reports about us or the industry;

 

   

changes in market valuations of similar companies;

 

   

the attractiveness of the securities of REITs in comparison to securities issued by other entities (including securities issued by other real estate companies);

 

   

adverse market reaction to any increased indebtedness we incur in the future;

 

   

additions or departures of key management personnel;

 

   

actions by institutional stockholders;

 

   

future offerings of debt or equity securities;

 

   

speculation in the press or investment community; and

 

   

general market and economic conditions.

In addition, the stock market has experienced price and volume fluctuations that have affected the market prices of many companies in industries similar or related to ours, which fluctuations may have been unrelated to operating performances of these companies. These broad market fluctuations could reduce the market price of our common stock.

Differences between our net tangible book value per share and the price paid by investors in this offering for our common stock could result in an immediate and material dilution in the book value of our common stock.

As of December 31, 2012, our net tangible book value per share was approximately $7.82, after giving effect to the reverse stock split. The pro forma net tangible book value per share after this offering will be $12.84, assuming a public offering price of $12.00, which is the midpoint of the price range set forth on the front cover of this prospectus. As a result, purchasers of common stock in this offering will not experience immediate dilution in the net tangible book value per share of our common stock. If, however, shares of our common stock are ultimately issued at a public offering price of more than $14.00, purchasers of our common stock in this offering will experience immediate dilution in the pro forma net tangible book value per share of our common stock.

 

41


Table of Contents

Increases in market interest rates may result in a decrease in the value of our common stock.

One of the factors that will influence the price of our common stock will be the distribution yield on our common stock (as a percentage of the price of our common stock) relative to market interest rates. An increase in market interest rates may lead prospective purchasers of our common stock to expect a higher distribution yield and, if we are unable to pay such yield, the market price of our common stock could decrease.

The market price of our common stock could be adversely affected by our level of cash distributions.

The market value of the equity securities of a REIT is based primarily upon the market’s perception of the REIT’s growth potential and its current and potential future cash distributions, whether from operations, sales or refinancings, and is secondarily based upon the real estate market value of the underlying assets. For that reason, our common stock may trade at prices that are higher or lower than our net asset value per share. To the extent we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock. Our failure to meet the market’s expectations with regard to future earnings and cash distributions likely would adversely affect the market price of our common stock.

Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital as and when we need it.

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with accounting standards newly issued or revised after April 5, 2012, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

We will become subject to financial reporting and other requirements for which our accounting, internal audit and other management systems and resources may not be adequately prepared and we may not be able to accurately report our financial results.

Following this offering, we will become subject to reporting and other obligations under the Exchange Act, including the requirements of Section 404(a) of the Sarbanes-Oxley Act. Section 404(a) requires annual management assessments of the effectiveness of our internal controls over financial reporting. These reporting and other obligations will place significant demands on our management, administrative, operational, internal audit and accounting resources and will cause us to incur significant expenses. We may need to upgrade our systems or create new systems; implement additional financial and management controls, reporting systems and procedures; expand our internal audit function; and hire additional accounting, internal audit and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.

For as long as we are an “emerging growth company” under the recently enacted JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b). We could be an emerging growth company for up to five years. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.

 

42


Table of Contents

Risks Related to Qualification and Operation as a REIT

If we fail to maintain our qualification as a REIT, our operations and distributions to stockholders would be adversely impacted.

We intend to continue to be organized and to operate so as to maintain our qualification as a REIT under the Code. A REIT generally is not subject to corporate income tax on income it currently distributes to its stockholders. Qualification as a REIT involves the application of highly technical and complex rules for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to maintain our qualification as a REIT. In addition, new legislation, regulations, administrative interpretations or court decisions could significantly change the tax laws, possibly with retroactive effect, with respect to qualification as a REIT or the federal income tax consequences of such qualification.

If we were to fail to maintain our qualification as a REIT, we would face serious tax consequences that would substantially reduce the funds available for distributions to our stockholders because:

 

   

we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income;

 

   

we would be subject to federal income tax at regular corporate rates and could be subject to the federal alternative minimum tax and increased state and local taxes; and

 

   

unless we are entitled to relief under certain statutory provisions under the Code, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to maintain our qualification as a REIT.

In addition, if we were to fail to maintain our qualification as a REIT, our cash available for stockholder distributions would be reduced, and we would no longer be required to make distributions. As a result of these factors, our failure to maintain our qualification as a REIT could impair our ability to expand our business and raise capital, force us to borrow additional funds or sell assets to pay corporate tax obligations and adversely affect the value of our common stock. See “Material U.S. Federal Income Tax Considerations” for a discussion of material federal income tax consequences relating to us and investments in our common stock.

Even if we maintain our qualification as a REIT, we may be subject to other tax liabilities that reduce our cash flows.

Even if we qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, taxes on net income from certain “prohibited transactions,” tax on income from certain activities conducted as a result of a foreclosure, and state or local income, franchise, property and transfer taxes. In addition, we could, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our qualification as a REIT. Also, our subsidiaries that are taxable REIT subsidiaries will be subject to regular corporate federal, state and local taxes. Any of these taxes would decrease our earnings and our cash available for distributions to stockholders.

Complying with REIT requirements may cause us to forgo otherwise attractive opportunities or liquidate otherwise attractive investments.

To maintain our qualification as a REIT for U.S. federal income tax purposes, we must continually satisfy requirements concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet these tests, we may be required to forgo investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.

 

43


Table of Contents

In particular, we must ensure that, at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in securities (other than government securities, securities of taxable REIT subsidiaries and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, securities of taxable REIT subsidiaries and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by the securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of such calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. In addition, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. As a result, we may be required to liquidate otherwise attractive investments, and may be unable to pursue investments that would otherwise be advantageous to us in order to satisfy the source-of-income or asset diversification requirements. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders. Thus, compliance with the REIT requirements may hinder our ability to acquire, and, in certain cases, maintain ownership of certain attractive investments.

We may need to incur additional borrowings or issue additional securities to meet the REIT minimum distribution requirement and to avoid excise tax.

In order to maintain our qualification as a REIT, we are required to distribute to our stockholders at least 90% of our annual real estate investment trust taxable income (excluding any net capital gain and before application of the dividends paid deduction). To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we are subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of (i) 85% of our ordinary income for that year, (ii) 95% of our capital gain net income for that year and (iii) 100% of our undistributed taxable income from prior years. Although we intend to pay dividends to our stockholders in a manner that allows us to meet the 90% distribution requirement and avoid this 4% excise tax, we cannot assure you that we will always be able to do so.

The prohibited transactions tax may limit our ability to dispose of our properties.

A REIT’s taxable income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although the Code provides a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or may conduct such sales through a taxable REIT subsidiary.

We may make distributions consisting of both stock and cash, in which case stockholders may be required to pay income taxes in excess of the cash distributions they receive.

We may make distributions that are paid in cash and stock at the election of each stockholder and may distribute other forms of taxable stock dividends. Taxable stockholders receiving such distributions will be required to include the full amount of the distributions as ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such distributions in excess of the cash received. If a stockholder sells the stock that it receives in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, in the case of certain non-U.S. stockholders, we may be required to withhold federal income tax with respect to

 

44


Table of Contents

taxable dividends, including taxable dividends that are paid in stock. In addition, if a significant number of our stockholders decide to sell their shares in order to pay taxes owed with respect to taxable stock dividends, it may put downward pressure on the trading price of our stock.

We generally will not be able to use net operating losses incurred during periods prior to the recapitalization.

We incurred substantial net operating losses during periods prior to the date of the recapitalization. Because we have experienced multiple recent “ownership changes” for U.S. federal income tax purposes, our ability to utilize such net operating losses will be severely limited. Accordingly, we generally will not be able to use net operating losses incurred prior to the recapitalization to offset REIT taxable income earned subsequent to the recapitalization.

Our ownership of taxable REIT subsidiaries will be subject to limitations, and our transactions with taxable REIT subsidiaries will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.

Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries. In addition, the Code limits the deductibility of interest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. The Code also imposes a 100% excise tax on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis. We intend to monitor the value of our investment in our taxable REIT subsidiaries for the purpose of ensuring compliance with taxable REIT subsidiary ownership limitations and intend to structure our transactions with our taxable REIT subsidiary on terms that we believe are arm’s-length to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% taxable REIT subsidiary securities limitation or to avoid application of the 100% excise tax.

If our operating partnership were classified as a “publicly traded partnership” taxable as a corporation for U.S. federal income tax purposes under the Code, we would cease to maintain our qualification as a REIT and would suffer other adverse tax consequences.

We intend for our operating partnership to be treated as a partnership for U.S. federal income tax purposes. If the IRS were to successfully challenge the status of our operating partnership as a partnership, however, our operating partnership generally would be taxable as a corporation. In such event, we likely would fail to maintain our status as a REIT for U.S. federal income tax purposes, and the resulting corporate income tax burden would reduce the amount of distributions that our operating partnership could make to us. This would substantially reduce the cash available to pay distributions to our stockholders. In addition, if any of the partnerships or limited liability companies through which the operating partnership owns its properties, in whole or in part, loses its characterization as a partnership and is not otherwise disregarded for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the operating partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our REIT qualification.

You may be restricted from acquiring or transferring certain amounts of our common stock.

Certain provisions of the Code and the stock ownership limits in our charter may inhibit market activity in our capital stock and restrict our business combination opportunities. In order to maintain our qualification as a REIT, five or fewer individuals, as defined in the Code, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity beneficially or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year. To help insure that we meet these tests, our charter restricts the acquisition and ownership of shares of our stock.

 

45


Table of Contents

Our charter, with certain exceptions, authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, our charter prohibits any person from beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock or capital stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of ownership limits would result in our failing to maintain our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to maintain our qualification as a REIT.

The ability of our board of directors to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to maintain our qualification as a REIT. If we cease to maintain our qualification as a REIT, we would become subject to U.S. federal income tax on our taxable income without the benefit of the dividends paid deduction and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on the total return to our stockholders.

Because we are classified as a pension-held REIT, stockholders that are pension or profit-sharing trusts may be required to treat a percentage of any distributions received from us as “unrelated business taxable income.”

We currently are classified as a “pension-held REIT,” and we anticipate that we will continue to be so classified upon the completion of this offering. Consequently, qualified employee pension or profit-sharing trusts that own more than 10% of the value of our stock may be required to treat a percentage of any distributions received from us as “unrelated business taxable income.” See “Material U.S. Federal Income Tax Considerations—Taxation of Tax-Exempt Stockholders.” Prospective stockholders that are pension or profit-sharing trusts should consult their own tax advisors regarding the effect of our status as a “pension-held REIT.”

Dividends paid by REITs generally do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to income from “qualified dividends” paid to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends paid by REITs, however, generally are not eligible for the reduced rates. Although the tax rates applicable to qualified dividends do not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The provisions of the Code applicable to REITs substantially limit our ability to hedge our liabilities. Any income from a hedging transaction that we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute “gross income” for purposes of the gross income requirements applicable to REITs. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through taxable REIT subsidiaries. This could increase the cost of our hedging activities because any taxable REIT subsidiary that we may form would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in taxable REIT subsidiaries will generally not provide any tax benefit, except for being carried forward against future taxable income in the taxable REIT subsidiaries.

 

46


Table of Contents

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

At any time, the U.S. federal income tax laws applicable to REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in the federal income tax laws, regulations or administrative interpretations.

ERISA Risks

If you fail to meet the fiduciary and other standards under ERISA or the Code as a result of an investment in our common stock, you could be subject to criminal and civil penalties.

Fiduciaries of employee benefit plans subject to ERISA should take into account their fiduciary responsibilities in connection with a decision to invest in our common stock. If such fiduciaries breach their responsibilities, including (among other things) the responsibility to act prudently, to diversify the plan’s assets, and to follow plan documents and investment policies, they may be held liable for plan losses and may be subject to civil or criminal penalties and excise taxes. Similar consequences may result if a plan’s investment in shares of our stock constitutes a so-called “prohibited transaction” under ERISA. Plans or arrangements that are not subject to ERISA, such as individual retirement accounts, may be subject to Section 4975 of the Code, which contains similar prohibited transaction rules.

Although it is intended that our underlying assets and our operating partnership’s underlying assets will not constitute “plan assets” of ERISA plans within the meaning of Department of Labor regulations and Section 3(42) of ERISA, there can be no assurance in this regard. If our assets or our operating partnership’s assets constitute plan assets under ERISA, certain transactions in which we might normally engage could constitute prohibited transactions under ERISA or the Code. If our assets or our operating partnership’s assets are plan assets, our managers may be fiduciaries under ERISA.

Governmental employee benefit plans and certain church plans are exempt from ERISA, but these plans may be subject to federal, state or local laws that are similar to the ERISA laws and regulations discussed above.

 

47


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains “forward-looking statements” within the meaning of the federal securities laws. You can identify forward-looking statements by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “will,” and variations of such words or similar expressions. Our forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by our forward-looking statements are reasonable, we can give no assurance that our plans, intentions, expectations, strategies or prospects will be attained or achieved and you should not place undue reliance on these forward-looking statements. Furthermore, actual results may differ materially from those described in the forward-looking statements and may be affected by a variety of risks and factors including, without limitation:

 

   

the factors included in this prospectus, including those set forth under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business and Properties;”

 

   

the competitive environment in which we operate;

 

   

real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for tenants in such markets;

 

   

decreased rental rates or increasing vacancy rates;

 

   

our ability to lease units in apartment communities that are newly constructed;

 

   

potential defaults on or non-renewal of leases by tenants;

 

   

potential bankruptcy or insolvency of tenants;

 

   

our ability to obtain financing for and complete acquisitions under contract;

 

   

acquisition risks, including failure of such acquisitions to perform in accordance with projections;

 

   

the timing of acquisitions and dispositions;

 

   

potential natural disasters such as hurricanes;

 

   

national, international, regional and local economic conditions;

 

   

our ability to continue to pay distributions at our quarterly and annual dividend rate set forth in this prospectus;

 

   

the general level of interest rates;

 

   

potential changes in the law or governmental regulations that affect us and interpretations of those laws and regulations, including changes in real estate and zoning or tax laws, and potential increases in real property tax rates;

 

   

financing risks, including the risks that our cash flows from operations may be insufficient to meet required payments of principal and interest and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all;

 

   

lack of or insufficient amounts of insurance;

 

   

our ability to maintain our qualification as a REIT;

 

   

litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; and

 

   

possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us or a subsidiary owned by us or acquired by us.

 

48


Table of Contents

Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

This list of risks and uncertainties, however, is only a summary of some of the most important factors and is not intended to be exhaustive. You should carefully read the section entitled “Risk Factors” in this prospectus. New risks and uncertainties may also emerge from time to time that could materially and adversely affect us.

 

49


Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds we will receive from the sale of shares of our common stock in this offering will be approximately $68.0 million (or approximately $78.5 million if the underwriters exercise their over-allotment option in full), assuming a public offering price of $12.00 per share, which is the midpoint of the price range set forth on the front cover of this prospectus, and in each case after deducting underwriting discounts and commissions and estimated offering expenses payable by us of $3.3 million, of which $2.1 remains unpaid. We will contribute the net proceeds of this offering to our operating partnership in exchange for common units of our operating partnership.

We intend to use the net proceeds of this offering as follows:

 

   

approximately $12.4 million to repurchase equity interests from our joint venture partners pursuant to the governing documents of such subsidiaries, as set forth in the table below:

 

Property

   Amount to be Paid  

Terraces at River Oaks(1)

   $ 2,250,000   

Park at Fox Trails(1)

     2,250,000   

Merce(1)

     1,507,500   

Beckanna on Glenwood(1)

The Estates at Perimeter(2)

    

 

1,650,000

4,741,000

  

  

  

 

 

 

Total

   $ 12,398,500   

 

  (1) An unaffiliated entity owns membership interests in the special purpose entity owning the named property, which membership interests entitle it to a maximum return on its investment, plus an 18% per annum return thereon. On June 1, 2012, our property owning subsidiaries for each respective property entered into an agreement with the noncontrolling interest holder of each such subsidiary for the purchase of the noncontrolling interest for total consideration of approximately $7.7 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Redemption of Noncontrolling Interests.”

 

  (2) An unaffiliated entity owns a 50% membership interest in the special purpose entity owning the named property. On April 3, 2013, we entered into a binding contract with such unaffiliated entity to purchase such membership interest, which we intend to fund with proceeds from this offering.

 

   

approximately $39.7 million to fund pending acquisitions as follows:

 

Property

  Purchase
Price
     Committed
Financing
    Offering
Proceeds to be
Used
 

Woodfield Creekstone(1)

  $ 35,800,000       $ 23,250,000 (2)    $ 12,550,000   

Woodfield St. James(1)

    27,150,000        
—  
  
    27,150,000   
 

 

 

    

 

 

   

 

 

 

Total

  $ 62,950,000       $ 23,250,000      $ 39,700,000   
 

 

 

    

 

 

   

 

 

 

 

  (1) For more information, see “Prospectus Summary — Recent Developments — Pending Acquisitions.”
  (2) We have received a lender commitment for mortgage financing to partially finance the acquisition of this property with a 10-year term and a fixed interest rate of 3.88%. Payments will be interest only for the first three years, with principal and interest payments based on a 30-year amortization thereafter.

 

50


Table of Contents
   

approximately $15.9 million, the remainder of the net proceeds, to be used for general corporate and working capital purposes, which may include future acquisitions, the repayment of indebtedness and the funding of capital improvements at our apartment communities.

If the underwriters exercise their over-allotment option in full, we expect to use the additional $10.5 million of net proceeds to fund future acquisitions and for general corporate purposes.

Pending application of cash proceeds, we intend to invest the net proceeds temporarily in interest-bearing, short-term investment-grade securities, money-market accounts or checking accounts, which are consistent with our intention to qualify for taxation as a REIT. Such investments may include, for example, government and government agency certificates, certificates of deposit, interest-bearing bank deposits and mortgage loan participations. These initial investments are expected to provide a lower net return than we will seek to achieve from investments in our properties.

 

51


Table of Contents

DISTRIBUTION POLICY

On December 14, 2012, we declared a dividend for the third quarter of 2012 of $0.07605 per share, which was paid on December 31, 2012 to stockholders of record as of December 26, 2012. On January 25, 2013, we declared a dividend for the fourth quarter of 2012 of $0.0855 per share, which was paid on March 15, 2013 to stockholders of record on February 5, 2013. On April 15, 2013, we declared a dividend for the first quarter of 2013 of $0.0855 per share, payable on May 31, 2013 to stockholders of record on April 25, 2013. Purchasers of common stock in this offering will not receive the dividend for the first quarter of 2013.

On April 22, 2013, prior to financial information for the three month period ended March 31, 2013 becoming available, we declared a dividend for the second quarter of 2013 of $0.1575 per share, payable on July 12, 2013 to stockholders of record on June 14, 2013, including purchasers of common stock in this offering. This dividend equates to an annual dividend rate of $0.63 per share. In authorizing this dividend, our board of directors considered our projected operating results for 2013, our debt maturities for 2013 and the potential for refinancing or extending the maturity of such debt, our anticipated capital expenditures for 2013, our cash resources, including cash on hand, availability under our revolving credit facility and expected proceeds from this offering, and the dividend rates as a percentage of market stock prices paid by comparable multifamily REITs.

While our board of directors has not yet determined the dividend we will pay for the third quarter of 2013 or thereafter, we intend to continue to pay quarterly dividends so as to satisfy the distribution requirements applicable to REITs, and we expect to distribute all or substantially all of our REIT taxable income to eliminate or minimize our obligation to pay income or excise taxes. The Code generally requires that a REIT distribute at least 90% of its annual adjusted REIT taxable income each taxable year, determined without regard to the deduction for dividends paid and excluding any net capital gain.

All future distributions will be determined by our board of directors in its sole discretion out of funds legally available therefor. When determining the amount of future distributions, our board of directors will consider, among other factors, (i) the amount of cash available for distribution, (ii) our expectations of future cash flows, including cash flows from financing and investing activities, (iii) our determination of near-term cash needs for debt repayments and other purposes, including selective acquisitions of new properties and property capital improvements, (iv) our ability to continue to access additional sources of capital, (v) the amount required to be distributed to maintain our status as a REIT and to reduce any income and excise taxes that we otherwise would be required to pay and (vi) any limitations on our distributions contained in our credit or other agreements.

We cannot assure you that we will generate sufficient cash flows to make distributions to our stockholders or that we will be able to sustain our current rate of distributions. If our operations do not generate sufficient cash flow to allow us to satisfy the REIT distribution requirements, we may be required to fund distributions from working capital, borrow funds, sell assets or reduce such distributions. In addition, we may fund our quarterly distributions out of the net proceeds of this offering or proceeds from future equity offerings to the extent other sources of cash are insufficient to fund our distributions, which could adversely impact our results of operations. As set forth in the table below, unless our operating cash flow increases, we may be required to fund the portion of the distribution for the second quarter of 2013 that exceeds our cash available for distribution from proceeds of this offering. Our distribution policy enables us to review the alternative funding sources available to us from time to time. Our actual results of operations will be affected by a number of factors, including the revenues we receive from our properties, our operating expenses, interest expense and unanticipated capital expenditures. For more information regarding risk factors that could materially adversely affect our actual results of operations, please see “Risk Factors.”

We have estimated our cash available for distribution for the year ending December 31, 2013 by making certain adjustments to our pro forma consolidated loss from continuing operations for the year ended December 31, 2012 as described in the table below. Our estimate of cash available for distribution does not

 

52


Table of Contents

include the effect of any changes in our working capital. Moreover, the table assumes that our distribution rate for the year ending December 31, 2013 is $0.63 per share, while in fact the distribution rate for the first quarter of 2013 was $0.0855 per share, which if added to three quarterly distributions of $0.1575 would result in a distribution rate for the year ending December 31, 2013 of $0.558 per share. The table also assumes that we complete no acquisitions other than the acquisitions described under “Use of Proceeds.”

We have provided the information below solely for the purpose of estimating cash available for distribution for the year ending December 31, 2013. Such estimate has been made based on the assumptions set forth in the footnotes to the table below. The assumptions are based primarily on historical financial or operating data, and our actual results in 2013 and later years may differ significantly from our assumptions and our historical results; therefore, our actual cash available for distribution for the year ending December 31, 2013 may differ significantly from the estimate below. See “Cautionary Note Regarding Forward-Looking Statements.” We do not intend this estimate to be a projection or forecast of our actual results of operations or our liquidity and have estimated cash available for distribution for the sole purpose of providing information to you of our ability to fund our dividends at our current annual dividend rate of $0.63 per share. Our estimate of cash available for distribution should not be considered as an alternative to cash flow from operating activities (computed in accordance with GAAP) or as an indicator of our liquidity or our ability to make distributions. In addition, the methodology upon which we made the adjustments described below is not necessarily intended to be a basis for determining future distributions.

As illustrated in the table below, the distributions we would pay during the twelve months following completion of the offering at an assumed annual rate of $0.63 per share exceed our estimated cash available for distribution for the year ending December 31, 2013 by approximately $5.0 million. If we are unable to generate sufficient earnings or we are unable to borrow funds under our revolving credit facility to fund distributions, a portion of our distributions may represent a return of capital for U.S. federal income tax purposes. For a more complete discussion of the tax treatment of distributions to holders of our common stock, see “Material U.S. Federal Income Tax Considerations.”

 

53


Table of Contents

The following table describes our pro forma consolidated loss from continuing operations, for the year ended December 31, 2012, and the adjustments that we have made thereto to estimate our cash available for distribution for the year ending December 31, 2013. For purposes of estimating cash available for distribution for the year ending December 31, 2013, we have assumed that our historical rates of resident retention and replacement of departing residents will continue and that our turnover cost with respect to departing residents will remain at the historical rates reflected in the pro forma property expense. We have no reason to believe that renewal rates or rates of replacement of departing residents will decline in 2013 or that our turnover cost will materially increase.

 

Pro forma consolidated loss from continuing operations

   $ (16,165,020

Add: Pro forma depreciation and amortization

     15,544,682   

Add: Non-recurring cost from recapitalization (1)

     1,851,459   

Add: Amortization of The Beckanna on Glenwood unfavorable ground lease (2)

     415,000   

Add: Non-recurring third party property management fees, less incremental increase in G&A expenses for the period from January 1, 2012 to May 31, 2012 (1)

     293,858   

Add: Restricted stock expense (3)

     754,687   

Add: Incremental net operating income from the Estates at Millenia (4)

     1,834,888   

Add: Incremental net operating income from Woodfield Creekstone (5)

     1,332,843   

Add: Amortization of deferred financing costs (non-cash) (6)

     1,255,479   

Less: Non-recurring revenue from advisory fees (1)

     (189,980

Less: Dividend on Class A preferred stock

     (309,130

Less: Distribution on Class B contingent units

     (316,373

Less: Incremental interest expense on Estates at Millenia and Woodfield Creekstone (7)

     (1,371,743
  

 

 

 

Estimated cash flow from operating activities for the year ending December 31, 2013

     4,930,650   

Estimated cash used in investing activities for the year ending December 31, 2013 (8):

  

Less: Estimated recurring capital expenditures (9)

     (783,251

Less: Estimated non-recurring capital expenditures (10)

     (467,500
  

 

 

 

Estimated cash used in investing activities for the year ending December 31, 2013 (8)

     (1,250,751

Estimated cash flow used in financing activities for the year ending December 31, 2013:

  

Less: Scheduled loan principal payments (11)

     (1,126,925

Less: Fees on anticipated refinancings (12)

     (504,500
  

 

 

 

Estimated cash used in financing activities for the year ending December 31, 2013

     (1,631,425
  

 

 

 

Estimated cash available for distribution for the year ending December 31, 2013

   $ 2,048,474   

Total initial estimated annual distribution to common stockholders at $0.63 annual rate (13)

   $ 7,078,956   

Payout ratio

     345.6 % 

Shortfall of estimated cash available for initial estimated annual distribution to common stockholders at $0.63 annual rate

   $ (5,030,482

Net proceeds available for general corporate purposes and working capital, which may include future acquisitions, the repayment of indebtedness and the funding of capital improvements at our apartment communities (see “Use of Proceeds”)

   $ 15,900,000   

 

(1)

On June 1, 2012, we consummated our recapitalization, incurring $1,851,459 of expenses in connection with that transaction, which expenses are not recurring and have been added to pro forma consolidated loss from continuing operations in estimating cash available for distribution. At the time of the recapitalization, Trade Street Company was integrated with us as a self-administered and self-managed REIT, and we assumed the overhead and property management costs formerly borne by Trade Street Capital and certain third party property managers. At such time, TSIA discontinued receiving advisory fees, and the limited liability companies that own our properties discontinued paying property management fees. For the year ended December 31, 2012, advisory fees received by TSIA were $189,980, which have been subtracted in estimating cash available for distribution, and Trade Street Company incurred third party property

 

54


Table of Contents
  management fees of $706,358, which have been added in estimating cash available for distribution, as advisory fee revenue will not be received, nor will third party management fees be paid with respect to our current portfolio, during 2013. However, our pro forma consolidated loss from continuing operations for the year ended December 31, 2012 includes only 7 months of property management expenses incurred by us. Therefore, in estimating cash available for distribution, we have subtracted from pro forma consolidated loss from continuing operations an estimated increase in general and administrative expenses of $412,500, as a result of the addition of a Director of Property Operations, a Director of Property Accounting, a Senior Property Accountant, two Regional Property Managers, a Property Accountant and two Accounts Payable personnel. The estimate is based on the incremental compensation cost of such personnel not included in pro forma consolidated loss from continuing operations. This additional compensation expense is the result of the termination of third party property management arrangements after our recapitalization on June 1, 2012.
(2) In connection with the purchase of The Beckanna on Glenwood in October 2011, we assumed a non-cancellable operating ground lease. We expense the rental on the ground lease on a straight-line basis. We have added to pro forma consolidated net loss from continuing operations the difference between cash rent payments and straight-line expense with respect to this ground lease net of amortization of the unfavorable ground lease obligation.
(3) Our board of directors has approved the grant to certain of our officers and employees of $3,018,750 of shares of restricted common stock at the time of the offering. These shares of restricted stock will vest ratably over a four year period. We have included $754,687 of expense in general and administrative expenses in our pro forma condensed consolidated statement of operations for the year ended December 31, 2012, which expense is a non-cash expense. Accordingly, we have added that expense to pro forma consolidated loss from continuing operations in estimating our cash available for distribution for the year ended December 31, 2013.
(4) Estates at Millenia is a newly-constructed property in Orlando, Florida acquired by us in December 2012. A certificate of occupancy was issued, and lease-up of the property commenced in June 2012. Physical occupancy has increased each month. We have included historical net operating income for the three months ended March 31, 2013 and assumed annualized April 2013 net operating income from the property for purposes of estimating cash flow from operating activities for the nine months ending December 31, 2013, as we believe annualizing April 2013 net operating income is more indicative of continuing operating income from that property than other available historical data. As the property completes its lease-up phase, we expect that the actual operating results for the nine months ending December 31, 2013 will significantly improve as occupancy increases and will provide additional cash flow from operating activities that is not reflected in our estimated cash available for distribution. For units for which we have executed leases that are not yet occupied, we have assumed rental income beginning June 1, 2013 until December 31, 2013, as the time between a lease being signed and the tenant moving into the unit averages 30 days. We do not believe there are material additional expenses associated with the increased occupancy and rental income. The following reflects the computation of incremental net operating income from Estates at Millenia:

 

Historical net operating income for the three months ended March 31, 2013

      $ 412,984   

Net operating income for April 2013

   $168,447   

Annualized net operating income from Estates at Millenia for nine months ending December 31, 2013

        1,516,023   

Add:     Rent for 19 units for which leases are signed but units are not occupied, based on the monthly effective rent per unit of $1,192 per occupied unit for the three months ended March 31, 2013, assuming rental income from June 1, 2013 to December 31, 2013

        158,536   

Less:    Income from operations for the year ended December 31, 2012. See column P to the unaudited pro forma consolidated statement of operations for the year ended December 31, 2012.

        (252,655
     

 

 

 

Incremental net operating income from Estates at Millenia

      $ 1,834,888   
     

 

 

 

 

 

55


Table of Contents
(5) Woodfield Creekstone is a newly-constructed property in Durham, North Carolina that we plan to acquire with proceeds from this offering. Leasing of the property commenced in August 2012. Physical occupancy has increased each month. We have included historical net operating income for the three months ended March 31, 2013 and assumed annualized March 2013 net operating income from the property for purposes of estimating cash flow from operating activities for the nine months ending December 31, 2013, as we believe annualizing March 2013 net operating income, the latest available data, is more indicative of continuing operating income from that property than other available historical data. As the property completes its lease-up phase, we expect that the actual operating results for the nine months ending December 31, 2013 will significantly improve as occupancy increases and will provide additional cash flow from operating activities that is not reflected in our estimated cash available for distribution. For units for which we have executed leases that are not yet occupied, we have assumed rental income beginning June 1, 2013 until December 31, 2013, as the time between a lease being signed and the tenant moving into the unit averages 30 days. We do not believe there are material additional expenses associated with the increased occupancy and rental income. The following reflects the computation of incremental net operating income from Woodfield Creekstone:

 

Historical net operating income for the three months ended March 31, 2013

      $ 196,347   

Net operating income for March 2013

     $93,547      

Annualized net operating income from Woodfield Creekstone for nine months ending December 31, 2013

        841,923   

Add:     Rent for 27 units for which leases are signed but the units are not occupied, based on the current average effective rent of $1,016 per occupied unit for March 2013, assuming rental income from June 1, 2013 to December 31, 2013

        192,024   

Add:     Loss from operations (see column S to the unaudited pro forma consolidated statement of operations for the year ended December 31, 2012)

        102,549   
     

 

 

 

Incremental net operating income from Woodfield Creekstone

      $ 1,332,843   
     

 

 

 

 

(6) Amortization of deferred financing cost represents a non-cash charge to interest expense of a proportionate amount of loan fees and expenses incurred in connection with the financing of our properties. The adjustment for amortization of deferred financing costs consists of the following components:

 

Historical amortization of deferred financing cost for the year ended December 31, 2012

   $ 964,000   

Add:     Pro forma amortization of deferred financing cost for the year ended December 31, 2012 with respect to financing on properties acquired in 2012 and 2013 and pending acquisitions (consists of Westmont Commons ($22,197), Estates at Millenia ($242,832), Vintage at Madison Crossing ($14,330) and Woodfield Creekstone ($12,120)). See “Pro Forma Financial Information—Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2012—Note W.”

     291,479   
  

 

 

 

Adjustment for amortization of deferred financing cost

   $ 1,255,479   
  

 

 

 

 

56


Table of Contents
(7) Represents estimated incremental interest expense for our debt on Estates at Millenia, which was purchased on December 3, 2012, and Woodfield Creekstone, which we intend to purchase with proceeds of this offering. The adjustment for the incremental interest expense consists of the following components:

 

Contractual cash interest on Estates at Millenia loan

   $ 2,010,000   

Contractual cash interest on Woodfield Creekstone loan

     902,100   

Less: Cash interest expense included in pro forma adjustment for Estates at Millenia

     (1,004,813

Less: Estates at Millenia cash interest expense from December 3, 2012 through December 31, 2012

     (159,669

Less: Cash interest expense included in pro forma adjustment for Woodfield Creekstone

     (375,875
  

 

 

 

Incremental cash interest expense on Estates at Millenia and Woodfield Creekstone

   $ 1,371,743   
  

 

 

 

 

(8) Although we have entered into binding contracts to purchase the Estates at Wakefield and Fountains at New Bern, both of which are currently under construction, for an aggregate purchase price of $71.3 million, the costs associated with the acquisition of these properties are not included in the estimate of cash available for distribution, as such acquisitions are not probable because the net proceeds from this offering are not sufficient to fully finance the acquisition of these properties and no assurance can be made that we will succeed in obtaining permanent financing to finance all or a portion of the purchase prices of these properties. Additionally, our estimate of cash available for distribution does not include any development or associated costs related to the development of Estates at Maitland and Midlothian Town Center—East, two of our Land Investments that we may begin developing in the next year, as we intend to primarily complete development of these properties in unconsolidated joint ventures with third party developers with no expected impact on cash flows.
(9) Estimated recurring capital expenditures represents generally operating replacements that substantially extend the useful lives of our properties and regularly occur in the normal course of business of operating and maintaining our assets, which replacements include appliances, carpeting and flooring, window glass replacements, HVAC, kitchen and bath cabinets, roof replacements, site improvements and exterior building improvements. For purposes of estimating cash available for distribution, we have subtracted actual 2012 capital expenditures of $588,569 plus estimated capital expenditures at our historical rate of $213 per unit for completed acquisitions (Westmont Commons—252 units; Vintage at Madison Crossing—178 units) and pending acquisitions (Woodfield St. James—244 units) and the Estates at Perimeter (240 units), which was unconsolidated in 2012, but is expected to be consolidated following the offering, as we intend to purchase the remaining 50% equity interest from our joint venture partner with proceeds from this offering. See “Use of Proceeds.” We have not included the apartment units contained in our Estates at Millenia and Woodfield Creekstone apartment communities, as those apartment communities are newly-constructed, in their lease-up phase, and unlikely to incur any material capital expenditures during 2013 due to the newness of the properties. We operate only garden-style apartment communities, which are leased to tenants pursuant to one-year leases, and we are not obligated to provide any tenant improvements to our tenants and do not incur any leasing commission costs with respect to our leases.
(10) Represents expected revenue enhancing non-recurring capital expenditures in 2013 at our Arbors River Oaks property in the amount of $454,000 and our Vintage at Madison Crossing property in the amount of $13,500.
(11)

We have scheduled principal payments on mortgage loans during the year ending December 31, 2013 of $1,126,925, excluding principal payments and scheduled payments of principal due upon maturity on mortgage loans in respect of the following properties: (i) the Estates at Millenia, which currently requires interest-only payments and for which we have begun discussions with a lender for refinancing on an interest-only basis for a period of years; (ii) The Pointe at Canyon Ridge, which currently requires interest-only payments and for which we have submitted an application with preliminary terms to a new lender for a new Fannie Mae loan on an interest-only basis for a period of one to two years; and (iii) The Estates at

 

57


Table of Contents
  Maitland, which was refinanced on April 25, 2013, pursuant to the terms of a previously received commitment, with a new one-year loan that requires interest-only payments and can be extended at our option, except that we have included scheduled principal payments that were paid on The Estates at Maitland loan prior to the refinancing. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
(12) We expect to refinance our mortgage loans secured by our Pointe at Canyon Ridge apartment community, which matures May 31, 2013, and our Estates at Millenia apartment community, which matures December 2, 2013. In connection with the refinancing of the Pointe at Canyon Ridge mortgage loan, we will be required to pay a fee of $330,000. In connection with the refinancing of the Estates at Millenia, we will be required to pay a fee of $174,500. While both loans contain yield maintenance provisions, at the anticipated date of refinancing each loan we will have paid enough in aggregate interest such that no yield maintenance will be owed. Accordingly, no yield maintenance payments have been recorded in the table above.
(13) Represents the estimated aggregate distributions on 11,236,438 shares of common stock, the estimated number of shares of common stock to be outstanding after this offering (see “Prospectus Summary—The Offering”), based on an annualized dividend of $0.63 per share (equal to the dividend of $0.1575 per share declared for the second quarter of 2013). There are no common units in the operating partnership outstanding that are not held by us.

Feldman did not declare or pay any distributions in 2011. The table below sets forth the quarterly distributions paid or payable per share to our stockholders since our recapitalization in June 2012. The amounts represented in the table have been adjusted for the 1-for-150 reverse stock split of shares of our common stock that was effected on January 17, 2013.

 

2012

   Distributions Per
Share of Common Stock/Common Unit
 

Third Quarter

   $             0.07605   

Fourth Quarter

   $ 0.08550   

2013

      

First Quarter

   $ 0.08550   

Second Quarter

   $ 0.1575   

 

58


Table of Contents

MARKET FOR COMMON STOCK

Our common stock has traded on the OTC Pink market since July 2008. The following table sets forth the quarterly high, low, and closing prices per share of our common stock reported on the OTC Pink market for the periods indicated. Our common stock trades sporadically, generally experiences low trading volume and does not trade every day, accordingly the prices included in the tables below may not be indicative of the prices at which our common stock could be expected to trade upon listing on a national securities exchange.

 

     High      Low      Close  

2010:

        

First Quarter

   $ 0.11       $ 0.07       $ 0.09   

Second Quarter

   $ 0.10       $ 0.08       $ 0.08   

Third Quarter

   $ 0.08       $ 0.04       $ 0.05   

Fourth Quarter

   $ 0.07       $ 0.03       $ 0.06   

2011:

        

First Quarter

   $ 0.08       $ 0.05       $ 0.08   

Second Quarter

   $ 0.12       $ 0.05       $ 0.10   

Third Quarter

   $ 0.19       $ 0.06       $ 0.12   

Fourth Quarter

   $ 0.18       $ 0.06       $ 0.06   

2012:

        

First Quarter

   $ 0.16       $ 0.04       $ 0.10   

Second Quarter

   $ 0.25       $ 0.06       $ 0.07   

Third Quarter

   $ 0.15       $ 0.06       $ 0.09   

Fourth Quarter

   $ 0.13       $ 0.06       $ 0.08   

2013:

        

First Quarter (through January 25, 2013)(1)

   $ 0.11       $ 0.08       $ 0.11   

 

(1) The 1-for-150 reverse stock split, effective on January 17, 2013, was announced and became effective on the OTC Pink market on January 25, 2013. All trading after January 25, 2013 reflects the reverse stock split.

The following table sets forth the quarterly high, low, and closing prices per share of our common stock reported on the OTC Pink market as adjusted to reflect the 1-for-150 reverse stock split that was effected on January 17, 2013.

 

     High      Low      Close  

2010:

        

First Quarter

   $ 16.50       $ 10.50       $ 13.50   

Second Quarter

   $ 15.00       $ 12.00       $ 12.00   

Third Quarter

   $ 12.00       $ 6.00       $ 7.50   

Fourth Quarter

   $ 10.50       $ 4.50       $ 9.00   

2011:

        

First Quarter

   $ 12.00       $ 7.50       $ 12.00   

Second Quarter

   $ 18.00       $ 7.50       $ 15.00   

Third Quarter

   $ 28.50       $ 9.00       $ 18.00   

Fourth Quarter

   $ 27.00       $ 9.00       $ 9.00   

2012:

        

First Quarter

   $ 24.00       $ 6.00       $ 15.00   

Second Quarter

   $ 37.50       $ 9.00       $ 10.50   

Third Quarter

   $ 22.50       $ 9.00       $ 13.50   

Fourth Quarter

   $ 19.50       $ 9.00       $ 12.00   

2013:

        

First Quarter

   $ 20.00       $ 12.00       $ 17.00   

Second Quarter (through April 19, 2013)

   $ 17.00       $ 16.00       $ 16.00   

 

59


Table of Contents

On April 8, 2013, the most recent day on which our shares traded on the OTC Pink market, the closing price of our common stock reported on the OTC Pink market was $16.00 per share, and there were approximately 60 stockholders of record.

 

60


Table of Contents

DILUTION

Purchasers of our common stock in this offering will not experience immediate dilution in the net tangible book value per share of our common stock from the assumed public offering price of $12.00, which is the midpoint of the price range set forth on the front cover of this prospectus. After giving effect to the sale of the shares of our common stock offered hereby, including the use of proceeds as described under “Use of Proceeds” and the deduction of underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of December 31, 2012 attributable to common stockholders, would have been $144.3 million, or $12.84 per share of our common stock after giving effect to the reverse stock split. The following table illustrates the anti-dilutive effect of the offering:

 

Assumed public offering price per share

      $ 12.00   

Net tangible book value per share before this offering(1)

   $ 7.82      

Increase in pro forma net tangible book value per share attributable to this offering(2)

   $ 5.02      
  

 

 

    

Pro forma net tangible book value per share after this offering(3)

      $ 12.84   
     

 

 

 

Dilution in pro forma net tangible book value per share to new investors(4)

      $ (0.84
     

 

 

 

 

(1) Our net tangible book value as of December 31, 2012 is computed as stockholders’ equity attributable to common stockholders less identified intangible assets (in place leases and deferred financing costs net of the unfavorable ground lease obligation). Net tangible book value per share of our common stock before this offering is determined by dividing our net tangible book value as of December 31, 2012 by the number of shares of our common stock held by continuing investors after giving effect to the reverse stock split. The number of shares of our common stock held by continuing investors after giving effect to the reverse stock split includes (i) 251,563 shares of restricted common stock estimated to be issued to certain of our officers and employees, assuming our offering price is $12.00 per share (the midpoint of the range set forth on the cover of this prospectus), and (ii) 17,500 shares of our common stock estimated to be issued to our non-employee directors as their 2013 annual retainer, assuming the same offering price as the shares of restricted stock. Excludes: (i) 139,215 shares of our common stock that may be issued upon the exercise of warrants issued by us in the recapitalization; (ii) an unknown number of shares of our common stock into which 309,130 shares of our Class A preferred stock may be converted at such time and as described under “Description of Stock—Preferred Stock”; and (iii) an unknown number of shares of our common stock that may be issued upon redemption of common units into which 210,915 Class B contingent units may be converted as described under “Our Operating Partnership and the Operating Partnership Agreement—Operating Partnership Units—Class B Contingent Units” and—“Common Units.”
(2) This amount is calculated after deducting underwriting discounts and commissions and estimated offering expenses.
(3) Based on pro forma net tangible book value per share of approximately $144.3 million divided by the sum of 11,236,438 shares of our common stock to be outstanding after this offering.
(4) Dilution is determined by subtracting pro forma net tangible book value per share of our common stock after this offering from the public offering price paid by a new investor for a share of our common stock. If shares of our common stock are ultimately issued at a public offering price of more than $14.00, purchasers of our common stock in this offering will experience immediate dilution in the pro forma net tangible book value per share of our common stock.

 

61


Table of Contents

The following table summarizes, on an adjusted pro forma basis as of December 31, 2012, the total number of shares of our common stock owned by existing stockholders after giving effect to the reverse stock split and to be owned by new investors, the total consideration paid, and the average price per share paid by our existing stockholders after giving effect to the reverse stock split and to be paid by new investors in this offering at an assumed public offering price of $12.00, which is the midpoint of the price range set forth on the front cover of this prospectus, calculated before the deduction of estimated underwriting discounts and commissions and offering expenses payable by us:

 

     Shares Acquired     Total Consideration     Average
Price
Per
Share
 
     Number      Percent     Amount      Percent    

Existing stockholders(1)

     4,986,438         44.4   $ 69,275,208         48.0   $ 13.89   

New investors

     6,250,000         55.6     75,000,000         52.0   $ 12.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     11,236,438         100.0   $ 144,275,208         100.0   $ 12.84   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Includes (i) 251,563 shares of restricted common stock estimated to be issued to certain of our officers and employees, assuming our offering price is $12.00 per share (the midpoint of the range set forth on the cover of this prospectus), and (ii) 17,500 shares of our common stock estimated to be issued to our non-employee directors as their 2013 annual retainer, assuming the same offering price. Excludes: (i) 139,215 shares of our common stock that may be issued upon the exercise of warrants issued by us in the recapitalization, which warrants have an exercise price of $21.60 per share and are $9.60 per share out-of-the-money based on the assumed public offering price of $12.00, which is the midpoint of the price range set forth on the front cover of this prospectus; and (ii) an unknown number of shares of our common stock that may be issued upon redemption of common units into which 210,915 Class B contingent units may be converted as described under “Our Operating Partnership and the Operating Partnership Agreement—Operating Partnership Units—Class B Contingent Units” and “—Common Units.”

 

62


Table of Contents

CAPITALIZATION

The following table sets forth our capitalization (i) on a historical basis as of December 31, 2012; (ii) on a pro forma basis to give effect to (a) our sale of Fontaine Woods and 2013 acquisition of Vintage at Madison Crossing, (b) the issuance on March 14, 2013 of 35,804 additional shares of our Class A preferred stock as a reimbursement to BREF/BUSF Millenia Associates, LLC of certain development costs incurred up to the date of the contribution in connection with the development of the site acquired in the acquisition of the Estates at Millenia and the adjacent development site on December 3, 2012 (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Acquisition and Disposition Activity—Estates at Millenia”), (c) the amendments to the terms of our Class A preferred stock that occurred on January 14, 2013, and (d) the amendments and restatements of the operating partnership agreement on February 8, 2013 and March 26, 2013, which resulted in the consolidation of the Class B and Class C preferred units into one class of partnership units designated as Class B contingent units and the exchange of 546,132 common units that were issued in our recapitalization for 14,307 additional Class B contingent units as set forth in “Our Recapitalization and Structure—Subsequent Transactions Related to the Recapitalization”; and (iii) on a pro forma as adjusted basis to give effect to this offering, assuming a public offering price of $12.00 per share, which is the midpoint of the price range set forth on the front cover of this prospectus, and application of the net proceeds as set forth under “Use of Proceeds.” You should read this table in conjunction with the sections captioned “Use of Proceeds,” “Selected Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited historical and pro forma financial information and related notes thereto included elsewhere in this prospectus.

 

     As of December 31, 2012  
     Historical     Pro Forma
(unaudited)
    Pro Forma
as Adjusted
 

Mortgage notes payable(1)

   $ 163,626,814      $ 175,063,814      $ 216,210,338   

Class A preferred stock; $0.01 par value per share; 423,326 shares authorized, 273,326 shares and 309,130 shares issued and outstanding, historical and pro forma respectively(2)

     26,802,814        —          —     

Noncontrolling interest in Operating Partnership—Class B and C preferred units(3)

     19,400,338        —          —     

Stockholders’ equity:

      

Class A preferred stock; $0.01 par value per share; 423,326 shares authorized, 273,326 shares and 309,130 shares issued and outstanding, historical, pro forma and pro forma as adjusted, respectively(2)

     —          3,091        3,091   

Common stock, $0.01 par value per share; 1,000,000,000 authorized; 4,717,375, 4,717,375 and 11,236,438 shares issued and outstanding, historical, pro forma and pro forma as adjusted, respectively(4)

     47,174        47,174        112,365   

Additional paid-in capital

     73,560,482        111,578,520        178,354,249   

Accumulated deficit

     (37,959,620     (36,359,620     (34,679,815
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity—Trade Street Residential, Inc.

     35,648,036        75,269,165        143,789,890   

Noncontrolling interest in Operating Partnership—common units

     9,613,516        —          —     

Noncontrolling interest in Operating Partnership—Class B contingent units(3)

     —          21,113,854        21,113,854   

Noncontrolling interest in consolidated real estate partnerships

     977,139        —          —     
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     46,238,691        96,383,019        164,903,744   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 256,068,657      $ 271,446,833      $ 381,114,082   
  

 

 

   

 

 

   

 

 

 

 

 

(1) Excludes liabilities of approximately $9.1 million related to real estate held for sale (Fontaine Woods) included in discontinued operations as of December 31, 2012.

 

63


Table of Contents
(2) On November 30, 2012, our board of directors classified and designated an additional 250,000 authorized but unissued shares of preferred stock as Class A preferred stock. Therefore, 423,326 shares of Class A preferred stock are authorized as of the date of this prospectus. On January 14, 2013, the terms of the Class A preferred stock were amended to require that, in any conversion, the average market price of our common stock in the conversion calculation be subject to a minimum price of $9.00 per share after giving effect to the reverse stock split. As a result, we expect that the Class A preferred stock will be presented in stockholders’ equity in future periods.
(3) Effective February 8, 2013, the operating partnership issued one Class B contingent unit for each outstanding Class C preferred unit and renamed the Class B preferred units as Class B contingent units in connection with the amendment and restatement of the operating partnership agreement. In addition, on March 26, 2013, the partners of the operating partnership entered into a Second Amendment and Restatement of the operating partnership agreement pursuant to which 546,132 common units of the operating partnership were exchanged for 14,307 additional Class B contingent units.
(4) Pro forma common stock outstanding includes (i) 6,250,000 shares of common stock to be issued in this offering; (ii) 251,563 shares of common restricted common stock estimated to be issued to certain of our officers and employees assuming our offering price is $12.00 per share (the midpoint of the range set forth on the cover of this prospectus); and (iii) 17,500 shares of our common stock estimated to be issued to our non-employee directors as their 2013 annual retainer assuming the same offering price. Excludes (i) an unknown number of shares of our common stock into which 309,130 shares of our Class A preferred stock, may be converted at such time and as described under “Description of Stock—Preferred Stock,” (ii) an unknown number of shares of our common stock that may be issued upon the redemption of common units into which 210,915 Class B contingent units may be converted as described under “Our Operating Partnership and the Operating Partnership Agreement—Operating Partnership Units—Class B Contingent Units”, and “—Common Units,” (iii) 139,215 shares of our common stock that may be issued upon the exercise of warrants issued in connection with our recapitalization, (iv) up to 937,500 additional shares of common stock issuable upon exercise of the underwriters’ over-allotment option in full, and (v) a number of shares of common stock available for future issuance under our Equity Incentive Plan, equal to $2,156,250 divided by the public offering price per share. See “Shares Eligible for Future Sale—Conversion Rights” and “Executive Compensation—Equity Incentive Plan.”

 

64


Table of Contents

OUR RECAPITALIZATION AND STRUCTURE

Background and Purpose of the Recapitalization

Until June 1, 2012, we conducted business as Feldman Mall Properties, Inc., a Maryland corporation that elected to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2004, and which immediately prior to the recapitalization transaction held a single land asset having minimal value and conducted no operations. Feldman was formed and completed its initial public offering in 2004. In connection with Feldman’s initial public offering, it completed a simultaneous series of formation transactions that resulted in its acquisition of three regional malls and related assets. After the initial public offering and formation transactions, Feldman acquired additional mall properties outright and through joint ventures with institutional investors. Due to the deep recession that began in late 2007, the financial performance of these mall properties was significantly adversely affected. In 2008, Feldman’s common stock was delisted by the New York Stock Exchange, Feldman ceased being a reporting company with the Securities and Exchange Commission, or the SEC, and Feldman’s entire senior management team left the company, after which the then-current Feldman board of directors engaged Brandywine Financial Services Corporation, or Brandywine, as a third party manager of the company. From 2008 until June 1, 2012, Feldman sold or otherwise disposed of all of its mall properties except a single parcel of land having minimal value.

In mid-2011, our current management team, which at the time was the management team for Trade Street Capital, was asked to determine, among several alternative strategies, if the investors in the Trade Street Funds would likely benefit from conversion into a publicly traded REIT in order to achieve liquidity in their investments several years earlier than the fund agreements provided, would have an opportunity to share in the value growth that could be generated by a publicly traded REIT with access to capital and could be less susceptible to refinancing risks that were experienced in 2008 through 2010 if their investment was in a publicly traded REIT. Trade Street Capital evaluated options for converting the Trade Street Funds into a publicly traded REIT. Given the uncertain market for initial public offerings of small REITs in late-2011, the Trade Street Capital management team determined that a reverse merger into a company that already had a publicly traded stock could possibly be done more quickly and with more certainty of closure than a traditional initial public offering. The Trade Street Capital management team evaluated several reverse merger candidates and determined that Feldman provided the best alternative because (1) it had a currently effective REIT election, and (2) a combination with Feldman would not be subject to “seasoning” rules recently adopted by the national securities exchanges delaying listing by certain companies that effected reverse mergers into public shell corporations.

In December 2011, Trade Street Capital commenced negotiations with Feldman with respect to a contribution transaction pursuant to which the Trade Street Funds would contribute real estate assets to Feldman and Trade Street Capital would contribute its management and advisory businesses and interests in the real estate assets to be contributed by the Trade Street Funds, all in exchange for equity securities of Feldman and its newly formed operating partnership subsidiary, which became our operating partnership after the recapitalization. Feldman and Trade Street Capital executed a preliminary term sheet on February 6, 2012 and exchanged multiple drafts of a contribution agreement prior to the execution of the definitive contribution agreement on April 23, 2012. The parties engaged in extensive negotiations regarding the value of the properties and the management and advisory businesses to be contributed and the per-share price of Feldman’s common stock for determining the number of shares and units to be issued in the transaction by Feldman and its newly formed operating partnership subsidiary.

During the negotiation period, Feldman conducted a due diligence investigation with respect to the properties and the management and advisory business being contributed by the Trade Street Funds and their affiliates. The purpose of the investigation was to confirm the reasonableness of the information provided by the Trade Street Funds with respect to the contributed properties and to confirm the current condition of each contributed property. This due diligence investigation entailed the following with respect to each of the contributed properties: (1) site visitation and physical inspection of the property; (2) audit of tenant leases and rent rolls; (3) review of third party reports, including property appraisals, property condition reports, and Phase I

 

65


Table of Contents

environmental assessment reports; (4) review of loan documentation; and (5) review of actual and budgeted financial information, including historical and projected net operating income. This assessment was provided to the Feldman board of directors.

In connection with the transaction, Feldman engaged a financial adviser to evaluate the transaction from a financial perspective in order to confirm that the transaction was fair to the Feldman stockholders at the time of the transaction. Because the existing Feldman stockholders would retain approximately 2.0% of the newly capitalized entity, in addition to taking into account the value of the special distribution and warrants issuable to the Feldman stockholders, as discussed below, the financial adviser valued the ongoing ownership in the recapitalized entity using traditional valuation methodologies, including the discounted cash flow method and comparable public traded company analysis. The financial adviser used the Black Scholes formula to value the warrants being issued to the existing Feldman stockholders. Based on its analysis, the financial adviser concluded that the recapitalization transaction was financially advantageous to existing Feldman stockholders.

The Feldman board of directors considered, among other things, the due diligence assessment and the financial adviser’s analysis discussed above in reaching its decision to approve the recapitalization transaction. Particularly, the Feldman board of directors noted that Feldman had few, if any, alternatives to the proposed recapitalization transaction and little cash on hand. The Feldman board of directors further acknowledged that, without the recapitalization transaction, Feldman would be forced to liquidate and dissolve, which would likely leave the Feldman stockholders with proceeds well below the value attributable to the recapitalization transaction, as at the time, Feldman’s liabilities exceeded its assets. Taking these factors into account, the Feldman board of directors determined that the recapitalization transaction was in the best interests of the Feldman stockholders and approved the transaction.

In April 2012, Feldman entered into the contribution agreement with the Trade Street Funds and Trade Street Capital providing for the recapitalization. The recapitalization was completed on June 1, 2012, at which time the board of directors of Feldman was reconstituted, Feldman changed its name to “Trade Street Residential, Inc.”, the third party management arrangement with Brandy wine was terminated and our current senior management team, which prior to the recapitalization was the Trade Street Capital management team, took over day-to-day management of the recapitalized company. After the recapitalization, our business is a continuation of the multifamily residential real estate investment and management business of the Trade Street Funds and Trade Street Capital that were contributed to the company in the recapitalization.

Terms of the Contribution Agreement and Other Ancillary Agreements

The complete text of the contribution agreement and the first amendment thereto, as well as the warrant agreement summarized below, are included as exhibits to the registration statement of which this prospectus is a part.

Consideration. As more fully described below, as consideration for the contribution of the Contributed Properties and the Contributed Land Investments, Feldman issued shares of common stock and Class A preferred stock to the Trade Street Funds. Additionally, as consideration for the contribution of TSIA and TS Manager, LLC, the operating partnership issued common units, Class B preferred units and Class C preferred units to Trade Street Adviser GP, Inc., Trade Street Capital and Mr. Baumann and his wife. Additionally, Feldman stockholders of record as of May 17, 2012 received the warrants and the special distribution described below.

Representations and Warranties. The contribution agreement contained customary representations and warranties made by Feldman and the operating partnership to Trade Street Capital, on its behalf and on behalf of the Trade Street Funds, and by Trade Street Capital, on its behalf and on behalf of the Trade Street Funds, to Feldman and the operating partnership. The representations and warranties made by Feldman and the operating partnership in the contribution agreement will survive for the applicable statute of limitations for a breach of contract claim. The representations and warranties made by Trade Street Capital, on its behalf and on behalf of the Trade Street Funds, in the contribution agreement did not survive the closing of the transactions contemplated by the contribution agreement.

 

66


Table of Contents

Indemnification. The contribution agreement did not provide for a continuing obligation to indemnify on the part of Feldman and the operating partnership or Trade Street Capital or the Trade Street Funds.

Warrant Agreement. In connection with the transactions contemplated by the contribution agreement for the recapitalization. We entered into a warrant agreement with our transfer agent, American Stock Transfer & Trust Company, LLC, acting as our warrant agent. The warrant agreement sets forth the terms of the warrants to purchase an aggregate of 139,214 shares issued by Feldman to stockholders of record as of May 17, 2012. As set forth in the warrant agreement, the warrants are exercisable for a period of two years following listing of our common stock on a national securities exchange at an exercise price of $0.144 per share. Following the reverse stock split, the exercise price of these warrants is $21.60. In general, the warrants are not transferable, exchangeable or assignable without our consent.

Consideration Given in the Recapitalization

In connection with the recapitalization:

 

   

The Trade Street Funds contributed to our operating partnership all of their respective interests in the entities that owned certain of our Operating Properties, or the Contributed Properties, and certain of our Land Investments, or the Contributed Land Investments. In exchange for the Contributed Properties and the Contributed Land Investments, Feldman issued an aggregate of 3,396,976 shares of common stock and 173,326 shares of Class A preferred stock to the Trade Street Funds. Each share of Class A preferred stock has a liquidation preference of $100.00 per share, subject to a downward adjustment upon certain events (an aggregate liquidation preference of $17.3 million for such shares), has no voting rights except in certain limited instances, is entitled to a preferential annual distribution equal to 1.0% of the liquidation preference per share, which distribution rate increases to 2.0% on June 1, 2015 and 3.0% on June 1, 2016, is convertible into shares of our common stock at such time and as described under “Description of Stock—Preferred Stock,” and is redeemable by us in our sole discretion for cash equal to the liquidation preference per share plus accrued but unpaid distributions at any time after June 1, 2019. The aggregate value of the shares of common stock and shares of Class A preferred stock issued to the Trade Street Funds in the recapitalization was $78,478,168. In addition, a joint venture partner in one of the Contributed Properties contributed to our operating partnership all of its interest in the entity that owns such Contributed Property in exchange for an aggregate of 52,868 shares of our common stock having an aggregate value of $951,627. On January 14, 2013, we effected an amendment to the terms of the Class A preferred stock by providing that the average market price of our common stock for purposes of determining the number of shares of common stock into which shares of Class A preferred stock are converted is subject to a minimum of $9.00 per share. See “—Subsequent Transactions Related to the Recapitalization—Amendment of Terms of Class A Preferred Stock” and “Description of Stock—Class A Preferred Stock.”

 

   

Feldman issued 5,000 shares of common stock having a value of $90,000 to Brandywine as payment in full of a termination payment due upon termination of the management services agreement between Feldman and Brandywine.

 

   

Feldman declared a special distribution payable to stockholders of record as of May 17, 2012, in an amount equal to $7.50 per share, payable on the earlier of (A) five business days after the date Feldman sold the retained parcel of land referred to above and commonly known as the “Northgate Parcel” or (B) July 16, 2012. The distribution was to be payable in cash only to the extent of net proceeds from the sale of the Northgate Parcel prior to July 16, 2012, with the balance payable in shares of common stock. As the Northgate Parcel was not sold prior to July 16, 2012, we issued an aggregate of 42,340 shares of common stock on July 16, 2012 to the stockholders entitled to be paid the special distribution.

 

   

Feldman issued to stockholders of record as of May 17, 2012, as a special distribution, warrants to purchase an aggregate of 139,215 shares of common stock, which warrants are exercisable for a period of two years following listing of our common stock on a national securities exchange at an exercise price of $21.60 per share, subject to adjustment for any other stock splits, stock distributions and other capital changes.

 

67


Table of Contents
   

Our operating partnership issued 3,556,460 common units to our company, which equals the number of shares of our common stock outstanding immediately after the recapitalization, and 173,326 Class A preferred units to our company, which equals the number of shares of Class A preferred stock outstanding immediately after the recapitalization. After the recapitalization, all of our assets are held by, and all of our operations are conducted by, our operating partnership and its subsidiaries in a traditional umbrella partnership REIT, or UPREIT, structure.

 

   

Trade Street Adviser GP, Inc., Trade Street Capital and Mr. Baumann and his wife contributed to our operating partnership all of their ownership interests in TSIA and TS Manager, LLC in exchange for (i) 546,132 common units having an aggregate value of $9,830,382, (ii) 98,304 Class B preferred units having an aggregate value of $9,830,400, and (iii) 98,304 Class C preferred units having an aggregate value of $9,830,400. The common units were redeemable at the option of the holder at any time after June 1, 2013 for a cash price per common unit equal to the average closing price of our common stock for the 20 trading days prior to the delivery of the notice of redemption by the holder, or, at our election, for shares of our common stock on a one-for-one basis. At the time of issuance, the Class B preferred units had a liquidation preference of $100.00 per unit or an aggregate liquidation preference of $9.8 million, and the Class C preferred units had a liquidation preference of $100.00 per unit or an aggregate liquidation preference of $9.8 million. In addition, the Class B preferred units and Class C preferred units were each entitled to cumulative annual distributions equal to 1.5% of the liquidation preference per share, payable quarterly. The Class B preferred units and Class C preferred units were convertible into common units beginning June 1, 2013 and June 1, 2014, respectively, at a conversion rate equal to the sum of (A) the liquidation preference per unit, (B) an additional 3.0% per annum of the liquidation preference per unit, and (C) any unpaid accumulated distributions; divided by, generally, the average closing price of our common stock for the 20 trading days prior to the date of conversion. Effective February 8, 2013 and March 26, 2013 our operating partnership and its partners amended and restated the partnership agreement of the operating partnership in the manner described under “—Amendment and Restatement of Operating Partnership Agreement” and “Our Operating Partnership and the Operating Partnership Agreement.”

 

   

Trade Street Capital contributed its property management company, Trade Street Property Management, LLC, to our operating partnership for no additional consideration.

 

   

In connection with the recapitalization, each of the Trade Street Funds formed a Delaware statutory trust and adopted a plan of liquidation and executed a liquidating trust agreement in order to effectuate its dissolution and liquidation. Pursuant to the terms of the liquidation documentation, all of the assets of the Trade Street Funds not contributed to us in the recapitalization, as well as the shares of our common stock and preferred stock issued by Feldman to the Trade Street Funds in the recapitalization, were contributed to each fund’s respective liquidating trust. Upon completion of the dissolution and liquidation of each of the Trade Street Funds, the trustees of the liquidating trusts will distribute the assets held in the liquidating trusts, including the shares of common stock and preferred stock, to the respective partners and members of the Trade Street Funds, including the limited partners and non-managing members, all of which limited partners and non-managing members are pension funds, in accordance with the governing documents of the Trade Street Funds. The governing documents of the liquidating trusts require the assets of each liquidating trust to be distributed to the beneficial owners no later than May 31, 2015 unless such date is extended in the trustee’s discretion.

Subsequent Transactions Related to the Recapitalization

Amendment of Terms of Class A Preferred Stock

On January 14, 2013, the terms of the Class A preferred stock were amended to provide that in calculating the number of shares of common stock to be issued upon conversion of shares of Class A preferred stock, the average market price of our common stock in the conversion calculation shall not be less than $9.00 per share. For a complete description of the terms of the Class A preferred stock, please see “Description of Stock—Class A Preferred Stock.”

 

68


Table of Contents

Amendment and Restatement of the Operating Partnership Agreement

On February 8, 2013, the partners of the operating partnership entered into an Amendment and Restatement of the operating partnership agreement to combine the Class B preferred units and the Class C preferred units issued in the recapitalization into a single class of partnership units, designated as Class B contingent units, and to amend certain terms of the Class B contingent units. Each Class B contingent unit has a stated value of $100. The operating partnership issued one Class B contingent unit for each outstanding Class C preferred unit and all remaining Class B preferred units became Class B contingent units. The Amendment and Restatement of the operating partnership agreement was superseded by the Second Amendment and Restatement of the Operating Partnership agreement described in the next paragraph.

Second Amendment and Restatement of the Operating Partnership Agreement

On March 26, 2013, the partners of the operating partnership executed the Second Amended and Restated Agreement of Limited Partnership, or the partnership agreement, to amend the terms of the Class B contingent units. The 546,132 common units that were issued to Trade Street Adviser GP, Inc., Trade Street Capital and Mr. Baumann and his wife on June 1, 2012 at the closing of the recapitalization were exchanged for 14,307 additional Class B contingent units, such that after the Second Amendment and Restatement of the operating partnership agreement, Trade Street Adviser GP, Inc., Trade Street Capital and Mr. and Mrs. Baumann own no common units in the operating partnership and an aggregate of 210,915 Class B contingent units. As amended, the Class B contingent units are entitled to non-cumulative quarterly distributions that are preferential with respect to the payment of distributions on common units and pari passu with the payment of distributions on Class A preferred units. The quarterly distributions on the Class B contingent units must be declared and set aside for payment prior to any distributions being declared on the common units for that quarterly period. The amount of the distributions will be $0.375 (1.5% per annum of the stated value per Class B contingent unit) per quarter until December 31, 2014, $0.75 per quarter (3.0% per annum of the stated value per Class B contingent unit) from January 1, 2015 through December 31, 2015 and $1.25 per quarter (5.0% per annum of the stated value per Class B contingent unit) thereafter.

The Class B contingent units will be converted into common units in three tranches based upon the sale or stabilization, which is defined as the achievement of 90% physical occupancy, of our Land Investments, as follows (except that all Class B contingent units will be automatically converted into common units upon, among other events, a change of control, sale of substantially all assets or bankruptcy of our company):

 

   

52,728.75 units upon the earlier to occur of (i) the stabilization of our development property, The Estates at Maitland, and (ii) the sale of The Estates at Maitland.

 

   

52,728.75 units upon the earlier to occur of (i) the stabilization of our development property, Estates at Millenia—Phase II, and (ii) the sale of Estates at Millenia—Phase II.

 

   

105,457.50 units upon the earlier to occur of (i) the stabilization of either our development property, Midlothian Town Center East, or our development property, Venetian, and (ii) the sale of either Midlothian Town Center-East or Venetian.

The Class B contingent units will be converted into common units on the schedule set forth above (or an earlier triggering event) at a conversion rate equal to $100.00 per unit divided by, generally, the average closing price of our common stock for the 20 trading days prior to the date of conversion, subject to a minimum price of $9.00 per share (subject to further adjustment for subsequent stock splits, stock dividends, reverse stock splits and other capital changes). The Class B contingent units rank equally with common units with respect to losses of the operating partnership and share in profits only to the extent of the distributions. The Class B contingent units do not have a preference with respect to distributions upon any liquidation of the operating partnership. There have been no further changes to the common units or Class B contingent units since the second amendment and restatement of the limited partnership agreement on March 26, 2013.

 

69


Table of Contents

Summary of Recapitalization and Other Related Transactions

The following table summarizes the equity securities issued by us and our operating partnership in connection with the recapitalization and termination of the Brandywine management services agreement, as adjusted by the 1-for-150 reverse and, with respect to Class B contingent units, subsequent amendments and restatement of the Agreement of Limited Partnership of the operating partnership, or the operating partnership agreement, prior to the date of this prospectus:

 

Issuance/Recipient

   Number of
Shares/Units/
Warrants

Transferred
     Value of
Consideration
(Per Share/
Unit/
Warrant)
     Aggregate
Value of
Consideration
at the Time of
Issuance
 

Issuances of common stock for Contributed Properties(1)(2)

        

Trade Street Funds

     3,396,976       $ 18.00       $ 61,145,568   

Post Oak Partners, LLC

     52,868       $ 18.00       $ 951,627   

Issuance of common stock (termination fee under management services agreement with Brandywine)(1)

        

Brandywine Financial Services Corporation

     5,000       $ 18.00       $ 90,000   

Issuance of common stock as special distribution(1)

        

Feldman stockholders of record on May 17, 2012

     42,340       $ 7.50       $ 317,550   
  

 

 

       

 

 

 

Total common stock

     3,497,184          $ 62,504,745   

Issuance of warrants to purchase common stock(3)(4)

        

Feldman stockholders of record on May 17, 2012

     139,215       $ 2.10       $ 292,352   
  

 

 

       

 

 

 

Total common stock and warrants

     3,636,399          $ 62,797,097   
  

 

 

       

 

 

 

Issuances of Class A preferred stock for Contributed Land Investments(2)(5)(7)

        

Trade Street Funds

     173,326       $ 100.00       $ 17,332,600   

Issuances of Class B contingent units for ownership interests in TSIA and TS Manager LLC(6)(7)

        

Trade Street Capital, LLC

     70,298       $ 100.00       $ 7,029,800   

Trade Street Adviser GP, Inc.

     1,413       $ 100.00       $ 141,300   

Michael and Heidi Baumann

     139,204       $ 100.00       $ 13,920,400   
  

 

 

       

 

 

 

Total Class B contingent units

     210,915          $ 21,091,500   
  

 

 

       

 

 

 

 

(1) The number of shares of common stock issued gives effect to the 1-for-150 reverse stock split we effected on January 17, 2013. There were 3,556,460 shares of common stock outstanding immediately after the recapitalization. As discussed in this prospectus under the caption “Our Recapitalization and Structure,” the parties to the recapitalization engaged in extensive arm’s length negotiations regarding the per share price of Feldman’s common stock in order to determine the number of shares of common stock, and the value of the preferred stock and preferred units, to be issued in the recapitalization.
(2) On December 3, 2012, we issued 940,241 shares of common stock and 100,000 shares of our Class A preferred stock to BREF/BUSF Millenia Associates, LLC as consideration for the contribution of the Estates at Millenia and the development parcel adjacent thereto. On March 14, 2013, we issued 35,804 additional shares of our Class A preferred stock as a reimbursement to BREF/BUSF Millenia Associates, LLC of certain development costs incurred in connection with the development of such development parcel.These shares of common stock and Class A preferred stock were issued in a separate transaction that was not part of the recapitalization; accordingly these shares are not reflected in this table. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Acquisition and Disposition Activity—Estates at Millenia” for more information.
(3) The number of warrants to purchase shares of common stock gives effect to the 1-for-150 reverse stock split we effected on January 17, 2013. The warrants have an exercise price of $21.60 per share.

 

70


Table of Contents
(4) Value of warrants was determined using the Black Scholes valuation model.
(5) The per share/unit value and the aggregate value reflects the liquidation preference per share of Class A preferred stock.
(6) The ownership interests in TSIA and TS Manager LLC were contributed in exchange for 546,132 common units, 98,304 Class B preferred units and 98,304 Class C preferred units. By amendment and restatement of the operating partnership agreement on February 8, 2013 and March 26, 2013, the Class B preferred units and Class C preferred units were combined into 196,608 Class B contingent units having an agreed base value of $100 per unit and the 546,132 common units were exchanged for 14,307 additional Class B contingent units. See “Our Recapitalization and Structure—Terms of the Contribution Agreement and Other Ancillary Agreements” and “Our Operating Partnership and the Operating Partnership Agreement— Operating Partnership Units—Class B Contingent Units.”
(7) The Class A preferred stock is convertible into shares of commons stock upon the occurrence of certain contingencies described in “Description of Stock—Class A Preferred Stock.” The Class B contingent units are convertible into common units of the operating partnership upon the occurrence of certain contingencies described in “Our Operating Partnership and the Operating Partnership Agreement—Operating Partnership Units—Class B Contingent Units.”

Our Structure

We are a full service, vertically integrated, self-administered and self-managed corporation operating as a REIT for U.S. federal income tax purposes. All of our employees are employed by, and all of our operations are conducted through, our operating partnership. As of the date of this prospectus, we own 100% of the common units in our operating partnership. The following diagram depicts the expected ownership of our common stock and our operating partnership’s common units upon completion of this offering.

 

LOGO

 

(1) Includes 4,717,375 shares of common stock held by common stockholders prior to this offering.
(2)

Two liquidating trusts formed in connection with the impending liquidation of the Trade Street Funds also own 100% of the shares of Class A preferred stock issued to the Trade Street Funds in the recapitalization and to BREF/BUSF Millenia Associates, LLC in

 

71


Table of Contents
  December 2012 as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Acquisition and Disposition Activity—Estates at Millenia.”
(3) Trade Street Residential, Inc. also owns 100% of the Class A preferred units and no Class B contingent units of Trade Street Operating Partnership, LP.
(4) Trade Street Capital, LLC also owns approximately 33.33% of the Class B contingent units of Trade Street Operating Partnership, LP.
(5) Trade Street Adviser GP, Inc. also owns approximately 0.67% of the Class B contingent units of Trade Street Operating Partnership, LP.
(6) Michael and Heidi Baumann also own approximately 66.0% of the Class B contingent units of Trade Street Operating Partnership, LP.
(7) Includes shares of restricted stock to be granted to our executive officers upon completion of this offering, which are subject to vesting over a four-year period, and shares of our common stock to be granted to our non-employee directors in lieu of cash for the annual retainer fee. See “Management—Director Compensation” and “Executive Compensation—Equity Incentive Plan—Initial Awards.”

 

72


Table of Contents

SELECTED FINANCIAL AND OTHER DATA

The following table sets forth selected financial and other data of Trade Street Residential, Inc. The historical financial statements of Trade Street Residential, Inc. included in this prospectus for the periods prior to June 1, 2012 reflect the assets, liabilities and operations of Trade Street Company retroactively adjusted to reflect the legal capital of Trade Street Residential, Inc. Trade Street Company is not a legal entity, but instead represents a combination of certain real estate entities and management operations based on common ownership and control by the Trade Street Funds and Trade Street Capital.

The selected balance sheet data as of December 31, 2012 and 2011 and the selected statement of operations data for the years ended December 31, 2012 and 2011 have been derived from the audited historical financial statements of Trade Street Residential, Inc., appearing elsewhere in this prospectus.

Our unaudited selected pro forma financial and other data as of and for the year ended December 31, 2012 have been adjusted to give effect to this offering and our intended use of proceeds of this offering and certain other transactions as described in the pro forma condensed consolidated financial statements included elsewhere in this prospectus. You should read the following selected financial, operating and other data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes appearing elsewhere in this prospectus. All per share data set forth below has been adjusted to give effect to the 1-for-150 reverse stock split of our common stock that was effected on January 17, 2013.

 

     Year ended December 31,  
     Pro Forma     Historical  
     2012     2012     2011  

Statement of operations data:

      

Total revenue

   $ 31,928,517      $ 21,410,982      $ 11,949,569   

Total operating expenses (1)

     38,500,388        25,658,975        12,038,235   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (6,571,871     (4,247,993     (88,666
  

 

 

   

 

 

   

 

 

 

Total other expense, net

     (9,593,149     (6,553,778     (2,594,123
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income from unconsolidated joint venture

     (16,165,020     (10,801,771     (2,682,789

Income from unconsolidated joint venture

     —          45,739        43,381   

Income (loss) from discontinued operations

     —          2,204,772        (1,158,848
  

 

 

   

 

 

   

 

 

 

Net loss

     (16,165,020     (8,551,260     (3,798,256

Loss allocated to noncontrolling interests

     1,570,411        1,708,734        377,330   

Accretion of preferred stock and preferred units

     (375,482     (375,482     —     
  

 

 

   

 

 

   

 

 

 

Loss attributable to common stockholders of Trade Street Residential, Inc.

   $ (14,970,091   $ (7,218,008   $ (3,420,926
  

 

 

   

 

 

   

 

 

 

Earnings per common share - basic and diluted

      

Continuing operations

   $ (1.98   $ (4.14   $ (23.49

Discontinued operations

     —          0.97        (12.04
  

 

 

   

 

 

   

 

 

 
   $ (1.98   $ (3.17   $ (35.53
  

 

 

   

 

 

   

 

 

 

 

(1) Total operating expenses for the year ended December 31, 2012 include approximately $1.9 million of one-time expenses in connection with our recapitalization.

 

73


Table of Contents
     Year ended December 31,  
     Pro Forma     Historical  
     2012     2012     2011  

Balance sheet data (at end of period):

      

Investment in operating properties before accumulated depreciation and amortization

   $ 327,443,069      $ 224,172,470      $ 159,133,834   

Land held for future development

   $ 42,622,330      $ 42,622,330      $ 18,170,949   

Real estate held for sale

   $ —        $ 12,308,368      $ 38,176,079   

Total assets

   $ 395,317,201      $ 291,909,724      $ 235,199,632   

Mortgage notes payable(1)

   $ 216,210,338      $ 163,626,814      $ 112,097,662   

Total stockholders’ equity(2)

   $ 164,903,744      $ 46,238,691      $ 84,337,100   

Cash flows data:

      

Operating activities

     $ (1,428,243   $ 3,044,087   

Investing activities

     $ 2,873,320      $ (30,488,194

Financing activities

     $ 2,787,668      $ 26,531,632   

Other data:

      

FFO(3)

   $ (995,820   $ (2,165,452   $ 2,934,240   

Core FFO(3)

   $ 1,500,600      $ 815,559      $ 4,855,770   

NOI(4)

   $ 18,810,035      $ 13,623,021      $ 8,971,105   

Number of properties at end of the period

     18        14        13   

 

(1) Excludes liabilities of approximately $9.1 million related to real estate held for sale (Fontaine Woods) included in discontinued operations as of December 31, 2012. We completed the sale of our 70% ownership interest in this property on March 1, 2013. See “Prospectus Summary—Recent Developments—Sale of Fontaine Woods.”
(2) In addition, redeemable preferred stock of approximately $26.8 million is recorded as temporary equity as of December 31, 2012.
(3) FFO for the year ended December 31, 2012 includes recapitalization costs of approximately $1.9 million. For a definition and reconciliation of FFO and Core FFO and a statement disclosing the reasons why our management believes that the presentation of FFO and Core FFO provides useful information to investors and, to the extent material, any additional purposes for which our management uses FFO and Core FFO, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures—Funds from Operations and Core FFO.”
(4) For a definition and reconciliation of NOI and a statement disclosing the reasons why our management believes that the presentation of NOI provides useful information to investors and, to the extent material, any additional purposes for which our management uses NOI, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures—Net Operating Income.”

 

74


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the more detailed information set forth under the caption “Selected Financial and Other Data,” and in our audited financial statements and the related notes thereto appearing elsewhere in this prospectus. The financial statements for periods and as of dates prior to the recapitalization represent consolidated historical financials of Trade Street Company. All share and per share data set forth below has been adjusted to give effect to the 1-for-150 reverse stock split of shares of our common stock that was effected on January 17, 2013.

Overview of Our Company

We are a full service, vertically integrated, self-administered and self-managed Maryland corporation focused on acquiring, owning, operating and managing conveniently located, garden-style and mid-rise apartment communities in mid-sized cities and suburban submarkets of larger cities primarily in the southeastern United States, including Texas. We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2004. We seek to own and operate apartment communities in cities that have:

 

   

a stable work force comprised of a large number of “echo boomers” augmented by positive net population migration;

 

   

well-paying jobs provided by a diverse mix of employers across the education, government, healthcare, insurance, manufacturing and tourist sectors;

 

   

a favorable cost of living;

 

   

reduced competition from larger multifamily REITs and large institutional real estate investors who tend to focus on select coastal and gateway markets; and

 

   

a limited supply of new housing and new apartment construction.

We currently own and operate14 apartment communities containing 3,183 apartment units in Alabama, Florida, Georgia, Kentucky, North Carolina, Tennessee and Texas. We currently have 90 employees who provide property management, maintenance, landscaping, construction management and accounting services.

Our Recapitalization and Other Related Transactions

For a complete discussion of our recapitalization and our structure, see “Our Recapitalization and Structure.” After completion of the recapitalization on June 1, 2012, we are a full service, vertically integrated, self-administered and self-managed corporation operating as a REIT for federal income tax purposes. All of our employees are employed by, and all of our operations are conducted through, our operating partnership. As of the date of this prospectus, we own 100% of the common units in our operating partnership.

For accounting purposes, TSIA was deemed to be the accounting acquirer in the recapitalization even though Trade Street Residential, Inc. (formerly Feldman Mall Properties, Inc.) was the legal acquirer. The audited historical financial statements of the registrant as of and for the year ended December 31, 2011 represent the audited historical financial statements of Trade Street Company and the consolidated statements of operations and cash flows for the year ended December 31, 2012 include the operations and cash flows of Trade Street Company for the five months ended May 31, 2012, the day prior to effectiveness of the recapitalization. Trade Street Company is not a legal entity, but represents a combination of certain real estate entities and management operations based on common ownership and control of the Trade Street Funds and Trade Street Capital. During all periods presented in the accompanying consolidated financial statements up to June 1, 2012, the entities comprising Trade Street Company were under common control with Trade Street Capital.

 

75


Table of Contents

How We Derive Our Revenue

Our revenue consists primarily of rents received from residents of our apartment communities. Certain properties are owned through joint ventures, resulting in noncontrolling interests of 30% to 50%. Income (loss) allocations, if any, to noncontrolling interests includes the pro-rata share of such properties net real estate income (loss). All significant intercompany balances and transactions were eliminated as a result of the recapitalization transaction.

Trends

During the year ended December 31, 2012, rental demand for our apartments continued to be strong as compared to the same period in 2011. Occupancy remained a strong 94.1% across our portfolio of apartment communities owned as of December 31, 2012 as compared to 93.8% as of December 31, 2011, and our average price for new leases and renewals trended up. Average effective rent per unit is equal to the average of gross rent amounts after the effect of leasing concessions for occupied units, divided by the total number of units. Leasing concessions represent discounts to the current rate. We believe average effective rent is a helpful measure in evaluating average pricing. It does not represent actual rental revenue collected per unit. With strong occupancy at all of our apartment communities, we expect our positive trend in average effective rent to continue in the near term. While we have benefitted from positive trends in occupancy and pricing over the past four quarters, our portfolio occupancy and rates are impacted by employment trends in our markets. New employment continues to increase at a slow pace, and the unemployment rate remains at historically high levels; therefore, we remain cautiously optimistic about our ability to sustain occupancy increases and higher rents over the coming quarters.

We also continue to benefit from limited supply of new apartment units in our markets. In 2012, new supply of apartment units entering the market continued to run below historical averages. Competition from existing condominiums reverting to rental apartments, or new condominiums being converted to rental apartments, has not affected our portfolio because most of our submarkets have not been primary areas for condominium development. We have found the same to be true for rental competition from single family homes, and we have not experienced the entry of large single family rental “consolidators” into our markets. We have avoided committing a significant amount of capital to markets where the housing crisis most dramatically impacted home values and sales and created a new rental market consisting of single family homes. We expect new supply of new apartments and rental units in our markets to remain low over the foreseeable future.

Throughout the year ended December 31, 2012, we continued to have the benefit of lower interest rates resulting from a continued strong market for Fannie Mae and Freddie Mac debt securities. Short term interest rates continue to be at historically low levels and, as a result, we expect a continuation of favorable interest rates in the near term with rates rising as the economy improves.

Factors That May Influence Future Results of Operations

We derive a substantial majority of our revenues from rents received from residents in our apartment communities. We consider our strong internal property management capability to be a vital component of our business; therefore, as we grow we will likely add personnel as necessary to provide outstanding customer service to our residents in order to maintain or increase occupancy levels at our apartment communities and to preserve the ability to increase rents. This is likely to result in an increase in our operating and general and administrative expenses.

Substantially all of the leases at our apartment communities are for terms of one year or less, which generally enables us to seek increased rents upon renewal of existing leases or commencement of new leases. These short-term leases minimize the potential adverse effect of inflation or deflation on rental income, although residents may leave without penalty at the end of their lease terms for any reason. As is customary in the multifamily industry, a certain number of residents move out of an apartment community at the end of a lease term, which is referred to as “turnover.” All apartment owners incur costs in connection with turnover, including the costs of repainting and repairing apartment units, replacing obsolete or damaged appliances and re-leasing the

 

76


Table of Contents

units. While we budget for turnover and the costs associated therewith, our turnover cost may be affected by certain factors we cannot control. Excessive turnover and failure to properly manage turnover cost may adversely affect our operations and could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock.

We seek earnings growth primarily through increasing rents and occupancy at existing properties, acquiring additional apartment communities in markets complementing our existing portfolio locations and selectively disposing of stabilized properties to redeploy capital into higher growth investments. Our apartment communities are concentrated in mid-sized cities and suburban submarkets of larger cities primarily in the southeastern United States, including Texas, which makes us more susceptible to adverse developments in those markets. As a result, we are particularly affected by the local economic conditions in these markets, including, but not limited to, changes in supply of or demand for apartment units in our markets, competition for real property investments in our markets, changes in government rules, regulations and fiscal policies, including those governing real estate usage and tax, and any environmental risks related to the presence of hazardous or toxic substances or materials at or in the vicinity of our properties, which will negatively impact our overall performance.

We may be unable to accurately predict future changes in national, regional or local economic, demographic or real estate market conditions. For example, continued volatility and uncertainty in the global, national, regional and local economies could make it more difficult for us to lease apartments, may require us to lease our apartments at lower rental rates than projected and may lead to an increase in resident defaults. In addition, these conditions may also lead to a decline in the value of our properties and make it more difficult for us to dispose of these properties at competitive prices. These conditions, or others we cannot predict, could adversely affect our financial condition, results of operations, cash flows and ability to pay distributions on, and the market price of, our common stock.

In connection with the recapitalization and this offering, we have incurred substantial, one-time general and administrative expenses. Following completion of this offering, we will incur increased general and administrative expenses, including legal, accounting and other expenses related to corporate governance, public reporting and compliance with various provisions of the Sarbanes-Oxley Act, related regulations of the SEC, including compliance with the reporting requirements of the Exchange Act, and the requirements of the national securities exchange on which our stock is listed.

Emerging Growth Company

We are an “emerging growth company” under the federal securities laws and, as such, we have elected to provide reduced public company reporting requirements in this prospectus and in future filings. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with accounting standards newly issued or revised after April 5, 2012. In other words, an “emerging growth company” can delay the adoption of accounting standards until those standards would otherwise apply to private companies. We are choosing to take advantage of the extended transition period for complying with accounting standards newly issued or revised after April 5, 2012.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses in the reporting periods. Our actual results may differ from these estimates.

We identify and discuss our significant accounting policies that directly impact our financial statements in the notes to the financial statements included in this prospectus. We discuss below those policies that may be of

 

77


Table of Contents

particular interest to readers of this prospectus. Other companies in similar businesses may utilize different estimation policies and methodologies, which may impact the comparability of our results of operations and financial condition to those companies.

Purchase Price Allocation and Related Depreciation and Amortization

When we acquire apartment communities, management analyzes and determines the relative value of the components of real estate assets and intangible assets acquired and assigns useful lives to such components based on age and condition at the time of original acquisition. These estimates of useful lives are highly subjective and are based in part on assumptions that could differ materially from actual results in future periods.

Capital Expenditures and Depreciation

Construction and improvement costs incurred in connection with the development of new properties or the redevelopment of existing properties are capitalized to the extent the total carrying value of the property does not exceed the estimated net realizable value of the completed property. Capitalization of these costs begins when the activities and related expenditures commence and ceases when the project is substantially complete and ready for its intended use, at which time the project is placed in service and depreciation commences. Real estate taxes, construction costs, insurance, and interest costs incurred during construction periods are capitalized. Capitalized real estate taxes and interest costs are amortized over periods which are consistent with the constructed assets. Real estate investments are stated at the lower of cost less accumulated depreciation or fair value, if deemed impaired, as described below. Depreciation on real estate is computed using the straight-line method over the estimated useful lives of the related assets, generally 35 to 50 years for buildings, 2 to 15 years for long-lived improvements and 3 to 7 years for furniture, fixtures and equipment. Ordinary repairs and maintenance costs are expensed. Significant improvements, renovations and replacements that extend the life of the assets are capitalized and depreciated over their estimated useful lives.

Impairment of Real Estate Assets

We evaluate our real estate assets when events or occurrences, which may include significant adverse changes in operations and/or economic conditions, indicate that the carrying amounts of such assets may not be recoverable. We assess a property’s recoverability by comparing the carrying amount of the property to our estimate of the undiscounted future operating cash flows expected to be generated over the holding period of the property, including cash flow from its eventual disposition. If our evaluation indicates that we may be unable to recover the carrying value of a property, we record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the property. Recording an impairment loss results in an immediate negative charge to net income. For real estate owned through unconsolidated real estate joint ventures or other similar real estate investment structures, at each reporting date we compare the estimated fair value of our real estate investment to the carrying value, and record an impairment charge to the extent the fair value is less than the carrying amount and the decline in value is determined to be other than a temporary decline. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future operating results that could differ materially from actual results in future periods. For a discussion of our impairments in 2012 and 2011, see “—Historical Results of Operations—Comparison of Years Ended December 31, 2012 to December 31, 2011—Asset Impairment Losses.”

Revenue Recognition

Revenues are recorded when earned. Residential properties are leased under operating leases with terms of generally one year or less. Rental income is recognized when earned on a straight-line basis. Sales of real estate property occur through the use of a sales contract where gains or losses from real estate property sales are recognized upon closing of the sale. We use the accrual method and recognize gains or losses on the sale of our properties when the earnings process is complete, we have no significant continuing involvement and the collectability of the sales price and additional proceeds is reasonably assured, which is typically when the sale of the property closes.

 

78


Table of Contents

Operating Expenses

Operating expenses associated with the rental property include costs to maintain the property on a day to day basis as well as any utility costs, real estate taxes and insurance premiums. Operating expenses are recognized as incurred.

Accounting for Recapitalization

For legal purposes, our recapitalization consisted of the contribution by the Trade Street Funds of all of their respective interests in the entities that own the Contributed Properties and the Contributed Land Investments and the contribution by Trade Street Advisor GP, Inc., Trade Street Capital and Mr. Baumann and his wife and all of their interest in the real estate investment advisory and management platform to the surviving legal entity, Trade Street Residential, Inc., a Maryland corporation, formerly known as Feldman Mall Properties, Inc. prior to June 1, 2012. For accounting purposes the transaction was accounted for as a recapitalization, and TSIA, which was owned and controlled by Mr. Baumann, was deemed to be the “accounting acquirer.” Accordingly, the accompanying historical audited financial statements of Trade Street Residential, Inc. and the unaudited historical condensed financial statements of Trade Street Residential, Inc. included elsewhere in this prospectus and the discussion below represent the historical financial statements of the entities contributed to the operating partnership prior to June 1, 2012, which have been retroactively adjusted to reflect the legal capital of the recapitalized corporation, and Trade Street Residential Inc. subsequent to June 1, 2012. See Note A to the audited historical consolidated financial statements for the years ended December 31, 2012 and 2011 appearing elsewhere in this prospectus for further discussion.

Accounting for the Variable Interest Entity

Under Financial Accounting Standards Board, or FASB, Accounting Standard Codification, or ASC 810, “Consolidation,” when a reporting entity is the primary beneficiary of an entity that is a variable interest entity as defined in FASB ASC 810, the variable interest entity must be consolidated into the financial statements of the reporting entity. The determination of the primary beneficiary requires management to make significant estimates and judgments about rights, obligations, and economic interests in such entities as well as the same of the other owners. A primary beneficiary has both the power to direct the activities that most significantly impact the variable interest entity, and the obligation to absorb losses and the right to receive benefits from the variable interest entity. Unconsolidated joint ventures in which we do not have a controlling interest but exercise significant influence are accounted for using the equity method, under which the Company recognizes its proportionate share of the joint venture’s earnings and losses. The entities contributed to the operating partnership in the recapitalization were under common control, directly or indirectly, of Mr. Baumann.

Internal Controls and Procedures

We have had limited accounting personnel and systems to adequately execute accounting processes and limited other supervisory resources with which to address internal controls over financial reporting. As such, our internal controls may not be sufficient to ensure that (1) all transactions are recorded as necessary to permit the preparation of financial statements in conformity with GAAP and (2) the design and execution of our controls has consistently resulted in effective review of our financial statements and supervision by individuals with financial reporting oversight roles. In the past, lack of adequate staffing levels resulted in insufficient time spent on review and approval of certain information used to prepare our financial statements. The lack of adequate accounting systems prevented us from capturing all transactions and related journal entries, which prevented us from preparing timely and accurate financial reporting and analysis. We and our independent registered accounting firm concluded that these control deficiencies constituted a material weakness in the internal controls over financial reporting as of December 31, 2011. Further, in connection with the review of our financial statements as of and for the period ended September 30, 2012, we and our independent registered accounting firm concluded that additional material weaknesses existed with the company’s processes of identifying, tracking, evaluating, recording, disclosing and communicating to those charged with corporate governance,

 

79


Table of Contents

related party transactions. In connection with the audit of our financial statements as of and for the year ended December 31, 2012, we and our independent registered accounting firm concluded that a material weakness still existed with the company’s process of identifying, tracking, recording and communicating related party transactions.

Additionally, after issuing interim financial statements as of and for the six and nine months ended June 30, 2012 and September 30, 2012, respectively, we identified two accounting errors: (1) expenses incurred in connection with the recapitalization on June 1, 2012 six months that should have been recorded as expense and included in our statement of operations for the six months ended June 30, 2012 were incorrectly recorded as a direct reduction to equity in those financial statements; and (2) certain capital expenditures occurring from January 1, 2012 through September 30, 2012 were inappropriately recorded as operating expenses but should have been capitalized. We have revised and restated our previously issued financial statements as of and for the six and nine months ended June 30, 2012 and September 30, 2012, respectively. In connection with our restatement of our interim financial statements, we and our independent public registered accounting firm concluded that an additional material weakness existed with the company’s process of identifying, tracking and recording capital asset additions.

A material weakness is a control deficiency, or a combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The control deficiencies described above, at varying degrees of severity, contributed to the material weakness in the control environment of Trade Street Residential, Inc.

Our senior management team has taken steps to address the causes of these material weaknesses by putting into place new accounting processes and control procedures, including the implementation of best-in-class multifamily property management, financial accounting and revenue management software systems. During 2012 and the first two months of 2013, we have added six experienced accounting and property management personnel in response to our identification of gaps in our skills base and expertise of our staff required to meet the financial reporting requirements of a public company. We have also adopted a related party transaction policy, which is described under the caption “Certain Relationships and Related Transactions—Related Party Transaction Policy.” In addition, we have adopted a formal capitalization policy that we are following in order to prevent errors in our process of identifying, tracking and recording capital asset additions.

We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act, and are, therefore, not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. We will not be required to make our first assessment of our internal control over financial reporting until the year following the first annual report required to be filed with the SEC after the completion of this offering. To comply with the requirements of being a public company, we may need to implement additional financial and management controls, reporting systems and procedures and hire additional accounting and finance staff.

Further, our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal controls over financial reporting for as long as we are an emerging growth company. Once it is required to do so, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed.

 

80


Table of Contents

Acquisition and Disposition Activity

During 2012 and 2011, we completed various acquisitions of multifamily apartment communities from unrelated sellers and one disposition. Each acquisition involved the acquisition of the operating real estate, but no management or other business operations were acquired in such acquisitions. The assets acquired are summarized below.

2012 Acquisitions

Westmont Commons—On December 13, 2012, we acquired Westmont Commons, an apartment community located in Asheville, North Carolina. Westmont Commons contains 252 apartment units. The purchase price of $22.4 million was comprised of a mortgage note payable of approximately $17.9 million plus cash of approximately $4.5 million.

Estates at Millenia—On December 3, 2012, we acquired Estates at Millenia, a 297-unit apartment community located in Orlando, Florida, and the seven-acre development site adjacent to the Estates at Millenia approved for the development of 403 apartment units and known as Estates at Millenia - Phase II.

Consideration for the purchase consisted of:

 

   

For the Estates at Millenia Property, a total of $43.2 million, consisting of approximately $29.1 million in cash to pay off the existing loan and shares of our common stock valued at approximately $14.1 million;

 

   

For the Estates at Millenia-Phase II, 100,000 shares of Class A preferred stock having an aggregate liquidation preference of $10.0 million, valued at approximately $9.3 million as of the acquisition date based on a valuation performed by us of the stock. On March 14, 2013, we issued an additional 35,804 shares of Class A preferred stock having an aggregate liquidation preference of $3.6 million, as additional consideration to the seller equal to the amount of certain development costs incurred by the seller up to the date of contribution. This issuance of shares of Class A preferred stock was the only change to the amount of our capital stock outstanding from December 31, 2012 to the date of this prospectus. Upon receipt of the final certificate of occupancy for the development property, we will issue to the seller an additional number of shares of Class A preferred stock equal to 20% of the increase in value of the property (as defined) based on a valuation performed us. We valued the contingent consideration at $356,000 and the Class A preferred stock at $3,318,315 for a total of $3,674,315, which is included as acquisition consideration payable in preferred stock in the accompanying consolidated balance sheets as of December 31, 2012.

At the closing of the foregoing acquisition, we entered into a new $35.0 million mortgage loan secured by the Estates at Millenia that matures on December 2, 2013 unless extended for one additional one-year period subject to the payment of an extension fee and the satisfaction of certain conditions.

Venetian—On February 19, 2012, we acquired Venetian, one of our Land Investments, from an insolvent developer after construction began through the completion of foreclosure proceedings on a previously acquired delinquent loan. The property is carried at $11 million including land, site work, and improvements. The project is not expected to start before 2014.

2012 Disposition

The Estates at Mill Creek—On November 16, 2012, we completed the sale of The Estates at Mill Creek, an apartment community located in Buford, Georgia. The consideration for the disposition was $27.5 million, including approximately $8.4 million cash and the assumption by the buyer of a $19.1 million mortgage loan that bears interest at a fixed rate of 4.67% per annum and matures on November 1, 2020. The sale resulted in a gain to the company of approximately $2.2 million. The proceeds of this sale were primarily used to acquire Westmont Commons, as described below.

 

81


Table of Contents

2011 Acquisitions

The Trails of Signal MountainOn May 26, 2011, we acquired The Trails of Signal Mountain, a multifamily apartment community located in Chattanooga, Tennessee. The Trails of Signal Mountain contains 172 apartment units in 12 two- and three-story garden-style apartment buildings on seven acres of land. The purchase price of $12.0 million was comprised of a mortgage note payable of approximately $8.3 million plus cash of approximately $3.7 million.

Fontaine Woods—On May 9, 2011, through a joint venture, we acquired a 70% ownership interest in Fontaine Woods, a multifamily apartment community located in Chattanooga, Tennessee. Fontaine Woods contains 263 apartment units. The total purchase price paid by the joint venture entity was $13.0 million, which was comprised of a mortgage note payable of $9.1 million plus cash of $3.9 million. On March 1, 2013, we completed the sale of our 70% interest in Fontaine Woods to our joint venture partner. The results of operations for Fontaine Woods have been reported as discontinued operations for all periods presented. See “2013 Acquisition and Disposition.”

Post OakOn July 28, 2011, we acquired Post Oak, a multifamily apartment community located in Louisville, Kentucky. Post Oak contains 126 apartment units in 19 three story residential apartment buildings located on five acres of land. The purchase price of approximately $8.3 million was comprised of a mortgage note payable of approximately $5.3 million plus cash of $3.0 million.

Mercé ApartmentsOn October 31, 2011, we acquired Mercé Apartments, a multifamily apartment community located in Dallas, Texas. Mercé Apartments contains 114 garden-style apartment units in six one- and three-story residential buildings on three acres of land. The purchase price of $8.1 million was comprised of a mortgage note payable of $5.5 million plus cash of approximately $2.6 million.

The Beckanna on GlenwoodOn October 31, 2011, we acquired The Beckanna on Glenwood, a multifamily apartment community located in Raleigh, North Carolina. The Beckanna on Glenwood contains 254 garden-style apartment units in one eight-story residential building located on seven acres of land. The property was purchased subject to a non-cancelable operating ground lease. The term of the lease is through March 23, 2055, with the option to extend the lease for five additional ten-year periods. The purchase price of approximately $9.4 million was comprised of a mortgage note payable of approximately $6.4 million plus cash of $3.0 million.

Park at Fox TrailsOn December 6, 2011, we acquired Park at Fox Trails, a multifamily apartment community located in Plano, Texas. Park at Fox Trails contains 286 garden-style apartment units in 45 one- and two-story residential buildings on 16 acres of land. The purchase price of approximately $21.2 million was comprised of a mortgage note payable of approximately $15.0 million plus cash of approximately $6.2 million.

Terrace at River OaksOn December 21, 2011, we acquired Terrace at River Oaks, a multifamily apartment community located in San Antonio, Texas. Terrace at River Oaks contains 314 garden-style apartment units in 77 two-story residential buildings on 24 acres of land. The purchase price of approximately $20.4 million was comprised of a mortgage note payable of $14.3 million plus cash of approximately $6.1 million.

2013 Acquisition and Disposition

Subsequent to the year ended December 31, 2012, we completed the sale of one and acquired one multifamily apartment community. These transactions are described below.

Fontaine Woods—On March 1, 2013, we completed the sale of our 70% ownership interest in Fontaine Woods, an apartment community located in Chattanooga, Tennessee. The consideration for our 70% ownership interest was $10.5 million, including $4.0 million of cash. The sale resulted in a gain to the company of approximately $1.6 million. The proceeds of this sale were primarily used to acquire Vintage at Madison Crossing, as described below.

 

82


Table of Contents

Vintage at Madison CrossingOn March 4, 2013, we acquired Vintage at Madison Crossing, a 178-unit multifamily community consisting of 12 buildings in Huntsville, Alabama. The purchase price of $15.3 million was comprised of a new mortgage of $11.4 million plus cash of $3.9 million.

Historical Results of Operations

Comparison of Years Ended December 31, 2012 to December 31, 2011

 

     Years ended December 31,              
     2012      2011     Change     %  

Total revenue

   $ 21,410,982      $ 11,949,569      $ 9,461,413        79.2   
  

 

 

   

 

 

   

 

 

   

Property operations

     9,066,921        3,955,637        5,111,284        129.2   

Real estate taxes and insurance

     2,932,135        1,572,455        1,359,680        86.5   

General and administrative

     3,801,687        763,572        3,038,115        397.9   

Depreciation and amortization

     7,522,182        3,883,315        3,638,867        93.7   

Asset impairment losses

     —          413,726        (413,726     (100.0

Provision for loan losses

     —          59,461        (59,461     (100.0

Acquisition and recapitalization costs

     2,336,050        1,390,069        945,981        68.1   
  

 

 

   

 

 

   

 

 

   

Total expenses

     25,658,975        12,038,235        13,620,740        113.1   
  

 

 

   

 

 

   

 

 

   

Loss from operations

     (4,247,993     (88,666     4,159,327        4,691.0   

Interest expense (net)

     (6,553,778     (2,594,123     3,959,655        152.6   

Income from unconsolidated joint venture

     45,739        43,381        2,358        5.4   
  

 

 

   

 

 

   

 

 

   

Loss from continuing operations

     (10,756,032     (2,639,408     8,116,624        307.5   

Income (loss) from discontinued operations including gain from sale of rental real estate property

     2,204,772        (1,158,848     3,363,620        290.3   
  

 

 

   

 

 

   

 

 

   

Net loss

     (8,551,260     (3,798,256     4,753,004        125.1   

Noncontrolling interests

     1,708,734        377,330        1,331,004        352.7   

Accretion of preferred stock and preferred units

     (375,482     —         375,482        —    
  

 

 

   

 

 

   

 

 

   

Net loss attributable to common stockholders

   $ (7,218,008 )    $ (3,420,926   $ 3,797,082        111.0   
  

 

 

   

 

 

   

 

 

   

Our focus throughout 2012 and 2011 was increasing pricing where possible through our revenue management system, while maintaining strong physical occupancy. Through these efforts, weighted average effective rent per unit and weighted average physical occupancy increased during both comparative periods. During the year ended December 31, 2012, the weighted average effective rent per unit for our same store properties increased to $814 per unit from $803 per unit for the year ended December 31, 2011. Occupancy of our same store properties as of December 31, 2012 and 2011 was 93.3% and 93.1%, respectively.

We define “same store” properties as those that we owned and operated for the entirety of both periods being compared, except for properties that are in the construction or lease-up phases, or properties that are undergoing significant redevelopment. We move properties previously excluded from our same store portfolio for these reasons into the same store designation once they have stabilized or the redevelopment is complete. For newly constructed or lease-up properties or properties undergoing significant redevelopment, we consider a property stabilized at the earlier of (i) attainment of 90% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment. For comparison of the year ended December 31, 2012 and 2011, the same store properties included properties owned since January 1, 2011, excluding our Land Investments. No other properties owned since January 1, 2011 were under construction or redevelopment.

The weighted average effective rent per unit for the entire portfolio for the year ended December 31, 2012 was $784 reflecting our entry into middle markets with lower rent price points. These markets have strong

 

83


Table of Contents

economic and demographic fundamentals, which we believe should allow for improved operating trends in the future. However, no assurance can be given that such improvement will occur. The occupancy of our properties, excluding our Land Investments, owned as of December 31, 2012 and 2011 was 94.1% and 93.8%, respectively.

Net income (loss) applicable to Common Stockholders

There was an approximate $3.8 million increase in our net loss attributable to common stockholders for the year ended December 31, 2012 over the net loss attributable to common stockholders incurred for the year ended December 31, 2011. The following is a discussion of changes from period to period of the material components of our results of operations.

Revenue

Rental revenue for the year ended December 31, 2012 was approximately $21.2 million, an increase of approximately $10.4 million or 95.2%, from the year ended December 31, 2011 due primarily to: (i) the acquisition of two multifamily communities added to our portfolio in 2012; (ii) a full year of operations of the six multifamily communities added to our portfolio in 2011 and (iii) an increase in average effective rent per unit. In addition, advisory fee revenue decreased by approximately $0.9 million to approximately $0.2 million for the year ended December 31, 2012 from approximately $1.1 million for the same period in the prior year. This reduction in advisory fees reflects the decrease in the number and value of assets under management for properties which were not contributed in the recapitalization. We do not expect advisory fees to contribute meaningfully to our operating revenue in the future.

Property Operations Expense

Expenses from property operations include property-level costs including, without limitation, compensation costs for property-level personnel, repairs and maintenance, utilities and landscaping. Expenses from property operations for the year ended December 31, 2012 were approximately $9.1 million, an increase of approximately $5.1 million, or 129.2%, from the year ended December 31, 2011 due primarily to (i) a full year of operations of the six multifamily communities added to our portfolio in 2011 ($4.2 million), (ii) increases in same store expenses ($0.5 million) related to additional staffing and turnover costs associated with bringing management in house and increased occupancy, (iii) expenses from two multifamily communities purchased in 2012.

General and Administrative Expense

General and administrative expense increased 397.9%, from approximately $0.8 million for the year ended December 31, 2011 to approximately $3.8 million for the year ended December 31, 2012. The increase in general and administrative expense is attributed primarily to growth in the number of corporate personnel needed to acquire, manage and maintain the increased number of properties that were acquired during the third and fourth quarters of 2011 and in 2012, increased professional fees primarily attributable to the audit of our financial statements and increased overhead from being a wholly self managed and advised company after the recapitalization. General and administrative expenses include the costs associated with corporate management, including executive officers, acquisition and corporate development staff and functions. We expect general and administrative expense, including accounting and legal fees, to increase in future periods as we incur additional public company expenses.

Depreciation and Amortization

Depreciation and amortization expense for the year ended December 31, 2012 was approximately $7.5 million, an increase of approximately $3.6 million from the year ended December 31, 2011, primarily due to (i) the acquisition of two multifamily communities added to our portfolio in 2012; and (ii) a full year of depreciation on the six multifamily communities added to our portfolio in 2011. The 2012 amount includes amortization of $2.0 million for the in-place leases capitalized in connection with the acquisition of each asset as compared to $1.2 million for the year ended December 31, 2011 as 64% of the units purchased were acquired

 

84


Table of Contents

during the last two months of 2011 (24% in the last month) and, therefore, most of the related in-place lease costs had not yet been amortized as of December 31, 2012. As a result, the majority of the amortization from these properties acquired during 2011 is reflected in the amortization expense for the year ended December 31, 2012.

Asset Impairment Losses

The carrying value of the loan to Venetian Ft. Myers Associates, LLLP was $11.0 million as of December 31, 2011, reflecting an impairment loss of approximately $59,000 recorded in 2011. Venetian is located in southwest Florida, which experienced substantial price depreciation over the last few years. Due to the aforementioned weakness in pricing, an appraisal was obtained to determine the net realizable value of the loan at the balance sheet date. Recently, demand in this market has improved and we expect to begin development of the property in the next few years. On February 19, 2012, BREF Venetian, LLC, as the lender, completed foreclosure proceedings on Venetian Ft. Myers Associates, LLLP and took possession of the underlying property, The Venetian. The $11.0 million carrying value of the loan as of December 31, 2011 was the carrying value of the property at the time of possession, which also equaled the appraised value. This amount is included in Land Held for Future Development as of December 31, 2012 in the accompanying consolidated balance sheets.

For investment properties, specifically Estates at Maitland, Midlothian Town Center—East and Oak Reserve at Winter Park, management recorded impairment losses in 2011 of $0.4 million, in order to adjust land, buildings, improvements and other capitalized costs of impaired properties to their fair value. Fair values were determined using internally developed valuation models and property appraisals performed by MAI certified independent appraisers. Prior to our recapitalization transaction, we were required by our governing documents to obtain appraisals of each of our properties on an annual basis. Following our recapitalization transaction, to determine fair value, we use appraisals, internal estimates, and discounted cash flow calculations to indicate a potential impairment and then obtain third-party appraisals to further analyze any potential impairment. Appraisals performed are generally consistent with our internally generated valuations, and we do not adjust appraisals in arriving at the fair value of a property.

Estates at Maitland and Midlothian Town Center—East are both pre-development mixed use multifamily projects with a small retail component. The projects are located in Maitland, Florida and Midlothian, Virginia, respectively. As a result of the general downturn in the national economy and each of these local economies, the redevelopment trend had slowed significantly, the active development was primarily limited to already commenced projects and a significant amount of nearby vacant retail space existed. These factors, coupled with tighter credit standards, which reduced the financing capabilities of potential lenders, placed significant downward pressure on valuations and led to the recorded impairments. Over the past year, demand in each of these markets has improved, and we expect to begin development of each of these properties in the next year.

Oak Reserve at Winter Park is a 142-unit property is located in Winter Park, Florida. The economic downturn had a significant impact on existing developments, and both rental rates and occupancy levels had dropped for residential projects in this market. The surrounding multifamily market had experienced a significant increase in apartment-to-condominium conversions during 2005 to 2007. However, due to a lack of buyers and available financing, many of these converted condominium units had been placed back on the market as rentable units creating an additional supply of units and placing downward pressure on occupancy and rental rates. These factors contributed to reduced valuations and the aforementioned impairments. The market has shown positive trends over the past year and valuations have improved.

Acquisition and Recapitalization Costs

Acquisition expenses are charged to current expense in the period incurred. Our acquisition expenses include direct costs to acquire apartment communities, including real estate commissions, attorney fees, due diligence costs, title searches and title insurance costs. We also paid acquisition fees to related parties in 2011, which are reflected in acquisition expenses.

 

85


Table of Contents

For the year ended December 31, 2012, acquisition expenses were approximately $0.5 million, compared to $1.4 million for the year ended December 31, 2011, a decrease of approximately 64.3%. The decrease was attributable to our acquisition of two apartment communities during 2012 compared to six apartment communities during 2011.

In connection with the recapitalization, acquisition and recapitalization costs of $2.7 million were incurred during the year ended December 31, 2012, of which $0.9 million was charged against additional paid-in capital and $1.8 million was recorded as acquisition and recapitalization costs.

Interest Expense (Net)

Interest expense (net) increased approximately $4.0 million or 153% in 2012 due to (i) the acquisition of two apartment communities added to our portfolio in 2012 ($0.2 million); (ii) a full year of operations of the six apartment communities added to our portfolio in 2011 ($2.4 million); and (iii) the debt refinancing we completed in 2012 ($1.4 million).

Income (Loss) from Discontinued Operations Including Gain from Sale of Rental Real Estate Property

Income (loss) from discontinued operations including gain from sale of rental real estate property increased approximately $3.4 million or 290% as a result of the gain from the sale of Estates at Mill Creek ($2.2 million) and the inclusion of a full year of operations for Estates of Mill Creek and Fontaine Woods in 2012 ($1.2 million).

Noncontrolling Interests

Noncontrolling interests increased approximately $1.3 million or 353% due to the recapitalization and the resulting noncontrolling interest in the operating partnership.

Accretion of Preferred Stock and Preferred Units

The accretion of preferred stock and preferred units is due to the recapitalization and was recorded as a result of the issuance of the shares of our Class A preferred stock and the operating partnership’s Class B and Class C units.

Liquidity and Capital Resources

We estimate that the net proceeds we will receive from the sale of shares of our common stock in this offering, at an assumed public offering price of $12.00, which is the midpoint of the price range set forth on the cover of this prospectus, will be approximately $68.0 million (or approximately $78.5 million if the underwriters exercise their over-allotment option in full), after deducting underwriting discounts and commissions of $4.9 million (or approximately $5.6 million if the underwriters exercise their over-allotment option in full) and estimated organizational and offering expenses of approximately $2.1 million payable by us, excluding $1.2 million of offering expenses that we paid prior to December 31, 2012. We will contribute the net proceeds we receive from this offering to our operating partnership in exchange for common units of our operating partnership. We expect our operating partnership will use the net proceeds as set forth in “Use of Proceeds.”

As of December 31, 2012, on a pro forma basis after giving effect to this offering and the use of the net proceeds therefrom, our outstanding indebtedness was $216.2 million, which is comprised of mortgage indebtedness secured by our properties. Of this amount, net of scheduled amortization, $74.9 million matures in 2013, no debt matures in 2014, $9.0 million matures in 2015, and no debt matures in 2016. Our mortgage loan on The Pointe at Canyon Ridge in the principal amount of $26.4 million matures on May 31, 2013. We have submitted an application with preliminary terms to a new lender with respect to the refinancing of The Pointe at Canyon Ridge mortgage with a Fannie Mae multifamily mortgage loan, but have no commitment from such lender. We have received a commitment to refinance the mortgage loan for our Estates at Maitland property. The

 

86


Table of Contents

commitment is for a one year loan at Wall Street Journal prime plus 3.5% with monthly interest only payments for the term of the loan. The loan can be extended at our option in exchange for a 1% fee equal to the committed loan amount. Refinancing of The Pointe at Canyon Ridge and Estates at Maitland is subject to our reaching definitive agreements with the respective lenders. No assurance can be given that we will be able to refinance either loan on favorable terms or at all.

We have entered into binding contracts to acquire the Estates at Wakefield, an apartment community under construction in Wake Forest, North Carolina for a price of $37.3 million and Fountains at New Bern, an apartment community under construction in Charlotte, North Carolina for a price of $34.0 million. Each purchase contract provides for closing, subject to the satisfaction of customary closing conditions, upon completion of the respective property, which for Estates at Wakefield is expected to occur during the fourth quarter of 2013 and for Fountains at New Bern during the third quarter of 2013. While we are seeking permanent financing for such acquisitions, we currently have no commitment for financing of either property nor can there be any assurance that such financing will be procured. Moreover, the proceeds from this offering are not sufficient to finance the acquisition of these properties. If we are unable to procure financing for the acquisition of these properties by the time we are required to close pursuant to the purchase contracts, we may forfeit up to $1.5 million of non-refundable deposits that we have paid under the contracts. See “Risk Factors — If we do not complete the purchase of the apartment communities that we currently have under contract, we will have incurred substantial expenses without our stockholders realizing the expected benefits.

As a REIT, we are required to distribute at least 90% of our REIT taxable income, excluding net capital gains, to stockholders on an annual basis. We expect that these needs will be met from cash generated from operations and other sources, including proceeds from secured mortgages and unsecured indebtedness, proceeds from additional equity issuances, cash generated from the sale of property and the formation of joint ventures.

Short-Term and Long-Term Liquidity Needs

We expect to pursue acquisitions utilizing a portion of the net proceeds from this offering within the 12 months following the completion of this offering.

Apart from acquisition activities, our short-term liquidity needs will primarily be to fund operating expenses, recurring capital expenditures, property taxes and insurance, interest and scheduled debt principal payments, general and administrative expenses and distributions to stockholders and unit holders. We generally expect to meet our short-term liquidity requirements through proceeds of this offering and net cash provided by operations, and we believe we will have sufficient resources to meet our short-term liquidity requirements. We believe that net cash provided by operations will be adequate to meet the REIT operating requirements in both the short- and the long-term.

Our principal long-term liquidity needs will primarily be to fund additional property acquisitions, major renovation and upgrading projects and debt payments and retirements at maturities. We do not expect that net cash provided by operations will be sufficient to meet all of these long-term liquidity needs. We anticipate meeting our long-term liquidity requirements by using cash and short-term credit facilities as an interim measure, to be replaced by funds from public and private equity and debt offerings, long-term secured and unsecured debt, or joint venture investments. In addition, we may use operating partnership units issued by the operating partnership to acquire properties from existing owners seeking a tax deferred transaction.

We believe that as a publicly traded REIT, we will have access to multiple sources of capital to fund our long-term liquidity requirements. These sources include the incurrence of additional debt and the issuance of additional equity. However, we cannot assure you that this will be the case. Our ability to secure additional debt will be dependent on a number of factors, including our cash flow from operations, our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed. Our ability to access the equity capital markets will be dependent on a number of factors as well, including general market conditions for REITs and market perceptions about our company.

 

87


Table of Contents

Approximately $75.8 million of our mortgage debt will mature during 2013. We plan to use a combination of working capital, refinancing, extensions, payoffs and our credit facility to meet our mortgage maturities. In addition, the mortgage debt for estates at Millenia, which had an outstanding balance of $34.95 million as of December 31, 2012, can be extended for a one percent fee and satisfaction of other conditions.

From January 1, 2013 through April 22, 2013, our long term debt increased by approximately $6.0 million due to (i) our new revolving credit facility entered into on January 31, 2013 (an increase of $13.0 million), (ii) a new mortgage loan entered into in connection with our acquisition of Vintage at Madison Crossing on March 4, 2013 (an increase of $11.4 million), (iii) the repayment of indebtedness on January 31, 2013 for Arbors River Oaks, which property is now included in the borrowing base for the revolving credit facility (a decrease of $9.0 million), and (iv) the repayment of indebtedness for Fontaine Woods, which property was sold on March 1, 2013 (a decrease of $9.1 million) and (v) required principal debt repayments on existing loans (a decrease of $0.3 million).

We believe that our current cash flows from operations, coupled with additional mortgage debt and borrowings under our revolving credit facility, will be sufficient to allow us to continue operations, satisfy our contractual obligations and pay dividends to our stockholders and limited partners of our operating partnership.

Contractual Obligations and Commitments

As of December 31, 2012, we had the following contractual obligations:

 

     Payment Due By Period  

Contractual Obligations

   Less than 1
Year
     1-3 Years      3-5 Years      More than 5
Years
     Total  

Long-term debt obligations(1)

   $ 75,882,068       $ 11,846,491       $ 3,454,164       $ 81,544,091       $ 172,726,814   

Operating lease obligations

     985,941         1,724,209         1,742,400         54,987,871         59,440,421   

Redemption of noncontrolling interest(2)

     7,657,500         —           —          —          7,657,500   

Interest payments(3)

     7,550,281         7,402,252         6,595,076         6,360,624         27,908,233   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 92,075,790       $ 20,972,952       $ 11,791,640       $ 142,892,586       $ 267,732,968   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $9.1 million of indebtedness on Fontaine Woods, which was assumed by the buyer upon the sale of the property on March 1, 2013. Excludes (i) $11.4 million of indebtedness on the Vintage at Madison Crossing due in 2023, incurred upon the purchase of the Vintage at Madison Crossings on March 4, 2013; and (ii) $13.0 million of indebtedness under our credit facility entered into on January 31, 2013, which matures on January 31, 2016 and was used for general corporate purposes and to repay in full all amounts outstanding on a mortgage loan secured by Arbor River Oaks that had an outstanding principal balance of $9.0 million as of December 31, 2012.
(2) See “—Redemption of Noncontrolling Interests” below.
(3) For variable rate indebtedness, we have assumed that such indebtedness will be paid at the rate in effect on December 31, 2012 for the duration of the obligation. Excludes interest payments on (i) indebtedness secured by the Vintage at Madison Crossing, which bears interest at a fixed rate per annum of 4.19%; and (ii) indebtedness under our credit facility, $9.0 million of which bears interest at a floating rate of six-month LIBOR plus 3.25% and the remaining $4.0 million of which bears interest at a floating rate of three-month LIBOR plus 3.25%

Redemption of Noncontrolling Interests

On June 1, 2012, four of our property owning subsidiaries entered into an agreement with the noncontrolling interest holder of each such subsidiary for the purchase of the noncontrolling interest for total consideration of approximately $7.7 million. Approximately $5.1 million of the consideration was payable on September 15, 2012 and the remaining $2.6 million was payable on December 31, 2012. Such amounts have not yet been paid. The

 

88


Table of Contents

agreement specifies that late payments will be subject to interest at monthly rates ranging from 1.5% to 2.5% of the unpaid amount until paid in full. Since January 1, 2013 we have paid approximately $139,000 per month in interest on this obligation, which will affect our earnings and cash flows until we pay the repurchase price for the noncontrolling interests. Upon payment in full of the outstanding amounts, the noncontrolling interests will automatically be redeemed by the applicable entity and canceled. We intend to pay the approximately $7.7 million purchase price for the noncontrolling interests with proceeds from this offering. See “Use of Proceeds.”

Consolidated Indebtedness to be Outstanding After this Offering

The following table sets forth information with respect to the indebtedness that we expect to have outstanding after the completion of this offering and the deployment of the net proceeds as described under “Use of Proceeds.” Unless otherwise indicated, the interest rate and outstanding balance is as of December 31, 2012.

 

Property

  InterestRate     Origination
Date
    Amortization
(Years)
    Number of
Months of
Interest Only
Payments from
Origination Date
    Maturity
Date
    Outstanding
Balance
 

Revolving Credit Facility(1)

    3.65     01/31/2013        N/A        All        01/31/2016      $ 13,000,000   

Estates at Millenia(2)

    5.75     12/03/2012        N/A        All        12/2/2013        34,950,000   

Estates at Perimeter(3)

    4.25     09/01/2010        30        24        09/01/2017        17,896,524   

Lakeshore on the Hill

    4.48     12/14/2010        30        24        01/01/2018        6,834,000   

Mercé Apartments(2)

    3.14     10/31/2011        30        24        11/01/2018        5,475,000   

Oak Reserve at Winter Park

    5.00     10/30/2010        30        36        10/30/2013        9,712,122   

Park at Fox Trails(2)

    3.13     12/06/2011        30        12        01/01/2019        14,968,000   

Post Oak(2)

    3.39     07/28/2011        30        24        08/01/2018        5,277,000   

Terrace at River Oaks

    4.32     12/21/2011        30        24        01/01/2022        14,300,000   

The Beckanna on Glenwood(2)

    3.13     10/31/2011        30        12        11/01/2018        6,369,269   

The Estates at Maitland(4)

    7.00     04/02/2012        9        —          05/02/2013        4,126,423   

The Pointe at Canyon Ridge(2)(5)

    6.00     06/01/2012        30        All        05/31/2013        26,400,000   

The Trails of Signal Mountain

    4.92     05/26/2011        30        24        06/01/2018        8,317,000   

Westmont Commons

    3.84     12/13/2012        30        24        01/01/2023        17,920,000   

Vintage at Madison Crossing(6)

    4.19     03/04/2013        10        12        04/01/2023        11,437,000   
           

 

 

 

Total(7)

            $ 196,982,338   
           

 

 

 

 

(1) We entered into the revolving credit facility on January 31, 2013. The information provided is as of March 31, 2013. The interest rate on credit facility borrowings is the weighted average interest rate on the outstanding balance as of March 31, 2013.
(2) Variable rate indebtedness. See Note G to the accompanying financial statements for the years ended December 31, 2012 and 2011 for a description of the terms of our variable rate indebtedness. We expect to refinance this indebtedness and have begun discussions with a lender regarding the same, but have not yet received a commitment from the lender. There can be no assurance that we will be able to do the same on more favorable terms or at all.
(3) We intend to use proceeds from this offering to purchase the 50% equity interest in this property currently owned by our joint venture partner. As part of the transaction we will assume the mortgage of the joint venture and the entity owning the property will be consolidated in our financial statements in future periods.
(4) We have received a commitment to refinance the mortgage loan for our Estates at Maitland property. The commitment is for a one year loan at an interest rate of Wall Street Journal prime plus 3.5% with monthly interest only payments for the term of the loan. The loan can be extended at our option in exchange for the payment of a 1% fee equal to the committed loan amount.
(5) We have submitted an application with preliminary terms to a new lender with respect to the refinancing of this indebtedness with a Fannie Mae mortgage loan but have no commitment from such lender. There can be no assurance that we will enter into a definitive loan agreement with such lender.
(6) This loan was entered into in connection with the purchase of Vintage at Madison Crossing on March 4, 2013. The information provided is as of March 4, 2013.
(7) Excludes expected mortgage financing for which we have received a lender commitment to partially finance the acquisition of Woodfield Creekstone for $23,250,000. The loan is expected to have a 10-year term and a fixed interest rate of 3.88%. Repayment will be interest only for the first three years, with principal and interest payments based on a 30-year amortization thereafter.

 

89


Table of Contents

Revolving Credit Facility

On January 31, 2013, our operating partnership entered into a $14.0 million senior secured revolving credit facility for which BMO Harris Bank N.A. is serving as sole lead arranger and administrative agent. We will serve as the guarantor for any funds borrowed by the operating partnership as borrower under the credit facility. The credit facility has a term of three years and allows for borrowings of up to $14.0 million, with an accordion feature that will allow us to increase the availability thereunder by $66.0 million to an aggregate of $80.0 million under certain conditions as additional properties are included in the borrowing base. The Arbors River Oaks property is currently the only property included in the borrowing base. We intend to use the credit facility to reduce or refinance existing indebtedness, finance capital expenditures, finance working capital, finance real estate investments and for general corporate purposes. On January 31, 2013, we borrowed $9.0 million on the credit facility to repay in full the mortgage loan on the Arbors River Oaks property and $1.5 million to fund prepayment penalties, closing costs and other related fees and working capital needs. We borrowed an additional $2.5 million on the credit facility for general corporate purposes. We currently have approximately $1.0 million available under the credit facility.

The credit facility bears interest, at our option, either at a base rate plus a margin of 150 basis points to 225 basis points, depending on our leverage ratio, or at the rate of LIBOR, plus a margin of 250 basis points to 325 basis points, depending on our leverage ratio. The amount available for us to borrow at any given time will be dependent upon certain borrowing base covenants. Initially the borrowing base includes only Arbors River Oaks, and we expect to add additional unencumbered properties to the borrowing base over time.

The credit facility contains customary affirmative and negative covenants and contains financial covenants that, among other things, require us to maintain certain leverage ratios, ratios of earnings before payment or charges of interest, taxes, depreciation, amortization or extraordinary items, or EBITDA, as compared to fixed charges, and minimum tangible net worth. The financial covenants also limit our distributions to 95% of FFO. In addition, it will constitute an event of default under the credit facility if we default on any of our indebtedness that equals or exceeds $10.0 million for non-recourse debt or $5.0 million for recourse debt, including any indebtedness we have guaranteed.

Cash Flows for the Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

Cash flows provided by (used in) operating activities, investing activities and financing activities for the years ended December 31, 2012 and 2011 were as follows:

 

     2012     2011  

Operating activities

   $ (1,428,243   $ 3,044,087   

Investing activities

   $ 2,873,320      $ (30,488,194

Financing activities

   $ 2,787,668      $ 26,531,632   

Net cash flow used in operating activities was approximately $1.4 million for the year ended December 31, 2012 compared to net cash provided by operating activities of approximately $3.0 million for the year ended December 31, 2011. The net increase is mainly a result of:

 

   

Increase in amortization of deferred loan costs by approximately $0.8 million;

 

   

Increase of approximately $3.6 million in depreciation and amortization;

 

   

Increase of approximately $2.2 million in the change in accounts payable and accrued expenses, which includes professional fees related to the recapitalization; and

 

   

Increase of approximately $0.9 million in the change in security deposits and deferred rent;

 

   

Less: Increase of approximately $4.1 million in the change in prepaid expenses and other assets, which includes professional fees related to this offering; and

 

   

Less: Increase of approximately $8.1 million in loss from continuing operations.

 

90


Table of Contents

Net cash provided by investing activities was approximately $3.0 million during the year ended December 31, 2012 compared to net cash used in investing activities of approximately $30.5 million during the year ended December 31, 2011. The increase was primarily the result of the use of approximately $24.5 million during the year ended December 31, 2011 for the acquisition of six properties compared to the use of approximately $4.5 million during the year ended December 31, 2012 for the acquisition of two properties. Also increasing cash provided from investing activities were net proceeds of approximately $7.9 million from the sale of a property held for sale and approximately $0.8 million from the sale of land that was owned by Feldman prior to the recapitalization in the year ended December 31, 2012.

Net cash provided by financing activities was approximately $2.7 million during the year ended December 31, 2012 compared to net cash provided by financing activities of approximately $26.5 million provided during the year ended December 31, 2011. The net reduction in the current year was primarily due to increases in payment of deferred loan costs ($1.3 million), recapitalization costs ($0.9 million), decreases in contributions from partners and members ($26.9 million), and the reduction of cash provided by discontinued operations ($5.3 million); partially offset by an increase in net borrowings under mortgage financing ($4.9 million), private placement of common stock ($2.7 million), a reduction due from related parties ($1.5 million) and a decrease in distributions to partners, members and shareholders ($1.5 million).

On August 7, 2012, we sold an aggregate of 178,333 shares of our common stock in a private placement at a price equal to $15.00 per share to certain individuals with pre-existing relationships with us and members of our senior management team. We conducted the private placement to generate cash for working capital and general corporate purposes and used the net proceeds of $2.7 million for those purposes.

Income Taxes

No provision has been made for income taxes since all of the company’s operations are held in pass-through entities and accordingly the income or loss of the company is included in the individual income tax returns of the partners or members.

We elected to be taxed as a REIT under the Code beginning with our taxable year ended December 31, 2004. As a REIT, we generally are not subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate tax rates. We believe that we are organized and operate in a manner to qualify and be taxed as a REIT and we intend to operate so as to remain qualified as a REIT for federal income tax purposes.

Inflation

Inflation in the United States has been relatively low in recent years and did not have a significant impact on the results of operations for the company’s business for the periods shown in the consolidated historical financial statements. We do not believe that inflation poses a material risk to the company. The leases at our apartment properties are short term in nature. None are longer than two years, and most are one year or less.

Although the impact of inflation has been relatively insignificant in recent years, it does remain a factor in the United States economy and could increase the cost of acquiring or replacing properties in the future.

Quantitative and Qualitative Disclosures About Market Risk.

Our future income, cash flows and fair value relevant to our financial instruments depends upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Based upon the nature of our operations, we are not subject to foreign exchange rate or commodity price risk. The principal market risk to which we are exposed is the risk related to interest rate fluctuations. Many factors, including governmental monetary and tax policies, domestic and international economic and political

 

91


Table of Contents

considerations, and other factors that are beyond our control contribute to interest rate risk. Our interest rate risk objective is to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve this objective, we manage our exposure to fluctuations in market interest rates for our borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable. All of our financial instruments were entered into for other than trading purposes.

Fixed Interest Rate Debt

As of December 31, 2012, we had approximately $79.3 million of fixed rate mortgage debt, or approximately 46% of our outstanding mortgage debt, which limits our risk to fluctuating interest rates. Though a change in the market interest rates affects the fair market value, it does not impact net income to stockholders or cash flows. Our total outstanding fixed rate mortgage debt had an average effective interest rate as of December 31, 2012 of approximately 4.6% per annum with expirations ranging from 2013 to 2023.

Variable Interest Rate Debt

As of December 31, 2012, we had approximately $93.4 million of variable rate mortgage debt, or approximately 54% of our outstanding debt. As of December 31, 2012, we did not have any interest rate swaps, caps or other derivative instruments in place, leaving the variable debt subject to interest rate fluctuations. The impact of a 1% increase or decrease in interest rates on our variable rate mortgage debt would result in a decrease or increase of annual net income of approximately $934,000, respectively.

Off-Balance Sheet Arrangements

As of December 31, 2012, we do not have any off-balance sheet arrangements that have had or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures. We own interests in one joint venture, which is accounted for under the equity method as we exercise significant influence over, but do not control, the investee.

Non-GAAP Financial Measures

In this prospectus, we disclose and discuss funds from operations, or FFO, core funds from operations, or Core FFO, and net operating income, or NOI, all of which meet the definition of “non-GAAP financial measure” set forth in Item 10(e) of Regulation S-K promulgated by the SEC. As a result we are required to include in this prospectus a statement of why management believes that presentation of these measures provides useful information to investors.

None of FFO, Core FFO and NOI should be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance; however, we believe that to understand our performance further, FFO, Core FFO and NOI should be compared with our reported net income or net loss and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements.

Funds from Operations and Core FFO

FFO is defined by the National Association of Real Estate Investment Trusts, or NAREIT, as net income (computed in accordance with GAAP), excluding gains (losses) from sales of property (and impairment adjustments), plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO is consistent with FFO as defined by NAREIT.

Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. In fact, real estate values have historically risen or fallen with market conditions. FFO is intended to be a standard supplemental measure of operating performance that excludes

 

92


Table of Contents

historical cost depreciation and valuation adjustments from—or “adds it back” to—GAAP net income. We consider FFO to be useful in evaluating potential property acquisitions and measuring operating performance. FFO does not represent net income or cash flows from operations as defined by GAAP. You should not consider FFO to be an alternative to net income as a reliable measure of our operating performance; nor should you consider FFO to be an alternative to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity.

FFO does not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to stockholders. FFO does not represent cash flows from operating, investing or financing activities as defined by GAAP. Further, FFO as disclosed by other REITs might not be comparable to our calculation of FFO.

Management believes that the computation of FFO in accordance with NAREIT’s definition includes certain items such provision for loan losses, prepayment penalty on early payment of debt, as acquisition costs and costs relating to our recapitalization transaction that are not indicative of the results provided by our operating portfolio and affect the comparability of our period-over-period performance with other multifamily REITs. Specifically, the provision for loan losses reflects the loss on a mortgage loan held by Trade Street Company, which loss was included in loss from continuing operations, was non-recurring and is akin to an impairment loss on a real estate asset. Recapitalization costs and the prepayment penalty on early repayment of debt are one-time, non-recurring charges related to the recapitalization described elsewhere in this prospectus. Accretion to preferred stock and preferred units is a one-time charge associated with the balance sheet classification of preferred stock and preferred units at December 31, 2012 as temporary equity, which charge is non-recurring due to amended terms of these instruments which is expected to result in reclassification of such items as permanent equity in the first quarter of 2013. Management believes that it is helpful to investors to add back non-recurring items to arrive at our Core FFO.

The following table sets forth a reconciliation of FFO and Core FFO for the periods presented to net loss, as computed in accordance with GAAP (amounts in thousands):

 

     Years Ended December 31,  
     Pro Forma     Historical  
     2012     2012     2011  

Net loss

   $ (16,165,020   $ (8,551,260   $ (3,798,256

Net loss allocated to noncontrolling interests

     1,570,411        1,708,734        377,330   

Accretion of preferred stock and preferred units

     (375,482 )      (375,482 )      —     
  

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

     (14,970,091     (7,218,008     (3,420,926

Depreciation and amortization of real estate assets

     15,544,682        7,522,182        3,883,315   

Asset impairment losses

     —          —          413,726   

Depreciation and amortization of real estate assets of discontinued operations

     —          1,030,538        1,960,300   

Gain on sale of discontinued operations

     —          (2,182,413     —     

Depreciation and amortization of real estate assets of unconsolidated joint venture

     —          390,983        475,155   

Net loss allocated to noncontrolling interests

     (1,570,411     (1,708,734     (377,330
  

 

 

   

 

 

   

 

 

 

FFO attributable to common stockholders

     (995,820     (2,165,452     2,934,240   

Provision for loan losses

     —          —          59,461   

Prepayment penalty on early repayment of debt

     269,479        269,479        —     

Accretion of preferred stock and preferred units

     375,482        375,482        —     

Acquisition costs including discontinued operations

     —          484,591        1,862,069   

Recapitalization costs

     1,851,459        1,851,459        —     
  

 

 

   

 

 

   

 

 

 

Core FFO attributable to common stockholders

   $ 1,500,600      $ 815,559