10-Q 1 tv526455_10q.htm FORM 10-Q

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x Quarterly Report Pursuant to Section 13 or 15(d) Securities Exchange Act of 1934 for Quarterly Period Ended June 30, 2019

 

-OR-

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transaction period from _________ to ________

 

Commission File Number 001-37865

 

Reven Housing REIT, Inc.

(Exact name of Registrant in its charter)

 

Maryland   84-1306078
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification Number)

 

875 Prospect Street, Suite 304

La Jolla, CA 92037

(Address of principal executive offices)

 

Registrant's Telephone Number, Including Area Code:   (858) 459-4000

 

Not Applicable
(Former name or former address, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:   Trading Symbol(s)   Name of each exchange on which registered:
Common Stock   RVEN   Nasdaq Capital Market

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x      No ¨

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company or an emerging growth company as defined by Rule 12b-2 of the Exchange Act:

 

Large accelerated filer  ¨   Non-accelerated filer x
Accelerated filer ¨   Smaller reporting company  x
      Emerging growth company  ¨

 

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

 

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

 

The number of outstanding shares of the registrant's common stock, as of July 31, 2019: 11,038,737

 

 

 

 

 

 

REVEN HOUSING REIT, INC.

FORM 10-Q

INDEX

 

    Page
     
PART I – FINANCIAL INFORMATION  
   
Item 1. Condensed Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 24
Item 4. Controls and Procedures 24
     
PART II - OTHER INFORMATION  
   
Item 6. Exhibits 25
     
SIGNATURES 26

 

 2 

 

 

FORWARD-LOOKING STATEMENTS

 

Various statements contained in this Quarterly Report on Form 10-Q of Reven Housing REIT, Inc. (the “Company,” “we,” “our” and “us”), including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements may include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, and other non-historical statements. In some cases, you can identify these forward-looking statements by the use of words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "could," "seeks," "projects," "predicts," "intends," "plans," "estimates," "anticipates" or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties, including, among others, risks inherent to the single-family rental industry sector and our business model, macroeconomic factors beyond our control, competition in identifying and acquiring our properties, competition in the leasing market for quality residents, increasing property taxes, homeowners’ association (“HOA”) and insurance costs, our dependence on third parties for key services, risks related to evaluation of properties, poor resident selection and defaults and non-renewals by our residents, performance of our information technology systems, our ability to raise the capital required to acquire additional properties, and risks related to our indebtedness. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under Part I. Item 1A. “Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2018 as such factors may be updated from time to time in our periodic filings with the Securities and Exchange Commission. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in the Annual Report on Form 10-K and in our other periodic filings. The forward-looking statements speak only as of the date made, and we expressly disclaim any obligation or undertaking to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except to the extent otherwise required by law.

 

 3 

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

REVEN HOUSING REIT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2019 and December 31, 2018

 

   2019     
   (unaudited)   2018 
         
ASSETS          
           
Investments in single-family residential properties:          
Land  $14,476,461   $13,642,461 
Buildings and improvements   70,216,778    64,781,322 
    84,693,239    78,423,783 
Accumulated depreciation   (7,955,740)   (6,591,066)
Investments in single-family residential properties, net   76,737,499    71,832,717 
           
Cash   11,997,147    8,252,460 
Restricted cash   1,760,758    1,179,126 
Rent and other receivables   1,035,721    730,345 
Lease origination costs, net   488,650    473,739 
Other assets, net   979,167    633,135 
           
Total Assets  $92,998,942   $83,101,522 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Accounts payable and accrued liabilities  $2,711,376   $1,572,713 
Resident security deposits   912,500    825,233 
Notes payable, net   60,449,178    50,132,147 
           
Total Liabilities   64,073,054    52,530,093 
           
Commitments and contingencies (Note 9)          
           
Stockholders' Equity          
Preferred stock, $.001 par value; 25,000,000 shares authorized; No shares issued or outstanding   -    - 
Common stock, $.001 par value; 100,000,000 shares authorized; 11,038,737 and 10,951,579 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively   11,039    10,952 
Additional paid-in capital   42,857,528    42,569,520 
Accumulated deficit   (13,942,679)   (12,009,043)
           
Total Stockholders' Equity   28,925,888    30,571,429 
           
Total Liabilities and Stockholders' Equity  $92,998,942   $83,101,522 

 

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

 

 4 

 

 

REVEN HOUSING REIT, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2019 and 2018

 

   Three Months   Three Months   Six Months   Six Months 
   Ended   Ended   Ended   Ended 
   June 30,   June 30,   June 30,   June 30, 
   2019   2018   2019   2018 
Revenue:                    
Rental income  $2,899,554   $2,232,786   $5,655,285   $4,412,078 
                     
Expenses:                    
Property operating and maintenance   944,450    682,431    1,866,238    1,300,594 
Real estate taxes   433,577    369,545    870,081    732,916 
Depreciation and amortization   784,536    514,858    1,526,066    1,033,896 
General and administration   920,002    575,413    1,583,719    1,191,832 
Noncash share-based compensation   -    -    39,375    - 
                     
Total expenses   3,082,565    2,142,247    5,885,479    4,259,238 
                     
Operating (loss) income   (183,011)   90,539    (230,194)   152,840 
                     
Other income (expenses):                    
Casualty (loss) gain, net   -    25,758    (25,000)   76,133 
Previously deferred stock issuance costs   -    (674,144)   -    (674,144)
Other   36,782    7,201    67,380    14,995 
Interest expense   (797,641)   (435,171)   (1,525,765)   (835,763)
                     
Total other income (expenses), net   (760,859)   (1,076,356)   (1,483,385)   (1,418,779)
                     
Net loss  $(943,870)  $(985,817)  $(1,713,579)  $(1,265,939)
                     
Net loss per share                    
(Basic and fully diluted)  $(0.09)  $(0.09)  $(0.16)  $(0.12)
                     
Weighted average number of common shares outstanding   11,036,535    10,769,530    11,020,965    10,764,063 

 

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

 

 5 

 

 

REVEN HOUSING REIT, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2019 and 2018

 

   Common Stock   Additional   Accumulated     
   Shares   Amount   Paid-in Capital   Deficit   Total 
                     
Balance at March 31, 2019   11,026,948   $11,027   $42,818,165   $(12,888,404)  $29,940,788 
                          
Stock issued under share-based compensation plans   11,789    12    39,363    -    39,375 
                          
Distributions on common stock ($0.01 per share)   -    -    -    (110,405)   (110,405)
                          
Net loss   -    -    -    (943,870)   (943,870)
                          
Balance at June 30, 2019   11,038,737   $11,039   $42,857,528   $(13,942,679)  $28,925,888 

 

   Common Stock   Additional   Accumulated     
   Shares   Amount   Paid-in Capital   Deficit   Total 
                     
Balance at March 31, 2018   10,769,530   $10,770   $41,841,805   $(9,025,125)  $32,827,450 
                          
Net loss   -    -    -    (985,817)   (985,817)
                          
Balance at June 30, 2018   10,769,530   $10,770   $41,841,805   $(10,010,942)  $31,841,633 

 

   Common Stock   Additional   Accumulated     
   Shares   Amount   Paid-in Capital   Deficit   Total 
                     
Balance at December 31, 2018   10,951,579   $10,952   $42,569,520   $(12,009,043)  $30,571,429 
                          
Stock issued under share-based compensation plans   87,158    87    288,008    -    288,095 
                          
Distributions on common stock   -    -    -    (220,057)   (220,057)
                          
Net loss   -    -    -    (1,713,579)   (1,713,579)
                          
Balance at June 30, 2019   11,038,737   $11,039   $42,857,528   $(13,942,679)  $28,925,888 

 

   Common Stock   Additional   Accumulated     
   Shares   Amount   Paid-in Capital   Deficit   Total 
                     
Balance at December 31, 2017   10,734,025   $10,734   $41,677,465   $(8,745,003)  $32,943,196 
                          
Stock issued under share-based compensation plans   35,505    36    164,340    -    164,376 
                          
Net loss   -    -    -    (1,265,939)   (1,265,939)
                          
Balance at June 30, 2018   10,769,530   $10,770   $41,841,805   $(10,010,942)  $31,841,633 

 

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

 

 6 

 

 

REVEN HOUSING REIT, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2019 and 2018

 

   2019   2018 
         
Cash Flows From Operating Activities:          
Net loss  $(1,713,579)  $(1,265,939)
Adjustments to reconcile net loss to net cash provided by operating activities:          
Depreciation and amortization   1,526,066    1,033,896 
Noncash share-based compensation   39,375    - 
Amortization of deferred loan fees   105,950    101,988 
Previously deferred stock issuance costs   -    674,144 
Changes in operating assets and liabilities:          
Rent and other receivables   (305,376)   15,848 
Other assets   (346,032)   (295,172)
Accounts payable and accrued liabilities   1,387,382    (74,220)
Resident security deposits   87,267    56,813 
Net cash provided by operating activities   781,053    247,358 
           
Cash Flows From Investing Activities:          
Acquisitions of single-family residential properties   (5,191,608)   (1,681,413)
Capital improvements to single-family residential properties   (1,077,848)   (1,510,195)
Insurance proceeds received for property damages   -    1,390,298 
Lease origination costs   (176,303)   (134,817)
Net cash used in investing activities   (6,445,759)   (1,936,127)
           
Cash Flows From Financing Activities:          
           
Proceeds from notes payable   10,523,000    2,736,630 
Payments of notes payable   -    (603,699)
Payment of loan fees   (311,918)   (65,161)
Payment of stock issuance costs   -    (120,848)
Distributions on common stock   (220,057)   - 
Net cash provided by financing activities   9,991,025    1,946,922 
           
Net Increase In Cash and Restricted Cash   4,326,319    258,153 
Cash and Restricted Cash at the Beginning of the Period   9,431,586    6,442,322 
           
Cash and Restricted Cash at the End of the Period  $13,757,905   $6,700,475 
           
Supplemental Disclosure:          
           
Cash paid for interest  $1,385,188   $720,769 

 

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

 

 7 

 

 

REVEN HOUSING REIT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019 and 2018

 

NOTE 1. ORGANIZATION AND OPERATION

 

Reven Housing REIT, Inc. is a Maryland corporation (Reven Housing REIT, Inc., which along with its wholly-owned subsidiaries, are also referred to herein collectively as the “Company”) which acquires portfolios of occupied and rented single-family residential properties located in the United States with the objective of receiving income from rental property activity and future profits from the sale of rental property at appreciated values.

 

As of June 30, 2019, the Company owned 993 single-family homes in the Houston, Jacksonville, Memphis, Birmingham, Oklahoma City, and Atlanta metropolitan areas.

 

NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”), and the rules and regulations of the Securities Exchange Commission (“SEC”).

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the 2018 Annual Report on Form 10-K filed with the SEC on March 21, 2019. The results of operations for the period ended June 30, 2019 are not necessarily indicative of the operating results for the full year.

 

Principles of Consolidation

 

The accompanying condensed unaudited condensed consolidated financial statements include the accounts of Reven Housing REIT, Inc, Reven Housing REIT OP, LP, a Delaware limited partnership which is its 100% owned operating partnership, and its wholly-owned subsidiaries, which have been formed primarily for financing purposes. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and reported amounts of revenues and expenses for the periods presented. Accordingly, actual results could differ from those estimates.

 

Financial Instruments

 

The carrying value of the Company’s financial instruments, as reported in the accompanying condensed consolidated balance sheets, approximates fair value due to their short-term nature. The Company’s short-term financial instruments consist of cash, restricted cash, rents and other receivables, escrow deposits, accounts payable and accrued liabilities, and resident security deposits.

 

The carrying value of the Company’s notes payable, as reported in the accompanying condensed consolidated balance sheets, approximates fair value due to their market interest rate and because their security and payment terms are similar to other debt instruments currently being issued.

 

 8 

 

 

REVEN HOUSING REIT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019 and 2018

 

NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Investments in Single-Family Residential Properties

 

The Company accounts for its investments in single-family residential properties as asset acquisitions and records these acquisitions at their purchase price. The purchase price is allocated between land, building, improvements and existing leases based upon their relative fair values at the date of acquisition. The purchase price for purposes of this allocation is inclusive of acquisition costs which typically include legal fees, title fees, property inspection and valuation fees, as well as other closing costs.

 

Building improvements and buildings are depreciated over estimated useful lives of approximately 10 to 27.5 years, respectively, using the straight-line method. Lease origination costs are amortized over the average remaining term of the in-place leases which is generally less than one year. Maintenance and repair costs are charged to expenses as incurred.

 

The Company assesses its investments in single-family residential properties for impairment whenever events or changes in business circumstances indicate that carrying amounts of the assets may not be fully recoverable. When such events occur, management determines whether there has been impairment by comparing the asset’s carrying value with its fair value. Should impairment exist, the asset is written down to its estimated fair value. The Company did not recognize any impairment losses for either the six-month periods ended June 30, 2019 or 2018.

 

Cash

 

The Company maintains its cash at quality financial institutions. The combined account balances at one or more institutions typically exceed the federal insurance coverage and thus there is a concentration of credit risk related to amounts on deposit in excess of available federal insurance coverage. The Company believes that the risk is not significant, as the Company does not anticipate the financial institutions’ non-performance.

 

Restricted Cash

 

Pursuant to the terms of the note payable referred to in Note 5, the Company is required to establish, maintain, and fund monthly specified reserve accounts. These reserve accounts include property tax reserves, insurance reserves, and capital expenditure reserves.

 

Rents and Other Receivables

 

Rents and other receivables represent the amount of rent receivables, security deposits and net rental funds which are held by the property managers on behalf of the Company, net of any allowance for amounts deemed uncollectible.

 

Deferred Loan Fees

 

Costs incurred in the placement of the Company’s notes payable are deferred and amortized using the effective interest method over the term of the loans as a component of interest expense on the condensed consolidated statements of operations. These deferred loan fees are offset against the notes payable in the accompanying condensed consolidated balance sheets.

 

Security Deposits

 

Security deposits represent amounts deposited by tenants at the inception of the lease. As of June 30, 2019 and December 31, 2018, the Company had $912,500 and $825,233, respectively, in resident security deposits. Security deposits are refundable, net of any outstanding charges and fees, upon expiration of the underlying lease.

 

Revenue Recognition

 

Residential properties are leased to tenants under short term rental agreements of generally one year and revenue is recognized over the lease term on a straight-line basis.

 

 9 

 

 

REVEN HOUSING REIT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019 and 2018

 

NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Income Taxes

 

The Company is currently evaluating whether to elect to be taxed as a real estate investment trust (“REIT”), as defined in the Internal Revenue Code, commencing with the taxable year ended December 31, 2018. The Company has until the extended due date of its December 31, 2018 tax return to formally make this election. Accordingly, should the Company elect REIT status, it does not expect to be subject to federal income tax, provided that it continues to qualify as a REIT and distributions to the stockholders equal or exceed REIT taxable income. Should the Company not elect to be taxed as a REIT, the Company will not be subject to federal income tax for periods ended June 30, 2019 and 2018 due to significant operating losses and net operating loss carry-forwards.

 

Qualification and taxation as a REIT depends upon the Company’s ability to meet the various qualification tests imposed under the Internal Revenue Code related to the percentage of income that are earned from specified sources, the percentage of assets that fall within specified categories, the diversity of capital stock ownership, and the percentage of earnings that are distributed. Accordingly, no assurance can be given that the Company will be organized or be able to operate in a manner to qualify or remain qualified as a REIT. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal and state income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates, and the Company may be ineligible to qualify as a REIT for four subsequent tax years. Even if the Company qualifies as a REIT, it may be subject to certain state or local income taxes.

 

Incentive Compensation Plan

 

During 2012, the Company established the 2012 Incentive Compensation Plan, which was subsequently amended and restated in December 2013 (“2012 Plan”). The 2012 Plan allows for the grant of options and other awards representing up to 1,650,000 shares of the Company’s common stock. Such awards may be granted to officers, directors, employees, consultants and other persons who provide services to the Company or any related entity. Under the 2012 Plan, options may be granted at an exercise price greater than or equal to the market value at the date of the grant, for owners of 10% or more of the voting shares, at an exercise price of not less than 110% of the market value. Awards are exercisable over a period of time as determined by a committee designated by the Board of Directors, but in no event, longer than ten years.

 

During January 2019, 75,369 shares were issued to officers, directors and employees in settlement of a portion of their accrued compensation for the year ended December 31, 2018. In April 2019, an additional 11,789 shares were issued to certain directors as payment for accrued 2019 compensation. A total of 628,940 shares have been issued under the 2012 plan as of June 30, 2019.

 

Net Loss Per Share

 

Net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding. Warrants, stock options, and common stock issuable upon the conversion of the Company's preferred stock (if any) are not included in the computation if the effect would be anti-dilutive and would increase earnings or decrease loss per share.

 

Segment Reporting

 

The Company has determined that it has one reportable segment with activities related to leasing and operating single-family homes as rental properties. The Company's properties are geographically dispersed, and management evaluates operating performance at the market level and while each market and its properties are unique, the aggregate market portfolios have similar economic interests and operating performance.

 

 10 

 

 

REVEN HOUSING REIT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019 and 2018

 

 

NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

 

New Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The standard can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. In July 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2014-09, ASU 2015-14 and ASU 2016-08 are herein collectively referred to as the "New Revenue Recognition Standards". The New Revenue Recognition Standards are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted but not before annual periods beginning after December 15, 2016. The Company has adopted the New Revenue Recognition Standards effective as of January 1, 2018, and has applied the modified retrospective method. The Company has evaluated its revenue streams and, as they are primarily related to leasing activities which are scoped out of the New Revenue Recognition Standards, has determined that the adoption of such standards does not have a material impact on the consolidated financial statements and thus there is no cumulative adjustment upon adoption. The Company evaluated its real estate sales contracts through December 31, 2018 and determined they qualified as sales to noncustomers.

 

In February 2016, the FASB issued ASU 2016-02, Leases, a new lease standard which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). Under ASU 2016-02, lessor accounting is substantially similar to the past model but aligned with certain changes to the lessee model and ASU 2014-09. The new standard requires lessors to account for leases using an approach that is substantially equivalent to past guidance for sales-type leases, direct financing leases and operating leases. The Company’s rental revenue is primarily generated from short-term operating leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to previous guidance. The new standard had an impact on the Company’s consolidated financial statements as the Company has an operating office lease arrangement for which it is the lessee. The new standard was adopted by the Company beginning on January 1, 2019 using the modified retrospective approach. In accordance with this standard the Company has recorded a right-of-use asset and a corresponding other liability of approximately $165,000 as of June 30, 2019 relating to its operating office lease arrangement for which it is the lessee.

 

 11 

 

 

REVEN HOUSING REIT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019 and 2018

 

NOTE 3. INVESTMENTS IN SINGLE-FAMILY RESIDENTIAL PROPERTIES

 

The following table summarizes the Company’s investments in single-family residential properties. The homes are generally leased to individual tenants under leases with terms of one year or less.

 

               Investments in 
               Single-Family 
   Number       Buildings and   Residential 
   of Homes   Land   Improvements   Properties, Gross 
                 
Total at December 31, 2018   965   $13,642,461   $64,781,322   $78,423,783 
                     
Purchases and improvements during 2019:                    
Acquisitions   28    834,000    4,357,608    5,191,608 
Improvements   -    -    1,077,848    1,077,848 
                     
Total at June 30, 2019   993   $14,476,461   $70,216,778   $84,693,239 
                     
Accumulated depreciation                  (7,955,740)
                     
Investments in single-family rental properties, net at June 30, 2019                 $76,737,499 

 

NOTE 4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

At June 30, 2019 and December 31, 2018, accounts payable and accrued liabilities consisted of the following:

 

   2019   2018 
         
Accounts payable  $213,328   $76,523 
Property insurance payable   753,793    - 
Real estate taxes payable   879,364    781,182 
Accrued compensation, board fees and other   455,550    505,365 
Interest payable   244,270    209,643 
Operating lease obligation   165,071    - 
   $2,711,376   $1,572,713 

 

 12 

 

 

REVEN HOUSING REIT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019 and 2018

 

NOTE 5. NOTES PAYABLE

 

On February 11, 2019, the Company through a wholly-owned subsidiary, entered into a loan agreement with Arbor Agency Lending, LLC, an approved seller/servicer for Federal Home Loan Mortgage Corporation (Freddie Mac). The loan agreement provides for a loan to the Company in the original principal amount of $10,523,000. The loan is a seven-year, interest-only payable loan with principal due and payable at its seven-year maturity, and accruing interest at a fixed rate of 4.72% per annum. The loan is secured by 143 of the Company’s single-family homes. Proceeds of approximately $2.9 million were utilized to purchase 12 homes in Oklahoma City, Oklahoma. Additionally, the Company received approximately $7.4 million of loan proceeds, net of transaction fees and the purchase of homes noted above, which the Company intends to use for future acquisitions of single-family homes and for working capital purposes.

 

A summary of the Company’s notes payable as of June 30, 2019 and December 31, 2018 is as follows:

 

   2019   2018  

Interest

Rate

(Fixed)

   Maturity Date
Note                  
Reven Housing Funding 1, LLC  $51,362,000   $51,362,000    4.74%  October, 2025
Reven Housing Funding 2, LLC   10,523,000    -    4.72%  March, 2026
    61,885,000    51,362,000         
Less deferred loan fees, net   (1,435,822)   (1,229,853)        
Notes payable, net  $60,449,178   $50,132,147         

 

Costs incurred in the placement of the Company’s debt are deferred and amortized using the effective interest method over the term of the loans as a component of interest expense on the condensed consolidated statements of operations. The amount of unamortized fees are deducted from the remaining principal amount owed on the corresponding notes payable. Unamortized deferred loan costs and fees totaled $1,435,822 and $1,229,853 as of June 30, 2019 and December 31, 2018, respectively.

 

During the three months ended June 30, 2019 and 2018, the Company incurred $797,641 and $435,171, respectively, of interest expense related to the notes payable, which includes $56,688 and $50,994, respectively, of amortization of deferred loan fees. During the six months ended June 30, 2019 and 2018, the Company incurred $1,525,765 and $835,763, respectively, of interest expense related to the notes payable, which includes $105,950 and $101,988, respectively, of amortization of deferred loan fees.

 

 13 

 

 

REVEN HOUSING REIT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019 and 2018

 

NOTE 6. STOCKHOLDERS’ EQUITY AND STOCK COMPENSATION

 

On October 16, 2014, the Company issued 425,000 shares of the Company’s common stock under the 2012 Plan to certain officers and consultants of the Company. The shares issued are subject to restrictions and future vesting conditions based on the Company reaching certain future milestones. During the year ended December 31, 2016, 106,250 of these shares became vested upon the achievement of certain milestones related to our public offering of common stock mentioned above. None of the remaining 318,750 shares were vested as of the issuance date. Compensation expense will be recognized in the applicable future periods on these unvested shares should the applicable milestones be achieved in accordance with the vesting schedule. There is no assurance that these milestones will in fact be achieved and that the shares will in fact vest in the future.

 

During January 2019, the Company issued 75,369 shares of the Company’s common stock under the 2012 Plan to certain directors, officers, and consultants of the Company as payment for accrued 2018 compensation. During April 2019, the Company issued 11,789 shares of the Company’s common stock under the 2012 Plan to certain directors as payment for accrued 2019 compensation totaling $39,375.

 

Distributions

 

In January 2019, the Company declared a distribution of $0.01 per share on the Company’s common shares. The distribution was made on February 15, 2019 to shareholders of record as of January 25, 2019 and totaled $109,652. In April 2019, the Company declared a distribution of $0.01 per share on the Company’s common shares. The distribution was made on May 15, 2019 to shareholders of record as of April 26, 2019 and totaled $110,405.

 

NOTE 7. INCOME TAXES

 

The Company is currently evaluating whether to elect to be taxed as a real estate investment trust (“REIT”), as defined in the Internal Revenue Code, commencing with the taxable year ended December 31, 2018. The Company has until the extended due date of its December 31, 2018 tax return to formally make this election. Accordingly, should the Company elect REIT status, it does not expect to be subject to federal income tax, provided that it continues to qualify as a REIT and distributions to the stockholders equal or exceed REIT taxable income. Should the Company not elect to be taxed as a REIT, the Company will not be subject to federal income tax for periods ended June 30, 2019 and 2018 due to significant operating losses and net operating loss carry-forwards.

 

Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and expected carry-forwards are available to reduce taxable income. The Company records a valuation allowance when, in the opinion of management, it is more likely than not, that the Company will not realize some or all deferred tax assets. As the achievement of required future taxable income is uncertain, the Company recorded a valuation allowance equal to the deferred tax asset at June 30, 2019 and December 31, 2018. At December 31, 2017 the Company had federal and state net operating loss carry-forwards of approximately $5,350,000. The federal and state tax loss carry-forwards will begin to expire in 2032, unless previously utilized.

 

Pursuant to Internal Revenue Code Section 382, use of the Company’s net operating loss carry-forwards may be limited if a cumulative change in ownership of more than 50% occurs within a three-year period. Management believes that such an ownership change had occurred but has not yet performed a study of the limitations on the net operating losses.

 

NOTE 8. RELATED PARTY TRANSACTIONS

 

Reven Capital, LLC, which is wholly-owned by Chad M. Carpenter, a shareholder of the Company and its Chief Executive Officer, currently subleases office space from the Company on a month to month basis for a monthly rental of $500. For each of the three months ended June 30, 2019 and 2018, the Company received income from Reven Capital, LLC of $1,500, respectively. For each of the six months ended June 30, 2019 and 2018, the Company received income from Reven Capital, LLC of $3,000, respectively.

 

 14 

 

 

REVEN HOUSING REIT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019 and 2018

 

NOTE 9. COMMITMENTS AND CONTINGENCIES

 

Legal and Regulatory

 

The Company is subject to potential liability under laws and government regulations and various claims and legal actions arising in the ordinary course of the Company’s business. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts established for those claims. Based on information currently available, management is not aware of any legal or regulatory claims that would have a material effect on the Company’s condensed consolidated financial statements and, therefore, no accrual has been recorded as of the periods ended June 30, 2019 and December 31, 2018.

 

 15 

 

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the information appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2018. This discussion and analysis contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set further under Part I. Item 1A. “Risk Factors” in our most recent Annual Report on Form 10-K as updated by our other periodic reporting.

 

Overview

 

We are an internally managed Maryland corporation that engages in the acquisition, ownership and operation of portfolios of leased single-family homes in the United States. We operate our portfolio properties as single-family rentals, or SFRs, and we generate most of our revenue from rental income from the existing tenants of the SFRs we have acquired. We are currently evaluating whether to elect to be taxed as a real estate investment trust (“REIT”), commencing with the taxable year ended December 31, 2018. We have until the extended due date of our December 31, 2018 tax return to formerly make this election. Accordingly, should we elect REIT status, we do not expect to be subject to federal income tax, provided that we continue to qualify as a REIT and distributions to the stockholders equal or exceed REIT taxable income. Should we not elect to be taxed as a REIT, we still would not be subject to federal income tax for periods ended June 30, 2019 and prior due to significant operating losses and net operating loss carry-forwards.

 

As of June 30, 2019, we have invested an aggregate of approximately $84.7 million and own a total of 993 homes, of which 263 homes are in the Houston, Texas metropolitan area, 252 homes are in the Jacksonville, Florida metropolitan area, 159 homes are in the Memphis, Tennessee metropolitan area, 144 homes are in the Birmingham, Alabama metropolitan area, 128 homes are in the Oklahoma City, Oklahoma metropolitan area, and 47 homes are in the Atlanta, Georgia metropolitan area.

 

We intend to expand our acquisitions to other select markets in the United States that fit our investment criteria as we continue to evaluate new investment opportunities in different markets. As of June 30, 2019, our portfolio properties were 94.1% occupied. Our portfolio properties have been acquired from available cash and with the proceeds from secured loan transactions pursuant to which we had an outstanding principal amount owed of $61,885,000 as of June 30, 2019. Our loan transactions are secured by first priority liens and related rents on our homes.

 

Our principal objective is to generate cash flow and distribute resulting profits to our stockholders in the form of distributions, while gaining home price appreciation, or HPA, at the same time through the ownership of our portfolio properties. With this objective in mind, we have developed our primary business strategy of acquiring portfolios of stabilized or leased SFRs. We believe the execution of this strategy will allow us to generate immediate and steady cash flow from the rental income from the SFRs that we acquire while potentially gaining significant HPA over time. While our goal is to grow our company and generate available cash flow from the rental income of our SFRs that will allow us to pay all of our operating costs for the operation of our portfolio properties and distribute profits to our stockholders in the form of quarterly dividends, there can be no assurance we will be able to do so.

 

In January 2019, we declared a distribution of $0.01 per share on our common shares. The distribution was made on February 15, 2019 to shareholders of record as of January 25, 2019 and totaled $109,652. On April 17, 2019, we declared a distribution of $0.01 per share on our common shares. The distribution was made on May 15, 2019 to shareholders of record as of April 26, 2019 in the amount of $110,405. We have not declared any additional distributions as of the date of this report.

 

We plan to continue to acquire and manage single-family homes with a focus on long term earnings growth and appreciation in asset value. Our ability to identify and acquire single-family properties that meet our investment criteria will be affected by home prices in our markets, the inventory of properties available through our acquisition channels, competition for our target assets, our capital available for investment, and the cost of that capital. We believe the housing market environment in our markets remains attractive for single-family property acquisitions and rentals. Pricing for housing in certain markets remains attractive and demand for housing is growing. At the same time, we continue to face relatively steady competition for new properties and residents from local operators and institutional managers. Housing prices across our markets have appreciated over the past year. Despite these gains, we believe housing in certain of our markets continues to provide attractive acquisition opportunities and remains inexpensive relative to replacement cost and affordability metrics.

 

We anticipate continued strong rental demand for single-family homes. While new building activity has begun to increase, it remains below historical averages and we believe substantial under-investment in residential housing over the past years will create upward pressure on home prices and rents as demand exceeds supply.

 

 16 

 

 

Property Portfolio

 

The following tables represent our investment in the homes as of June 30, 2019:

 

Total Portfolio of Single-Family Homes — Summary Statistics
(as of June 30, 2019)
Market  No. of
Homes		   Aggregate
Investment		   Average
Investment
per Home		   Properties
Leased		   Properties
Vacant		   Portfolio
Occupancy
Rate		   Average Age
(years)		   Average Size
(sq. ft.)		   Average
Monthly
Rent		   Average
Remaining
Lease Term
(Months)		 
Atlanta,
Georgia		   47    3,562,616    75,800    43    4    91.5%   31    1,453    947    6.2 
Birmingham,
Alabama		   144    10,196,493    70,809    127    17    88.2%   58    1,302    835    2.8 
Houston,
Texas		   263    22,833,305    86,819    254    9    96.6%   50    1,452    1,181    5.4 
Jacksonville,
Florida		   252    18,629,005    73,925    241    11    95.6%   56    1,289    971    6.4 
Memphis,
Tennessee		   159    13,822,007    86,931    151    8    95.0%   42    1,576    1,010    9.2 
Oklahoma City,
Oklahoma		   128    15,649,813    122,264    118    10    92.2%   41    1,510    1,161    3.6 
Totals   993   $84,693,239   $85,290    934    59    94.1%   49    1,416   $1,036    5.7 

 

Results of Operations

 

Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018

 

The following table sets forth a comparison of the results of operations for the three months ended June 30, 2019 and 2018:

 

           $   % 
   2019   2018   Change   Change 
Revenue:                    
Rental income  $2,899,554   $2,232,786   $666,768    29.9%
                     
Expenses:                    
Property operating and maintenance   944,450    682,431    262,019    38.4%
Real estate taxes   433,577    369,545    64,032    17.3%
Depreciation and amortization   784,536    514,858    269,678    52.4%
General and administration   920,002    575,413    344,589    59.9%
                     
Total expenses   3,082,565    2,142,247    940,318    43.9%
                     
Operating (loss) income   (183,011)   90,539    (273,550)   302.1%
                     
Other (expenses) income:                    
Casualty (loss) gain, net   -    25,758    (25,758)   -100.0%
Previously deferred stock issuance costs   -    (674,144)   674,144    -100.0%
Other   36,782    7,201    29,581    410.8%
Interest expense   (797,641)   (435,171)   (362,470)   83.3%
                     
Total other expenses   (760,859)   (1,076,356)   315,497    29.3%
                     
Net loss  $(943,870)  $(985,817)  $41,947    4.3%

 

For the three months ended June 30, 2019, we had total rental income of $2,899,554 compared to total rental income of $2,232,786 for the three months ended June 30, 2018. The increase is due primarily to an increase in the number of homes owned during the 2019 period when compared to the number of homes owned during the three months ended June 30, 2018. As of June 30, 2019, we owned 993 homes; at June 30, 2018, we owned 826 homes.

 

As of June 30, 2019, 934, or 94.1%, of our 993 homes were occupied. During the three months ended June 30, 2019, we had 67 home leases turnover, which represented approximately 6.7 % of our end of the quarter portfolio. As of June 30, 2018, 771, or 93.3%, of our 826 homes were occupied. During the quarter ended June 30, 2018, we had 64 home leases turnover, which represented approximately 7.7% of our end of the quarter portfolio.

 

 17 

 

 

For the three months ended June 30, 2019, we had property operating and maintenance expenses of $944,450 compared to $682,431 for the corresponding prior year period. Property operating and maintenance expenses consist of insurance, property management fees paid to third parties, repairs and maintenance costs, home owner association fees, and other miscellaneous property costs. Real estate taxes for the three months ended June 30, 2019 were $433,577 compared to $369,545 for the three months ended June 30, 2018. The increase in property operating and maintenance expenses from 2018 to 2019 reflects the corresponding increase in our inventory of single-family homes along with higher than normal increases in our repairs, maintenance activity along with increased insurance costs under our package policy when compared to the prior period. The increase in real estate taxes from 2018 to 2019 is based primarily on an increase in our inventory of single-family homes.

 

Depreciation and amortization on our home investments increased to $784,536 for the three months ended June 30, 2019 compared to $514,858 in 2018, reflecting the corresponding increase in our inventory of single-family homes.

 

General and administrative expenses for the three months ended June 30, 2019 totaled $920,002 compared to general and administrative expenses of $575,413 for the corresponding prior year period. General and administrative expenses consist of personnel costs, outside director fees, occupancy fees, public company filing fees, legal, accounting, and other general expenses. The increase in our general and administrative expenses is due primarily to increases in personnel costs and increases in professional fees due to work performed regarding our evaluation of future strategic alternatives in 2019 when compared to 2018.

 

We incurred total operating expenses of $3,082,565 for the three months ended June 30, 2019 resulting in operating loss for the three months ended June 30, 2019 of $183,011, compared to total operating expenses of $2,142,247 for the three months ended June 30, 2018 and a corresponding operating income of $90,539 for the three months ended June 30, 2018.

 

During the three months ended June 30, 2018 we had net casualty gains of $25,578. We had no casualty gains or losses during the three months ended June 30, 2019. During the quarter ended June 30, 2018 we expensed $674,144 of previously deferred stock issuance costs relating to a discontinued capital raise; there was not a corresponding charge during the three months ended June 30, 2019. Other income was $36,782 for the three months ended June 30, 2019 as compared to other income of $7,201 for the three months ended June 30, 2018. Interest expense on our notes payable was $797,641 for the three months ended June 30, 2019 compared to $435,171 for the three months ended June 30, 2018. The increase in interest expense is primarily due to higher note payable balances for the three months ended June 30, 2019 when compared to the corresponding period in 2018. This resulted in net other expense of $760,859 for the three months ended June 30, 2019 compared to a net other expense of $1,076,536 for the three months ended June 30, 2018.

 

Net loss for the three months ended June 30, 2019 was $943,870. The net loss for the three months ended June 30, 2018 was $985,817. The weighted average number of shares outstanding for the three months ended June 30, 2019 increased marginally to 11,036,535 from 10,769,530 for the three months ended June 30, 2018 resulting in a net loss per share of $0.09 for the three months ended June 30, 2019. The resulting net loss was also $0.09 per share for the three months ended June 30, 2018.

 

 18 

 

 

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

 

The following table sets forth a comparison of the results of operations for the six months ended June 30, 2019 and 2018:

 

           $   % 
   2019   2018   Change   Change 
                 
Revenue:                    
Rental income  $5,655,285   $4,412,078   $1,243,207    28.2%
                     
Expenses:                    
Property operating and maintenance   1,866,238    1,300,594    565,644    43.5%
Real estate taxes   870,081    732,916    137,165    18.7%
Depreciation and amortization   1,526,066    1,033,896    492,170    47.6%
General and administration   1,583,719    1,191,832    391,887    32.9%
Noncash share-based compensation   39,375    -    39,375      
                     
Total expenses   5,885,479    4,259,238    1,626,241    38.2%
                     
Operating (loss) income   (230,194)   152,840    (383,034)   250.6%
                     
Other (expenses) income:                    
Casualty (loss) gain, net   (25,000)   76,133    (101,133)   -132.8%
Previously deferred stock issuance costs   -    (674,144)   674,144      
Other   67,380    14,995    52,385    349.3%
Interest expense   (1,525,765)   (835,763)   (690,002)   82.6%
                     
Total other expenses   (1,483,385)   (1,418,779)   (64,606)   -4.6%
                     
Net loss  $(1,713,579)  $(1,265,939)  $(447,640)   -35.4%

 

For the six months ended June 30, 2019, we had total rental income of $5,655,285 compared to total rental income of $4,412,078 for the six months ended June 30, 2018. The increase in total rental and other income is due primarily to the increase in rental homes owned for the 2019 time period as compared to 2018.

 

For the six months ended June 30, 2019, we had property operating and maintenance expenses of $1,866,238 compared to $1,300,594 for the six months ended June 30, 2018. Real estate taxes for the six months ended June 30, 2019 were $870,081 compared to $732,916 for the six months ended June 30, 2018. The increase in property operating and maintenance expenses from 2018 to 2019 reflects the corresponding increase in our inventory of single-family homes along with higher than normal increases in our repairs, maintenance activity along with increased insurance costs under our package policy when compared to the prior period. The increase in real estate taxes from 2018 to 2019 is based primarily on an increase in our inventory of single-family homes.

 

Depreciation and amortization increased to $1,526,066 during the six months ended June 30, 2019 compared to $1,033,896 during the six months ended June 30, 2018, reflecting the corresponding increase in our number of single family homes owned.

 

General and administrative expenses for the six months ended June 30, 2019 totaled $1,583,719 compared to $1,191,832 for the prior year period. The increase in our general and administrative expenses is due primarily to increases in personnel costs and increases in professional fees due to work performed regarding our evaluation of future strategic alternatives in 2019 when compared to 2018.

 

We had net casualty losses of $25,000 during the six months ended June 30, 2019, compared to net casualty gains of $76,133 during the six months ended June 30, 2018. During the six months ended June 30, 2018 we expensed $674,144 of previously deferred stock issuance costs relating to a discontinued capital raise; there was not a corresponding charge during the six months ended June 30, 2019. Other income was $67,380 for the six months ended June 30, 2019 as compared to other income of $14,995 for the six months ended June 30, 2018. Interest expense on our notes payable was $1,525,765 for the six months ended June 30, 2019 compared to $835,763 for the six months ended June 30, 2018. The increase is primarily due to higher note payable balances for the six months ended June 30, 2019 when compared to the corresponding period in 2018. This resulted in net other expense of $1,483,385 for the six months ended June 30, 2019 compared to a net other expense of $1,418,779 for the six months ended June 30, 2018.

 

Net loss for the six months ended June 30, 2019 was $1,713,579. The net loss for the six months ended June 30, 2018 was $1,265,939. The weighted average number of shares outstanding for the six months ended June 30, 2019 increased to 11,020,965 from 10,764,063 for the six months ended June 30, 2018, resulting in a net loss per share of $0.16 for the six months ended June 30, 2019 and a net loss per share of $0.12 for the six months ended June 30, 2018.

 

 19 

 

 

Liquidity and Capital Resources

 

Liquidity is a measure of our ability to meet potential cash requirements, fund and maintain our assets and operations, make interest payments and fund other general business needs. Our liquidity, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control. Our near-term liquidity requirements consist primarily of acquiring properties, funding our operations, and making interest payments.

 

Our liquidity and capital resources as of June 30, 2019 consisted primarily of cash of $11,997,147. We believe our current liquidity and the expected cash flows from operations will be sufficient to fund the present level of our operations through the 12 months following the date of this report. However, our future acquisition activity will depend primarily on our ability to raise funds from the further issuance of shares of our common stock or units of our operating partnership combined with new loan transactions secured by our current and future home inventories. In order to purchase additional single-family homes, we intend to opportunistically utilize the capital markets to raise additional capital, including through the issuance of debt and equity securities, but there can be no assurance that we will be able to access adequate liquidity sources on favorable terms, or at all.

 

Credit Facilities

 

On February 11, 2019, we entered into a loan agreement with Arbor Agency Lending, LLC, an approved seller/servicer for Federal Home Loan Mortgage Corporation (Freddie Mac), which provides for a loan to us in the original principal amount of $10,523,000. The loan is a seven-year, interest-only payable loan with principal due and payable at its seven-year maturity, and accruing interest at a fixed rate of 4.72% per annum. The loan is secured by 143 of our single-family homes. Proceeds of approximately $2.9 million were utilized to purchase 12 homes in Oklahoma City, Oklahoma. Additionally, as a result of the loan, we received approximately $7.4 million of loan proceeds, net of transaction fees and the purchase of homes noted above.

 

On September 28, 2018, we refinanced our entire single-family home portfolio at that time by entering into a $51,362,000 loan with Arbor Agency Lending, LLC, on behalf of the Federal Home Loan Mortgage Corporation (Freddie Mac). The loan is a seven-year, monthly interest-only payable loan accruing interest at 4.74% per annum, with principal due and payable at its maturity on October 1, 2025. The loan is secured by 824 of our currently owned single-family homes and we also guaranteed approximately $12.8 million of the loan balance. Proceeds of approximately $33 million were utilized to pay off and replace our eight previously outstanding notes. We received approximately $17 million of proceeds from the refinancing, net of transaction fees, prepayment fees, and loan payoffs, which was been primarily used for the acquisitions of single-family homes and for working capital purposes

 

A summary of our notes payable as of June 30, 2019 and December 31, 2018 is as follows:

 

   2019   2018   Interest
Rate (Fixed)		   Maturity Date
Note                  
Reven Housing Funding 1, LLC  $51,362,000   $51,362,000    4.74%  October, 2025
Reven Housing Funding 2, LLC   10,523,000    -    4.72%  March, 2026
    61,885,000    51,362,000         
Less deferred loan fees, net   (1,435,822)   (1,229,853)        
Notes payable, net  $60,449,178   $50,132,147         

 

Cash Flows

 

The following table summarizes our cash flows for the six months ended June 30, 2019 and 2018.

 

   2019   2018   Change 
Net cash provided by operating activities  $781,053   $247,358   $533,695 
Net cash used in investing activities   (6,445,759)   (1,936,127)   (4,509,632)
Net cash provided by financing activities   9,991,025    1,946,922    8,044,103 
                
Change in cash and restricted cash  $4,326,319   $258,153   $4,068,166 

 

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Operating Activities

 

We had net cash provided by operating activities of $781,053 for the six months ended June 30, 2019. This resulted from a net loss of $1,713,579, adding back depreciation and amortization of $1,526,066, noncash share-based compensation of $39,375, amortization of deferred loan fees of $105,950, and then increasing the amount by the net change in operating assets and liabilities of $823,241.

 

We had net cash provided by operating activities of $247,358 for the six months ended June 30, 2018. This resulted from a net loss of $1,265,939, adding back depreciation and amortization of $1,033,896, amortization of deferred loan fees of $101,988, cancelled offering costs of $674,144, and then decreasing the amount by the net change in operating assets and liabilities of $296,731.

 

Investing Activities

 

During the six months ended June 30, 2019, we invested $5,191,608 in new homes, $1,077,848 in capital improvements for our homes, and $176,303 in lease origination costs for a total of $6,445,759 of net cash used in investing activities.

 

During the six months ended June 30, 2018, we invested $1,681,413 in new homes, $1,510,195 in capital improvements for our homes (of which approximately $987,000 were for hurricane renovation costs), and $134,817 in lease origination costs. We received $1,390,298 of insurance proceeds for property damages, for a total of $1,936,127 of net cash used in investing activities.

 

Financing Activities

 

During the six months ended June 30, 2019, we had net cash provided by financing activities of $9,991,025 derived from $10,523,000 of proceeds from a note payable, less $311,918 of loan fees, less distributions on common stock of $220,057.

 

During the six months ended June 30, 2018, we had net cash provided by financing activities of $1,946,922 derived from $2,736,630 of proceeds from a note payable, less $603,699 of notes payable principal payments, less $65,161 of loan fees, and the payment of $120,848 of deferred offering costs.

 

Our future acquisition activity relies primarily on our ability to raise funds from the further issuance of common shares combined with new loan transactions secured by our current and future home inventories. We remain focused on acquiring new capital. We believe our current cash balance combined with our estimated future net rental revenue is sufficient to fund our operating activities through the 12 months following the date of this report.

 

Off Balance Sheet Arrangements

 

None.

 

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Net Operating Income

 

We define net operating income (or NOI) as total revenue less property operating and maintenance and real estate taxes. NOI is a non-GAAP measurement that excludes acquisition costs, depreciation and amortization, general and administration, legal and accounting, and interest expenses.

 

We consider NOI to be a meaningful financial measure when considered with the financial statements determined in accordance with GAAP. We believe NOI is helpful to investors in understanding the amount of income after operating expenses which is generated in a given period.

 

The following is a reconciliation of our NOI to net loss as determined in accordance with GAAP for the three and six months ended June 30, 2019 and 2018.

 

   Three Months ended June 30,   Six Months ended June 30, 
   2019   2018   2019   2018 
   (unaudited)   (unaudited)   (unaudited)   (unaudited) 
                 
Net loss  $(943,870)  $(985,817)  $(1,713,579)  $(1,265,939)
                     
Depreciation and amortization   784,536    514,858    1,526,066    1,033,896 
General and administration   920,002    575,413    1,583,719    1,191,832 
Noncash share-based compensation   -    -    39,375    - 
Other expenses, net   760,859    1,076,356    1,483,385    1,418,779 
                     
Net operating income (NOI)  $1,521,527   $1,180,810   $2,918,966   $2,378,568 
                     
Net operating income as a percentage of total revenue   52.5%   52.9%   51.6%   53.9%

 

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NOI should not be considered an alternative to net loss or net cash flows from operating activities, as determined in accordance with GAAP, as indications of our performance or as measures of liquidity. Nor is NOI necessarily indicative of cash available to fund future cash needs or distributions to shareholders. In addition, although we use NOI for comparability in assessing our performance against other REITs, not all REITs compute the same non-GAAP measure of NOI. Accordingly, our basis for computing this non-GAAP measure may not be comparable with that of other REITs. This is due in part to the differences in property operating and maintenance expenses incurred by, and real estate taxes applicable to, different companies and the significant effect these items have on NOI.

 

Funds From Operations and Core Funds From Operations

 

Funds From Operations (or FFO) is a non-GAAP financial measure that we believe, when considered with the financial statements determined in accordance with GAAP, is helpful to investors in understanding our performance because it captures features particular to real estate performance by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than do other depreciable assets. The National Association of Real Estate Investment Trusts (or NAREIT) defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of, and impairment losses recognized with respect to, depreciable property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated on the same basis to determine FFO.

 

Core Funds From Operations (or Core FFO) is a non-GAAP financial measure that we use as a supplemental measure of our performance. We believe that Core FFO is further helpful to investors as it provides a more consistent measurement of our performance across reporting periods by removing the impact of certain items that are not comparable from period to period. We adjust FFO for expensed acquisition fees and costs, share-based compensation, non-cash interest expense related to amortization of deferred financing costs, casualty gains and losses, and certain other non-comparable costs to arrive at Core FFO.

 

FFO and Core FFO should not be considered alternatives to net income (loss) or net cash flows from operating activities, as determined in accordance with GAAP, as indications of our performance or as measures of liquidity. These non-GAAP measures are not necessarily indicative of cash available to fund future cash needs. In addition, although we use these non-GAAP measures for comparability in assessing our performance against other REITs, not all REITs compute the same non-GAAP measures. Accordingly, there can be no assurance that our basis for computing these non-GAAP measures is comparable with that of other REITs. This is due in part to the differences in capitalization policies used by different companies and the significant effect these capitalization policies have on FFO and Core FFO. Real estate costs which are accounted for as capital improvements are added to the carrying value of the property and depreciated over time, whereas real estate costs that are expenses are accounted for as a current period expense. This affects FFO and Core FFO because costs that are accounted for as expenses reduce FFO and Core FFO. Conversely, real estate costs associated with assets that are capitalized and then subsequently depreciated are added back to net income to calculate FFO and Core FFO.

 

The following table sets forth a reconciliation of our net loss as determined in accordance with GAAP and our calculations of FFO and Core FFO for the three and six months ended June 30, 2019 and 2018:

 

   Three Months ended June 30,   Six Months ended June 30, 
   2019   2018   2019   2018 
   (unaudited)   (unaudited)   (unaudited)   (unaudited) 
                 
Net loss   $(943,870)  $(985,817)  $(1,713,579)  $(1,265,939)
                     
Add back depreciation and amortization    784,536    514,858    1,526,066    1,033,896 
                     
Funds used in operations   $(159,334)  $(470,959)  $(187,513)  $(232,043)
                     
Add back noncash share-based compensation    -    -    39,375    - 
Add back noncash amortization of deferred loan fees   56,688    50,994    105,950    101,988 
Less net casualty gain; add net casualty loss    -    (25,758)   25,000    (76,133)
Add back previously deferred stock issuance costs   -    674,144    -    674,144 
                     
Core funds (used in) from operations   $(102,646)  $228,421   $(17,188)  $467,956 

 

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Item 3.  Quantitative and Qualitative Disclosure About Market Risk.

 

As a “smaller reporting company” defined in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.

 

Item 4.  Controls and Procedures.

 

Internal Control Over Financial Reporting

 

During the three months ended June 30, 2019, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 (“Exchange Act”)) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act as of June 30, 2019.  Disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2019.

 

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PART II - OTHER INFORMATION

 

Item 6.   Exhibits.

 

Exhibit
No.		   Description  

 

Method of Filing

         
31.1   Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed herewith
         
31.2   Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   Filed herewith
         
32.1   Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   Filed herewith
         
101.INS   XBRL Instance Document   Filed herewith
         
101.SCH   XBRL Taxonomy Extension Schema Document   Filed herewith
         
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document   Filed herewith
         
101.LAB   XBRL Taxonomy Extension Label Linkbase Document   Filed herewith
         
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document     Filed herewith
         
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document     Filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: August 8, 2019 REVEN HOUSING REIT, INC.
     
    /s/ Chad M. Carpenter
    Chad M. Carpenter,
    Chief Executive Officer
    (Principal Executive Officer)
     
Dated: August 8, 2019 REVEN HOUSING REIT, INC.
     
    /s/ THAD L. MEYEr
    Thad L. Meyer,
    Chief Financial Officer
    (Principal Financial Officer)

 

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