10-Q 1 star630201910-qq2xq3.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
 
 
þ     
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended June 30, 2019
OR
 
 
 
o     
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from _________ to _________
Commission file number 000-55428
STEADFAST APARTMENT REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
Maryland
 
36-4769184
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
 
 
18100 Von Karman Avenue, Suite 500
 
 
Irvine, California
 
92612
(Address of Principal Executive Offices)
 
(Zip Code)
 (949) 852-0700
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
N/A
N/A
N/A
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer o
Accelerated filer o
Non-Accelerated filer þ
Smaller reporting company o
Emerging growth company þ
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of August 6, 2019, there were 52,229,665 shares of the Registrant’s common stock issued and outstanding.
 



STEADFAST APARTMENT REIT, INC.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements



STEADFAST APARTMENT REIT, INC.

CONSOLIDATED BALANCE SHEETS

 
June 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
ASSETS
Assets:
 
 
 

Real Estate:
 
 
 
Land
$
164,113,072

 
$
164,113,072

Building and improvements
1,421,049,714

 
1,411,198,832

Total real estate held for investment, cost
1,585,162,786

 
1,575,311,904

Less accumulated depreciation and amortization
(255,443,023
)
 
(218,672,162
)
Total real estate held for investment, net
1,329,719,763

 
1,356,639,742

Real estate under development:
 
 
 
Real estate held for development
2,576,467

 

Total real estate, net
1,332,296,230

 
1,356,639,742

Cash and cash equivalents
43,745,735

 
58,880,007

Restricted cash
10,913,822

 
13,858,768

Rents and other receivables
1,850,444

 
1,836,406

Other assets
2,870,473

 
2,923,725

Total assets
$
1,391,676,704

 
$
1,434,138,648

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
 

Accounts payable and accrued liabilities
$
29,749,779

 
$
32,330,278

Notes Payable, net:
 
 
 
Mortgage notes payable, net
501,954,042

 
502,143,306

Credit facilities, net
548,256,798

 
548,012,437

Total notes payable, net
1,050,210,840

 
1,050,155,743

Distributions payable
3,856,773

 
3,953,499

Due to affiliates
2,634,840

 
1,711,168

Total liabilities
1,086,452,232

 
1,088,150,688

Commitments and contingencies (Note 9)

 

Stockholders’ Equity:
 
 
 
Preferred stock, $0.01 par value per share; 100,000,000 shares authorized, no shares issued and outstanding

 

Common stock, $0.01 par value per share; 999,999,000 shares authorized, 52,142,845 and 51,723,801 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
521,428

 
517,238

Convertible stock, $0.01 par value per share; 1,000 shares authorized, issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
10

 
10

Additional paid-in capital
690,921,687

 
684,140,823

Cumulative distributions and net losses
(386,218,653
)
 
(338,670,111
)
Total stockholders’ equity
305,224,472

 
345,987,960

Total liabilities and stockholders’ equity
$
1,391,676,704

 
$
1,434,138,648

 
See accompanying notes to consolidated financial statements.

2


PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Rental income
$
42,887,126

 
$
41,909,599

 
$
85,204,046

 
$
82,636,991

Other income
1,069,487

 
565,567

 
1,519,177

 
1,205,201

Total revenues
43,956,613

 
42,475,166

 
86,723,223

 
83,842,192

Expenses:
 
 
 
 
 
 
 
Operating, maintenance and management
10,496,086

 
10,439,849

 
20,537,351

 
20,414,684

Real estate taxes and insurance
6,443,394

 
5,962,503

 
13,024,583

 
11,647,883

Fees to affiliates
6,265,958

 
5,826,703

 
12,331,606

 
11,623,381

Depreciation and amortization
18,515,635

 
17,629,793

 
36,797,927

 
35,065,143

Interest expense
12,165,781

 
10,231,952

 
24,399,076

 
19,346,307

Loss on debt extinguishment

 

 
41,609

 

General and administrative expenses
2,062,769

 
1,330,544

 
3,943,353

 
2,709,066

Total expenses
55,949,623

 
51,421,344

 
111,075,505

 
100,806,464

Net loss
$
(11,993,010
)
 
$
(8,946,178
)
 
$
(24,352,282
)
 
$
(16,964,272
)
Loss per common share — basic and diluted
$
(0.23
)
 
$
(0.17
)
 
$
(0.47
)
 
$
(0.33
)
Weighted average number of common shares outstanding — basic and diluted
52,123,442

 
51,186,141

 
51,999,327

 
51,081,717

 
See accompanying notes to consolidated financial statements.

3


PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 (Unaudited)
 
 
 
Common Stock
 
Convertible Stock
 
Additional
Paid-In Capital
 
Cumulative Distributions & Net Losses
 
Total
Stockholders’ Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
BALANCE, April 1, 2019

51,939,159

 
$
519,392

 
1,000

 
$
10

 
$
687,531,131

 
$
(362,540,920
)
 
$
325,509,613

Issuance of common stock

339,571

 
3,395

 

 

 
5,375,301

 

 
5,378,696

Repurchase of common stock

(135,885
)
 
(1,359
)
 

 

 
(1,998,641
)
 

 
(2,000,000
)
Distributions declared


 

 

 

 

 
(11,684,723
)
 
(11,684,723
)
Amortization of stock-based compensation


 

 

 

 
13,896

 

 
13,896

Net loss


 

 

 

 

 
(11,993,010
)
 
(11,993,010
)
BALANCE, June 30, 2019

52,142,845

 
$
521,428

 
1,000

 
$
10

 
$
690,921,687

 
$
(386,218,653
)
 
$
305,224,472



 
 
Common Stock
 
Convertible Stock
 
Additional
Paid-In Capital
 
Cumulative Distributions & Net Losses
 
Total
Stockholders’ Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
BALANCE, January 1, 2019
 
51,723,801

 
$
517,238

 
1,000

 
$
10

 
$
684,140,823

 
$
(338,670,111
)
 
$
345,987,960

Issuance of common stock
 
693,889

 
6,938

 

 

 
10,750,324

 

 
10,757,262

Repurchase of common stock
 
(274,845
)
 
(2,748
)
 

 

 
(3,997,252
)
 

 
(4,000,000
)
Distributions declared
 

 

 

 

 

 
(23,196,260
)
 
(23,196,260
)
Amortization of stock-based compensation
 

 

 

 

 
27,792

 

 
27,792

Net loss
 

 

 

 

 

 
(24,352,282
)
 
(24,352,282
)
BALANCE, June 30, 2019
 
52,142,845

 
$
521,428

 
1,000

 
$
10

 
$
690,921,687

 
$
(386,218,653
)
 
$
305,224,472



 
See accompanying notes to consolidated financial statements.

4


PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 (Unaudited)
 
 
 
Common Stock
 
Convertible Stock
 
Additional
Paid-In Capital
 
Cumulative Distributions & Net Losses
 
Total
Stockholders’ Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
BALANCE, April 1, 2018
 
51,024,374

 
$
510,244

 
1,000

 
$
10

 
$
673,041,680

 
$
(262,720,553
)
 
$
410,831,381

Issuance of common stock
 
382,876

 
3,828

 

 

 
5,765,082

 

 
5,768,910

Commissions on sales of common stock and related dealer manager fees to affiliates
 

 

 

 

 
32,414

 

 
32,414

Repurchase of common stock
 
(144,440
)
 
(1,444
)
 

 

 
(1,998,556
)
 

 
(2,000,000
)
Distributions declared
 

 

 

 

 

 
(11,485,650
)
 
(11,485,650
)
Amortization of stock-based compensation
 

 

 

 

 
13,839

 

 
13,839

Net loss
 

 

 

 

 

 
(8,946,178
)
 
(8,946,178
)
BALANCE, June 30, 2018
 
51,262,810

 
$
512,628

 
1,000

 
$
10

 
$
676,854,459

 
$
(283,152,381
)
 
$
394,214,716


 
 
Common Stock
 
Convertible Stock
 
Additional
Paid-In Capital
 
Cumulative Distributions & Net Losses
 
Total
Stockholders’ Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
BALANCE, January 1, 2018
 
50,842,640

 
$
508,426

 
1,000

 
$
10

 
$
633,186,743

 
$
(243,389,996
)
 
$
390,305,183

Issuance of common stock
 
766,782

 
7,668

 

 

 
11,462,272

 

 
11,469,940

Commissions on sales of common stock and related dealer manager fees to affiliates
 

 

 

 

 
32,414

 

 
32,414

Transfers from redeemable common stock
 

 

 

 

 
37,028,102

 

 
37,028,102

Repurchase of common stock
 
(346,612
)
 
(3,466
)
 

 

 
(4,882,750
)
 

 
(4,886,216
)
Distributions declared
 

 

 

 

 

 
(22,798,113
)
 
(22,798,113
)
Amortization of stock-based compensation
 

 

 

 

 
27,678

 

 
27,678

Net loss
 

 

 

 

 

 
(16,964,272
)
 
(16,964,272
)
BALANCE, June 30, 2018
 
51,262,810

 
$
512,628

 
1,000

 
$
10

 
$
676,854,459

 
$
(283,152,381
)
 
$
394,214,716

 
See accompanying notes to consolidated financial statements.

5


PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended June 30,
 
2019
 
2018
Cash Flows from Operating Activities:
 
 
 

Net loss
$
(24,352,282
)
 
$
(16,964,272
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
36,797,927

 
35,065,143

Loss on disposal of buildings and improvements
140,919

 
188,369

Amortization of deferred financing costs
494,204

 
493,241

Amortization of stock-based compensation
27,792

 
27,678

Change in fair value of interest rate cap agreements
199,723

 
(578,894
)
Amortization of loan discount

 
177,491

Loss on debt extinguishment
41,609

 

Insurance claim recoveries
(639,483
)
 
(143,972
)
Changes in operating assets and liabilities:
 
 
 
Rents and other receivables
(89,038
)
 
75,434

Other assets
259,566

 
(789,711
)
Accounts payable and accrued liabilities
(2,702,679
)
 
1,373,613

Due to affiliates
1,003,318

 
(146,735
)
Net cash provided by operating activities
11,181,576

 
18,777,385

Cash Flows from Investing Activities:
 
 
 
Acquisition of real estate held for development
(2,158,815
)
 

Additions to real estate investments
(9,883,640
)
 
(7,808,428
)
Additions to real estate held for development
(102,284
)
 

Escrow deposits for pending real estate acquisitions
(700,100
)
 

Proceeds from insurance claims
714,483

 
143,972

Net cash used in investing activities
(12,130,356
)
 
(7,664,456
)
Cash Flows from Financing Activities:
 
 
 
Principal payments on mortgage notes payable
(480,716
)
 
(278,140
)
Payments of commissions on sale of common stock
(113,998
)
 
(114,741
)
Distributions to common stockholders
(12,535,724
)
 
(11,422,475
)
Repurchase of common stock
(4,000,000
)
 
(4,886,216
)
Net cash used in financing activities
(17,130,438
)
 
(16,701,572
)
Net decrease in cash, cash equivalents and restricted cash
(18,079,218
)
 
(5,588,643
)
Cash, cash equivalents and restricted cash, beginning of the period
72,738,775

 
38,667,705

Cash, cash equivalents and restricted cash, end of the period
$
54,659,557

 
$
33,079,062


6


PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)

 
Six Months Ended June 30,
 
2019
 
2018
Supplemental Disclosures of Cash Flow Information:
 
 
 
Interest paid
$
23,807,702

 
$
18,585,763

Supplemental Disclosures of Noncash Flow Transactions:
 
 
 
Distributions payable
$
3,856,773

 
$
3,792,428

Distributions paid to common stockholders through common stock issuances pursuant to the distribution reinvestment plan
$
10,757,262

 
$
11,469,940

Redemptions payable
$
2,000,000

 
$
2,000,000

Accounts payable and accrued liabilities from additions to real estate investments
$
954,446

 
$
436,638

Due to affiliates from additions to real estate investments
$
75,443

 
$
94,442

Due to affiliates for commissions on sale of common stock
$
185,953

 
$
415,184

Operating lease right-of-use asset,net
$
5,871

 
$

Operating lease liabilities, net
$
5,936

 
$

 
See accompanying notes to consolidated financial statements.

7


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)


1.         Organization and Business
Steadfast Apartment REIT, Inc. (the “Company”) was formed on August 22, 2013, as a Maryland corporation that elected to qualify as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2014. On September 3, 2013, the Company was initially capitalized with the sale of 13,500 shares of common stock to Steadfast REIT Investments, LLC (the “Sponsor”) at a purchase price of $15.00 per share for an aggregate purchase price of $202,500. Steadfast Apartment Advisor, LLC (the “Advisor”), a Delaware limited liability company formed on August 22, 2013, invested $1,000 in the Company in exchange for 1,000 shares of non-participating, non-voting convertible stock (the “Convertible Stock”) as described in Note 6 (Stockholders’ Equity).
The Company owns and operates a diverse portfolio of multifamily properties located in targeted markets throughout the United States. As of June 30, 2019, the Company owned 34 multifamily properties comprising a total of 11,601 apartment homes and one parcel of land held for the development of apartment homes. The Company may acquire additional multifamily properties or pursue multifamily developments in the future. For more information on the Company’s real estate portfolio, see Note 3 (Real Estate).
Public Offering
On December 30, 2013, the Company commenced its initial public offering to offer a maximum of 66,666,667 shares of common stock for sale to the public at an initial price of $15.00 per share (with discounts available for certain categories of purchasers) (the “Primary Offering”). The Company also registered up to 7,017,544 shares of common stock for sale pursuant to the Company’s distribution reinvestment plan (the “DRP,” and together with the Primary Offering, the “Public Offering”) at an initial price of $14.25 per share. The Company terminated its Public Offering on March 24, 2016, but continues to offer shares of common stock pursuant to the DRP. As of the termination of the Public Offering, the Company had sold 48,625,651 shares of common stock in the Public Offering for gross proceeds of $724,849,631, including 1,011,561 shares of common stock issued pursuant to the DRP for gross offering proceeds of $14,414,752. As of June 30, 2019, the Company had issued 53,615,560 shares of common stock for gross offering proceeds of $799,097,238, including 6,001,533 shares of common stock issued pursuant to the DRP for gross offering proceeds of $88,662,359.
On March 12, 2019, the Company’s board of directors approved an estimated value per share of the Company’s common stock of $15.84 as of December 31, 2018. In connection with the determination of an estimated value per share, the Company’s board of directors approved a price per share for the DRP of $15.84, effective April 1, 2019. The Company’s board of directors may again, from time to time, in its sole discretion, change the price at which the Company offers shares pursuant to the DRP to reflect changes in the Company’s estimated value per share and other factors that the Company’s board of directors deems relevant. 
The business of the Company is externally managed by the Advisor, pursuant to the Advisory Agreement dated December 13, 2013, by and among the Company, Steadfast Apartment REIT Operating Partnership, L.P. (the “Operating Partnership”) and the Advisor (as amended, the “Advisory Agreement”). The Advisory Agreement is subject to annual renewal by the Company’s board of directors. The current term of the Advisory Agreement expires on December 13, 2019. Subject to certain restrictions and limitations, the Advisor manages the Company’s day-to-day operations, manages the Company’s portfolio of properties, sources and presents investment opportunities to the Company’s board of directors and provides investment management services on the Company’s behalf. The Advisor has also entered into an Advisory Services Agreement with Crossroads Capital Advisors, LLC (“Crossroads Capital Advisors”), whereby Crossroads Capital Advisors provides certain advisory services to the Company on behalf of the Advisor. Stira Capital Markets Group, LLC (formerly known as Steadfast Capital Markets Group, LLC) (the “Dealer Manager”), an affiliate of the Advisor, served as the dealer manager for the Public Offering. The Dealer Manager was responsible for marketing the Company’s shares of common stock offered pursuant to the Public Offering. The Advisor, along with the Dealer Manager, provides marketing, investor relations and other administrative services on the Company’s behalf. 

8


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

Substantially all of the Company’s business is conducted through the Operating Partnership. The Company is the sole general partner of the Operating Partnership. The Company and Steadfast Apartment REIT Limited Partner, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company, entered into a Limited Partnership Agreement (the “Partnership Agreement”) on September 3, 2013.
As the Company accepted subscriptions for shares of its common stock, the Company transferred substantially all of the net offering proceeds from its Public Offering to the Operating Partnership as a contribution in exchange for partnership interests and the Company’s percentage ownership in the Operating Partnership increased proportionately. The Partnership Agreement provides that the Operating Partnership is operated in a manner that will enable the Company to (1) satisfy the requirements for being classified as a REIT for tax purposes, (2) avoid any federal income or excise tax liability and (3) ensure that the Operating Partnership will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), which classification could result in the Operating Partnership being taxed as a corporation. In addition to the administrative and operating costs and expenses incurred by the Operating Partnership in acquiring and operating real properties, the Operating Partnership pays all of the Company’s administrative costs and expenses, and such expenses are treated as expenses of the Operating Partnership.
2.         Summary of Significant Accounting Policies
There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2018, other than Accounting Standards Update (“ASU”) 2016-02 and the Securities and Exchange Commission’s (“SEC”) Disclosure Update and Simplification rule (Release 33-10532), as further described below. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 14, 2019. 
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company, the Operating Partnership and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. The financial statements of the Company’s subsidiaries are prepared using accounting policies consistent with those of the Company.
The accompanying unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments that are of a normal and recurring nature and necessary for a fair and consistent presentation of the results of such periods. Operating results for the three and six months ended June 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The unaudited consolidated financial statements herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

9


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

Fair Value Measurements
Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other assets and liabilities at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.
When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and will classify such items in Level 1 or Level 2. In instances where the market is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and will establish a fair value by assigning weights to the various valuation sources.
The following describes the valuation methodologies used by the Company to measure fair value, including an indication of the level in the fair value hierarchy in which each asset or liability is generally classified.
Interest rate cap agreements - The Company has entered into certain interest rate cap agreements. These derivatives are recorded at fair value. Fair value was based on a model-driven valuation using the associated variable rate curve and an implied market volatility, both of which were observable at commonly quoted intervals for the full term of the interest rate cap agreements. Therefore, the Company’s interest rate cap agreements were classified within Level 2 of the fair value hierarchy and are included in other assets in the accompanying consolidated balance sheets. Changes in the fair value of the interest rate cap agreements are recorded as interest expense in the accompanying consolidated statements of operations.

10


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

The following tables reflect the Company’s assets required to be measured at fair value on a recurring basis on the consolidated balance sheets:
 
 
June 30, 2019
 
 
Fair Value Measurements Using
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
  Interest rate cap agreements
 
$

 
$
8,046

 
$

 
 
December 31, 2018
 
 
Fair Value Measurements Using
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
  Interest rate cap agreements
 
$

 
$
207,769

 
$

Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
Fair Value of Financial Instruments
The accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, rents and other receivables, accounts payable and accrued liabilities, distributions payable, due to affiliates and notes payable.
The Company considers the carrying value of cash and cash equivalents, restricted cash, rents and other receivables, accounts payable and accrued liabilities and distributions payable to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization. The fair value of amounts due to affiliates is not determinable due to the related party nature of such amounts. The Company has determined that its notes payable, net are classified as Level 3 within the fair value hierarchy.
The fair value of the notes payable, net is estimated using a discounted cash flow analysis using borrowing rates available to the Company for debt instruments with similar terms and maturities. As of June 30, 2019 and December 31, 2018, the fair value of the notes payable was $1,096,206,883 and $1,042,358,884, respectively, compared to the carrying value of $1,050,210,840 and $1,050,155,743, respectively.
Distribution Policy
The Company elected to be taxed, and currently qualifies, as a REIT commencing with the taxable year ended December 31, 2014. To maintain its qualification as a REIT, the Company intends to make distributions each taxable year equal to at least 90% of its REIT taxable income (which is determined without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). Distributions declared during the six months ended June 30, 2019, were based on daily record dates and calculated at a rate of $0.002466 per share per day during the period from January 1, 2019 through June 30, 2019.
Distributions to stockholders are determined by the board of directors of the Company and are dependent upon a number of factors relating to the Company, including funds available for the payment of distributions, financial condition, the timing of property acquisitions, capital expenditure requirements and annual distribution requirements in order for the Company to qualify as a REIT under the Internal Revenue Code. During the three and six months ended June 30, 2019, the Company

11


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

declared distributions totaling $0.224 and $0.446 per share of common stock, respectively. During the three and six months ended June 30, 2018, the Company declared distributions totaling $0.224 and $0.446 per share of common stock, respectively.
Per Share Data
Basic loss per share attributable to common stockholders for all periods presented are computed by dividing net loss by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted loss per share is computed based on the weighted average number of shares of the Company’s common stock and all potentially dilutive securities, if any. Distributions declared per common share assume each share was issued and outstanding each day during the period. Nonvested shares of the Company’s restricted common stock and convertible stock give rise to potentially dilutive shares of the Company’s common stock but such shares were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during the period.
Segment Disclosure
The Company has determined that it has one reportable segment with activities related to investing in multifamily properties. The Company’s investments in real estate are in different geographic regions, and management evaluates operating performance on an individual asset level. However, as each of the Company’s assets has similar economic characteristics, tenants and products and services, its assets have been aggregated into one reportable segment.
Reclassifications
Certain amounts in the Company’s prior period consolidated financial statements were reclassified to conform to the current presentation. These reclassifications did not change the results of operations of those prior periods. On January 1, 2019, the Company adopted ASU 2016-02, as further described below. As a result, all income earned pursuant to tenant leases is reflected as one line item, “Rental Income,” in the consolidated statements of operations. To facilitate comparability, the Company has reclassified the prior period’s lease and non-lease income consistently with the current periods presented.
The table below provides a reconciliation of the prior period presentation of the income statement line items that were reclassified in our consolidated statements of operations to conform to the current period presentation, pursuant to the adoption of the new lease accounting standard and election of the single component practical expedient:
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Rental income (presentation prior to January 1, 2019)
 
$
37,749,899

 
$
74,550,233

Tenant reimbursements(1) (presentation prior to January 1, 2019)
 
4,159,700

 
8,086,758

Rental income (presentation effective January 1, 2019)
 
$
41,909,599

 
$
82,636,991

_________________
(1) Tenant reimbursements include reimbursements for recoverable costs.
Recent Accounting Pronouncements
 
In February 2016, the FASB established ASC Topic 842, Leases (“ASC 842”), by issuing ASU 2016-02, which requires lessees to recognize right-of-use assets and lease liabilities for operating leases on the balance sheet and disclose key information about leasing arrangements. ASC 842 also makes targeted changes to lessor accounting. ASC 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842 (“ASU 2018-01”), ASU 2018-10, Codification Improvements to Topic 842 (“ASU 2018-10”), ASU 2018-11, Targeted Improvements (“ASU 2018-11”) and ASU 2018-20, Leases (Topic 842), Narrow-scope Improvements for Lessors (“ASU 2018-20”). ASC 842 requires a modified retrospective transition approach that was effective in the first quarter of 2019, subject to early adoption. The Company elected an optional transition method that allows entities to initially apply ASC 842 at the

12


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

adoption date (January 1, 2019) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company evaluated the impact of ASC 842 on its leases both as it relates to the Company acting as a lessee and as a lessor. Based on its evaluation, as it relates to the former, the Company elected to apply each of the practical expedients described in ASC 842-10-65-1(f) that allowed the Company, among other things, to not reassess lease classification conclusions or initial direct cost accounting as of December 31, 2018, therefore these leases continue to be accounted for as operating leases. The Company also elected the practical expedient described in ASC 842-20-25-2 not to apply the recognition requirements in ASC 842 to short-term leases and instead, to recognize lease payments in the consolidated statement of operations on a straight-line basis over the lease term. The Company did not experience a material impact on the recognition of leases in the consolidated financial statements because the quantity of leased equipment by the Company is limited and immaterial to the consolidated financial statements. Upon adoption, the Company recognized an initial operating lease right-of-use asset, net, of $7,656 and an operating lease liability, net, of $7,720.
As it relates to the Company as lessor, the Company did not experience a material impact on the recognition of leases in the consolidated financial statements because under ASC 842, lessors continue to account for leases using an approach that is substantially equivalent to historical guidance for sales-type leases, direct financing leases, and operating leases. The Company elected a practical expedient which allows lessors to not separate non-lease components from the lease component when the timing and pattern of transfer for the lease components and non-lease components are the same and if the lease component is classified as an operating lease. As a result, on January 1, 2019, the Company began presenting all rentals and reimbursements from tenants as a single line item rental income within the consolidated statements of operations. As of January 1, 2019, the Company implemented changes to its business processes and controls related to accounting for and the presentation and disclosure of leases, including the reclassification of tenant reimbursements, previously disclosed as part of tenant reimbursements and other, to rental income, in the consolidated statements of operations.
Under ASC 842, beginning on January 1, 2019, changes in the probability of collecting tenant rental income could result in direct adjustments of rental income and tenant receivables. The Company did not experience a material impact on its rental income and tenant receivables as of the adoption date.
The Company’s rental income consists of fixed rental payments from tenants under operating leases and is recognized on a straight-line basis over the respective operating lease terms. The Company recognizes minimum rent, including rental abatements, concessions and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the non-cancelable term of the related lease. The Company’s rental income that relates to variable lease payments consists of tenant reimbursements and includes reimbursements for recoverable costs, which are recognized as revenue in the period during which the applicable expenses are incurred and the tenant’s obligation to reimburse the Company arises.
The Company recognized $42,887,126 and $85,204,046 of rental income related to operating lease payments of which $4,332,509 and $8,410,436 was for variable lease payments for the three and six months ended June 30, 2019.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASU 2016-13”). ASU 2016-13 requires more timely recording of credit losses on loans and other financial instruments that are not accounted for at fair value through net income (loss), including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 require the Company to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets and eliminates the “incurred loss” methodology in current GAAP. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments Credit Losses (“ASU 2018-19”), which clarifies that operating lease receivables accounted for under ASC 842 Leases, are not in the scope of the new credit losses guidance. The effective date and transition requirements for this guidance are the same as for ASU 2016-13. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related

13


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

disclosures and does not expect a material impact on its consolidated financial statements and related disclosures from its adoption.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The FASB issued ASU 2018-13 to improve the effectiveness of fair value measurement disclosures by adding, eliminating, and modifying certain disclosure requirements. The issuance of ASU 2018-13 is part of a disclosure framework project. The disclosure framework project’s objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP that is most important to users of each entity’s financial statements. Achieving the objective of improving the effectiveness of the notes to financial statements includes: (1) the development of a framework that promotes consistent decisions by the FASB board about disclosure requirements and (2) the appropriate exercise of discretion by reporting entities. The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting-Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. ASU 2018-13 removed certain disclosure requirements under Topic 820 such as the disclosure requirements of the valuation process for level 3 fair value measurements and modified and added certain of the disclosure requirements in Topic 820. ASU 2018-13 requires prospective and retrospective application depending on the amendment and is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact ASU 2018-13 will have on its consolidated financial statements and related disclosures and believes that certain disclosures of interest rate cap agreements in its consolidated financial statements may be impacted by the adoption of ASU 2018-13.
The SEC’s Disclosure Update and Simplification rule (Release 33-10532) amends the interim financial statement requirements to require a reconciliation of changes in stockholder’ equity in the notes or as a separate statement. This analysis should reconcile the beginning balance to the ending balance of each caption in stockholders’ equity for each period for which an income statement is required to be filed and comply with the remaining content requirements of Rule 3-04 of Regulation S-X. As a result, registrants will have to provide the reconciliation for both the year-to-date and quarterly periods and comparable periods in Form 10-Q but only for the year-to-date periods in registration statements. The rule does not prescribe the format of the presentation as long as the appropriate periods are provided. Per a Compliance and Disclosure Interpretation (Q 105.09, Exchange Act Forms, 10-Q), “the amendments are effective for all filings made on or after November 5, 2018. In light of the timing of effectiveness of the amendments and proximity of effectiveness to the filing date for most filers’ quarterly reports, the staff would not object if the filer’s first presentation of the changes in the shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments.” This allowed the Company to adopt the amendment for the Company’s first quarter 2019 filing. The Company first adopted this guidance in the three months ended March 31, 2019, by presenting a reconciliation of changes in stockholders’ equity for the current and prior period as a separate statement.
3.          Real Estate
As of June 30, 2019, the Company owned 34 multifamily properties comprising a total of 11,601 apartment homes and one parcel of land held for the development of apartment homes. The total contract acquisition price of the Company’s real estate portfolio was $1,501,958,217, including development costs. As of June 30, 2019 and December 31, 2018, the Company’s portfolio was approximately 93.8% and 93.9% occupied and the average monthly rent was $1,189 and $1,163, respectively.

14


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

As of June 30, 2019 and December 31, 2018, accumulated depreciation and amortization related to the Company’s consolidated real estate properties was as follows:
 
 
June 30, 2019
 
 
Assets
 
 
Land
 
Building and Improvements
 
Total Real Estate Held for Investment
 
Real Estate Under Development
 
Total Real Estate
Investments in real estate
 
$
164,113,072

 
$
1,421,049,714

 
$
1,585,162,786

 
$
2,576,467

 
$
1,587,739,253

Less: Accumulated depreciation and amortization
 

 
(255,443,023
)
 
(255,443,023
)
 

 
(255,443,023
)
Net investments in real estate and related lease intangibles
 
$
164,113,072

 
$
1,165,606,691

 
$
1,329,719,763

 
$
2,576,467

 
$
1,332,296,230



December 31, 2018


Assets


Land

Building and Improvements

Total Real Estate Held for Investment
 
Real Estate Under Development
 
Total Real Estate
Investments in real estate

$
164,113,072


$
1,411,198,832


$
1,575,311,904

 
$

 
$
1,575,311,904

Less: Accumulated depreciation and amortization



(218,672,162
)

(218,672,162
)
 

 
(218,672,162
)
Net investments in real estate and related lease intangibles

$
164,113,072


$
1,192,526,670


$
1,356,639,742

 
$

 
$
1,356,639,742

Depreciation and amortization expense was $18,515,635 and $36,797,927 for the three and six months ended June 30, 2019, and $17,629,793 and $35,065,143 for the three and six months ended June 30, 2018, respectively, all of which related to the depreciation of the Company’s buildings and improvements.
Real Estate Under Development
During the six months ended June 30, 2019, the Company acquired the following land held for the development of apartment homes:
Development Name
 
Location
 
Purchase Date
 
Land Held for Development
 
Construction in Progress
 
Total Carrying Value
Victory Station
 
Murfreesboro, TN
 
5/30/2019
 
$
2,469,183

 
$
107,284

 
$
2,576,467

Operating Leases
As of June 30, 2019, the Company’s real estate portfolio comprised 11,601 residential apartment homes and was 96.0% leased by a diverse group of residents. The residential lease terms consist of lease durations equal to twelve months or less.
Some residential leases contain provisions to extend the lease agreements, options for early termination after paying a specified penalty and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit

15


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in accounts payables and accrued liabilities in the accompanying consolidated balance sheets and totaled $4,288,717 and $4,130,860 as of June 30, 2019 and December 31, 2018, respectively.
As of June 30, 2019 and 2018, no tenant represented over 10% of the Company’s annualized base rent.
4.          Other Assets
As of June 30, 2019 and December 31, 2018, other assets consisted of:
 
June 30, 2019
 
December 31, 2018
Prepaid expenses
$
479,897

 
$
1,690,959

Interest rate cap agreements (Note 10)
8,046

 
207,769

Escrow deposits for pending real estate acquisitions
500,100

 
100,000

Other deposits
1,876,559

 
924,997

Operating lease right-of-use assets, net
5,871

 

Other assets
$
2,870,473

 
$
2,923,725

5.          Debt
Mortgage Notes Payable
The following is a summary of mortgage notes payable, net secured by real property as of June 30, 2019 and December 31, 2018.


June 30, 2019


 
 
 
 
Interest Rate Range
 
Weighted Average Interest Rate
 
 
Type

Number of Instruments
 
Maturity Date Range
 
Minimum
 
Maximum
 
 
Principal Outstanding
Variable rate(1)

8

12/1/2024 - 11/1/2025

1-Mo LIBOR + 1.88%


1-Mo LIBOR + 2.28%


4.41%

$
277,432,000

Fixed rate

7

7/1/2025 - 5/1/2054

4.34
%

4.60
%

4.45%

227,646,617

Mortgage notes payable, gross

15

 
 
 
 
 

4.43%

505,078,617

Deferred financing costs, net(2)
 
 
 
 
 
 
 
 
 
 
 
(3,124,575
)
Mortgage notes payable, net
 
 
 
 
 
 
 
 
 
 
 
$
501,954,042


16


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

 
 
December 31, 2018
 
 
 
 
 
 
Interest Rate Range
 
Weighted Average Interest Rate
 
 
Type
 
Number of Instruments
 
Maturity Date Range
 
Minimum
 
Maximum
 
 
Principal Outstanding
Variable rate(1)
 
8
 
12/1/2024 - 11/1/2025
 
1-Mo LIBOR + 1.88%

 
1-Mo LIBOR + 2.28%

 
4.53%
 
$
277,432,000

Fixed rate
 
7
 
7/1/2025 - 5/1/2054
 
4.34
%
 
4.60
%
 
4.45%
 
228,127,333

Mortgage notes payable, gross
 
15
 
 
 
 
 
 
 
4.49%
 
505,559,333

Deferred financing costs, net(2)
 
 
 
 
 
 
 
 
 
 
 
(3,416,027
)
Mortgage notes payable, net
 
 
 
 
 
 
 
 
 
 
 
$
502,143,306

___________
(1)
See Note 10 (Derivative Financial Instruments) for a discussion of the interest rate cap agreements used to manage the exposure to interest rate movement on the Company’s variable rate loans.
(2)
Accumulated amortization related to deferred financing costs as of June 30, 2019 and December 31, 2018 was $1,893,742 and $1,602,290, respectively.
Master Credit Facility
On July 31, 2018, (the “Closing Date”), 16 indirect wholly-owned subsidiaries of the Company terminated the existing mortgage loans with their lenders for an aggregate principal amount of $479,318,649 and entered into a Master Credit Facility Agreement (“MCFA”) with Newmark Group Inc. (“Facility Lender”) for an aggregate principal amount of $551,669,000. The MCFA provides for three tranches: (i) a fixed rate loan in the aggregate principal amount of $331,001,400 that accrues interest at 4.43% per annum; (ii) a fixed rate loan in the aggregate principal amount of $137,917,250 that accrues interest at 4.57%; and (iii) a variable rate loan in the aggregate principal amount of $82,750,350 that accrues interest at the one-month London Interbank Offered Rate (“LIBOR”) plus 1.70%. The loans have a maturity date of August 1, 2028, unless the maturity date is accelerated in accordance with the terms of the loan documents. Interest only payments are payable monthly through August 1, 2025, with interest and principal payments due monthly thereafter. The Company paid $1,930,842 in the aggregate in loan origination fees to the Facility Lender in connection with the refinancings, and paid the Advisor a loan coordination fee of $2,758,345.
CME Loans
Additionally, on the Closing Date, five of the Company’s indirect wholly-owned subsidiaries terminated the existing mortgage loans with their lenders for an aggregate principal amount of $131,318,742 and entered into new loan agreements with PNC Bank, National Association (“PNC Bank”) for an aggregate principal amount of $160,850,000. Each loan agreement provides for a term loan, a (“CME Loan” and, collectively, the “CME Loans”), with a maturity date of August 1, 2028, unless the maturity date is accelerated with the loan terms. Each CME Loan accrues interest at a fixed rate of 4.43% per annum. The entire outstanding principal balance and any accrued and unpaid interest on each of the CME Loans are due on the maturity date. Interest only payments on the CME Loans are payable monthly in arrears on specified dates as set forth in each loan agreement and interest and principal payments are due beginning September 1, 2023. Monthly payments are due and payable on the first day of each month, commencing September 1, 2018. The Company paid $643,400 in the aggregate in loan origination fees to PNC Bank in connection with the refinancings, and paid the Advisor a loan coordination fee of $804,250.



17


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

Line of Credit
On May 18, 2016, the Company entered into a line of credit facility (the “Line of Credit”) with PNC Bank in an amount not to exceed $65,000,000. The Line of Credit provided for advances (each, an “LOC Loan” and collectively, the “LOC Loans”) solely for the purpose of financing the costs in connection with acquisitions and development of real estate projects and for general corporate purposes (subject to certain debt service and loan to value requirements). The Line of Credit had a maturity date of May 17, 2019, subject to extension (the “LOC Maturity Date”), as further described in the loan agreement (the “LOC Loan Agreement”) entered into by certain of the Company’s wholly-owned subsidiaries with PNC Bank in connection with the acquisition of the Landings of Brentwood Property (the “Mortgaged Property”). Advances made under the Line of Credit were secured by the Mortgaged Property, as evidenced by the LOC Loan Agreement, the Revolving Credit Loan Note (the “LOC Note”), the Deed of Trust and a Guaranty from the Company (the “LOC Guaranty,” together with the LOC Loan Agreement and the LOC Note, the “LOC Loan Documents”).
The Company had the option to select the interest rate in respect of the outstanding unpaid principal amount of the LOC Loans from the following options (the “Interest Rate Options”): (1) the sum of the Base Rate (as defined in the LOC Loan Agreement) plus 0.60%, or (2) a rate per annum fixed for the applicable LIBOR Interest Period (as defined in the LOC Loan Agreement) equal to the sum of LIBOR plus 1.60%. The Company terminated the Line of Credit on January 9, 2019.
As of June 30, 2019 and December 31, 2018, the advances obtained and certain financing costs incurred under the MCFA and Line of Credit, which is included in credit facilities, net, in the accompanying consolidated balance sheets, are summarized in the following table.
 
 
Amount of Advance as of
 
 
June 30, 2019
 
December 31, 2018
Principal balance on Line of Credit, gross(1)
 
$

 
$

Principal balance on MCFA, gross
 
551,669,000

 
551,669,000

Deferred financing costs, net  on MCFA(2)
 
(3,412,202
)
 
(3,612,316
)
Deferred financing costs, net  on Line of Credit(3)
 

 
(44,247
)
Credit facilities, net
 
$
548,256,798

 
$
548,012,437

___________
(1)
At December 31, 2018, Landings of Brentwood was pledged as collateral pursuant to the Line of Credit. On January 9, 2019, the Company terminated the Line of Credit.
(2)
Accumulated amortization related to deferred financing costs in respect of the MCFA as of June 30, 2019 and December 31, 2018, was $628,755 and $428,641, respectively.
(3)
Accumulated amortization related to deferred financing costs in respect of the Line of Credit as of June 30, 2019 and December 31, 2018, was $0 and $280,753, respectively.
Maturity and Interest
The following is a summary of the Company’s aggregate maturities as of June 30, 2019:
 
 
 
 
 
 
Maturities During the Years Ending December 31,
 
 
Contractual Obligations
 
Total
 
Remainder of 2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
Principal payments on outstanding debt (1)
 
$
1,056,747,617

 
$
486,230

 
$
1,191,072

 
$
5,196,926

 
$
5,302,529

 
$
6,112,773

 
$
1,038,458,087

______________

18


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

(1)
Projected principal payments on outstanding debt obligations are based on the terms of the notes payable agreements. Amounts exclude the amortization of deferred financing costs associated with the notes payable.
The Company’s notes payable contain customary financial and non-financial debt covenants. As of June 30, 2019, the Company was in compliance with all debt covenants.
For the three and six months ended June 30, 2019, the Company incurred interest expense of $12,165,781 and $24,399,076, respectively. Interest expense for the three and six months ended June 30, 2019, includes amortization of deferred financing costs of $246,432 and $494,204, net unrealized losses from the change in fair value of interest rate cap agreements of $20,107 and $199,723 and credit facility commitment fees of $0 and $2,137, respectively.
For the three and six months ended June 30, 2018, the Company incurred interest expense of $10,231,952 and $19,346,307, respectively. Interest expense for the three and six months ended June 30, 2018, includes amortization of deferred financing costs of $246,966 and $493,241, net unrealized gains from the change in fair value of interest rate cap agreements of $131,281 and $578,894, credit facility commitment fees of $7,479 and $14,877, costs associated with the refinancing of debt of $0 and $21,472 and loan discount amortization of $88,746 and $177,491, respectively.
Interest expense of $3,903,574 and $4,006,127 was payable as of June 30, 2019 and December 31, 2018, respectively, and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets.
6.         Stockholders’ Equity
 General
Under the Company’s Articles of Amendment and Restatement (the “Charter”), the total number of shares of capital stock authorized for issuance is 1,100,000,000 shares, consisting of 999,999,000 shares of common stock with a par value of $0.01 per share, 1,000 shares of convertible stock with a par value of $0.01 per share and 100,000,000 shares designated as preferred stock with a par value of $0.01 per share.
Common Stock
The shares of the Company’s common stock entitle the holders to one vote per share on all matters upon which stockholders are entitled to vote, to receive dividends and other distributions as authorized by the Company’s board of directors in accordance with the Maryland General Corporation Law and to all rights of a stockholder pursuant to the Maryland General Corporation Law. The common stock has no preferences or preemptive, conversion or exchange rights.
On September 3, 2013, the Company issued 13,500 shares of common stock to the Sponsor for $202,500. From inception through March 24, 2016, the date of the termination of the Public Offering, the Company had issued 48,625,651 shares of common stock in its Public Offering for offering proceeds of $640,012,497, including 1,011,561 shares of common stock issued pursuant to the DRP for total proceeds of $14,414,752, net of offering costs of $84,837,134. Following the termination of the Public Offering, the Company continues to offer shares pursuant to the DRP. As of June 30, 2019, the Company had issued 53,615,560 shares of common stock for offering proceeds of $714,260,104, including 6,001,533 shares of common stock issued pursuant to the DRP for total proceeds of $88,662,359, net of offering costs of $84,837,134. The offering costs primarily consisted of selling commissions and dealer manager fees paid in the Primary Offering.
As further discussed in Note 8 (Incentive Award Plan and Independent Director Compensation), the shares of restricted common stock vest and become non-forfeitable in four equal annual installments beginning on the date of grant and ending on the third anniversary of the date of grant or will become fully vested and become non-forfeitable on the earlier to occur of (1) the termination of the independent director’s service as a director due to his or her death or disability or (2) a change in control of the Company.

19


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

The issuance and vesting activity for the six months ended June 30, 2019 and year ended December 31, 2018, for the restricted stock issued to the Company’s independent directors were as follows:
 
 
Six Months Ended June 30, 2019
 
Year Ended December 31, 2018
Nonvested shares at the beginning of the period
 
7,497

 
7,497

Granted shares
 

 
4,998

Vested shares
 

 
(4,998
)
Nonvested shares at the end of the period
 
7,497

 
7,497

Additionally, the weighted average fair value of restricted common stock issued to the Company’s independent directors for the six months ended June 30, 2019 and year ended December 31, 2018 was as follows:
Grant Year
 
Weighted Average Fair Value
2018
 

$15.18

2019
 
n/a

Included in general and administrative expenses is $13,896 and $27,792 for the three and six months ended June 30, 2019, and $13,839 and $27,678 for the three and six months ended June 30, 2018, respectively, for compensation expense related to the issuance of restricted common stock. As of June 30, 2019, the compensation expense related to the issuance of the restricted common stock not yet recognized was $62,467. The weighted average remaining term of the restricted common stock was approximately 0.8 years as of June 30, 2019. As of June 30, 2019, no shares of restricted common stock issued to the independent directors have been forfeited.
Convertible Stock
The Company issued 1,000 shares of Convertible Stock to the Advisor for $1,000. The Convertible Stock will convert into shares of common stock if and when: (A) the Company has made total distributions on the then-outstanding shares of its common stock equal to the original issue price of those shares plus an aggregate 6.0% cumulative, non-compounded, annual return on the original issue price of those shares, (B) the Company lists its common stock for trading on a national securities exchange or (C) the Advisory Agreement is terminated or not renewed (other than for “cause” as defined in the Advisory Agreement). In the event of a termination or non-renewal of the Advisory Agreement for cause, all of the shares of the Convertible Stock will be repurchased for $1.00. In general, each share of Convertible Stock will convert into a number of shares of common stock equal to 1/1000 of the quotient of (A) 15% of the excess of (1) the Company’s “enterprise value” plus the aggregate value of distributions paid to date on the then outstanding shares of the Company’s common stock over (2) the aggregate purchase price paid by stockholders for those outstanding shares of common stock plus an aggregated 6.0% cumulative, non-compounded, annual return on the original issue price of those outstanding shares, divided by (B) the Company’s enterprise value divided by the number of outstanding shares of common stock on an as-converted basis, in each case calculated as of the date of the conversion.
Preferred Stock
The Charter also provides the Company’s board of directors with the authority to issue one or more classes or series of preferred stock, and prior to the issuance of such shares of preferred stock, the board of directors shall have the power from time to time to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights and privileges of such shares of preferred stock. The Company’s board of directors is authorized to amend the Charter without the approval of the stockholders to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue. As of June 30, 2019 and December 31, 2018, no shares of the Company’s preferred stock were issued and outstanding.

20


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

Distribution Reinvestment Plan
The Company’s board of directors has approved the DRP through which common stockholders may elect to reinvest an amount equal to the distributions declared on their shares of common stock in additional shares of the Company’s common stock in lieu of receiving cash distributions. The purchase price per share under the DRP was initially $14.25. On March 12, 2019, March 14, 2018 and February 14, 2017, the Company’s board of directors approved a price per share for the DRP of $15.84, $15.18 and $14.85, effective April 1, 2019, April 1, 2018 and March 1, 2017, respectively, in connection with the determination of an estimated value per share of the Company’s common stock.
The Company’s board of directors may again, in its sole discretion, from time to time, change this price based upon changes in the Company’s estimated value per share and other factors that the Company’s board of directors deems relevant.
No sales commissions or dealer manager fees are payable on shares sold through the DRP. The Company’s board of directors may amend, suspend or terminate the DRP at its discretion at any time upon ten days’ notice to the Company’s stockholders. Following any termination of the DRP, all subsequent distributions to stockholders will be made in cash.
Share Repurchase Plan and Redeemable Common Stock
The Company’s share repurchase plan may provide an opportunity for stockholders to have their shares of common stock repurchased by the Company, subject to certain restrictions and limitations. No shares can be repurchased under the Company’s share repurchase plan until after the first anniversary of the date of purchase of such shares; provided, however, that this holding period shall not apply to repurchases requested within two years after the death or disability of a stockholder.
From March 29, 2016, the date the Company first published an estimated value per share, until April 14, 2018, the purchase price for shares repurchased under the Company’s share repurchase plan was as follows:
Share Purchase Anniversary
 
Repurchase Price
on Repurchase Date(1)
Less than 1 year
 
No Repurchase Allowed
1 year
 
92.5% of Estimated Value per Share(2)
2 years
 
95.0% of Estimated Value per Share(2)
3 years
 
97.5% of Estimated Value per Share(2)
4 years
 
100.0% of Estimated Value per Share(2)
In the event of a stockholder’s death or disability(3)
 
Average Issue Price for Shares(4)
________________
(1) 
As adjusted for any stock dividends, combinations, splits, recapitalizations or any similar transaction with respect to the shares of common stock. Repurchase price includes the full amount paid for each share, including all sales commissions and dealer manager fees.
(2) The “Estimated Value per Share” is the most recent publicly disclosed estimated value per share determined by the Company’s board of directors.
(3)
The required one-year holding period does not apply to repurchases requested within two years after the death or disability of a stockholder.
(4)
The purchase price per share for shares repurchased upon the death or disability of a stockholder will be equal to the average issue price per share for all of the stockholder’s shares.
On March 14, 2018, the board of directors of the Company determined to amend the terms of the Company’s share repurchase plan effective as of April 15, 2018 to (1) limit the amount of shares repurchased pursuant to the Company’s share repurchase plan each quarter to $2,000,000 and (2) revise the repurchase price to an amount equal to 93% of the most recently publicly disclosed estimated value per share. Pursuant to the amended share repurchase plan, the current share repurchase price

21


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

is $14.73 per share, which represents 93% of the estimated value per share of $15.84. The share repurchase price is further reduced based on how long the stockholder has held the shares as follows:
Share Purchase Anniversary
 
Repurchase Price
on Repurchase Date(1)
Less than 1 year
 
No Repurchase Allowed
1 year
 
92.5% of the Share Repurchase Price(2)
2 years
 
95.0% of the Share Repurchase Price(2)
3 years
 
97.5% of the Share Repurchase Price(2)
4 years
 
100.0% of the Share Repurchase Price(2)
In the event of a stockholder’s death or disability(3)
 
Average Issue Price for Shares(4)
________________
(1) 
As adjusted for any stock dividends, combinations, splits, recapitalizations or any similar transaction with respect to the shares of common stock. Repurchase price includes the full amount paid for each share, including all sales commissions and dealer manager fees.
(2) The “Share Repurchase Price” equals 93% of the Estimated Value per Share.
(3)
The required one-year holding period does not apply to repurchases requested within two years after the death or disability of a stockholder.
(4)
The purchase price per share for shares repurchased upon the death or disability of a stockholder will be equal to the average issue price per share for all of the stockholder’s shares.
The purchase price per share for shares repurchased pursuant to the Company’s share repurchase plan will be further reduced by the aggregate amount of net proceeds per share, if any, distributed to the Company’s stockholders prior to the Repurchase Date (defined below) as a result of the sale of one or more of the Company’s assets that constitutes a return of capital as a result of such sales.
Repurchases of shares of the Company’s common stock are made quarterly upon written request to the Company at least 15 days prior to the end of the applicable quarter. Repurchase requests are honored approximately 30 days following the end of the applicable quarter (“Repurchase Date”). Stockholders may withdraw their repurchase request at any time up to three business days prior to the Repurchase Date.
The Company is not obligated to repurchase shares of its common stock under the share repurchase plan. The share repurchase plan limits the number of shares to be repurchased in any calendar year to the lesser of (1) 5% of the weighted average number of shares of common stock outstanding during the prior calendar year and (2) those that could be funded from the net proceeds from the sale of shares under the DRP in the prior calendar year, plus such additional funds as may be reserved for that purpose by the Company’s board of directors. Such sources of funds could include cash on hand, cash available from borrowings and cash from liquidations of securities investments as of the end of the applicable month, to the extent that such funds are not otherwise dedicated to a particular use, such as working capital, cash distributions to stockholders or purchases of real estate assets. The Company’s board of directors has further limited the amount of shares that may be repurchased pursuant to the share repurchase plan to $2,000,000 per quarter. There is no fee in connection with a repurchase of shares of the Company’s common stock pursuant to the Company’s share repurchase plan. As of June 30, 2019, the Company had recognized repurchases payable of $2,000,000, which is included in accounts payable and accrued liabilities on the accompanying consolidated balance sheets.
During the three and six months ended June 30, 2019, the Company repurchased a total of 135,885 and 274,845 shares with a total repurchase value of $2,000,000 and $4,000,000, and received requests for repurchases of 355,607 and 796,515 shares with a total repurchase value of $5,210,102 and $11,623,936, respectively. During the three and six months ended June 30,

22


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

2018, the Company repurchased a total of 144,440 and 346,610 shares with a total repurchase value of $2,000,000 and $4,886,216, and received requests for the repurchase of 231,575 and 541,527 shares with a total repurchase value of $3,212,937 and $7,475,664, respectively.
As of June 30, 2019 and 2018, the Company’s total outstanding repurchase requests received that were subject to the Company’s limitations on repurchases were 1,778,162 shares and 379,816 shares, respectively, with a total net repurchase value of $25,978,431 and $5,224,754, respectively.
The Company cannot guarantee that the funds set aside for the share repurchase plan will be sufficient to accommodate all repurchase requests made in any quarter. In the event that the Company does not have sufficient funds available to repurchase all of the shares of the Company’s common stock for which repurchase requests have been submitted in any quarter, priority will be given to repurchase requests in the case of the death or disability of a stockholder. If the Company repurchases less than all of the shares subject to a repurchase request in any quarter, with respect to any shares which have not been repurchased, the Company will treat the shares that have not been repurchased as a request for repurchase in the following quarter pursuant to the limitations of the share repurchase plan and when sufficient funds are available, unless the stockholder withdraws the request for repurchase. Such pending requests will be honored among all requests for repurchases in any given repurchase period as follows: first, pro rata as to repurchases sought upon a stockholder’s death or disability; and, next, pro rata as to other repurchase requests.
The Company’s board of directors may, in its sole discretion, amend, suspend or terminate the share repurchase plan at any time upon 30 days’ notice to its stockholders if it determines that the funds available to fund the share repurchase plan are needed for other business or operational purposes or that amendment, suspension or termination of the share repurchase plan is in the best interest of the Company’s stockholders. Therefore, a stockholder may not have the opportunity to make a repurchase request prior to any potential termination or suspension of the Company’s share repurchase plan. The share repurchase plan will terminate in the event that a secondary market develops for the Company’s shares of common stock.
Pursuant to the share repurchase plan, for the three and six months ended June 30, 2019, the Company had no amounts to reclassify from temporary equity to permanent equity. For the three and six months ended June 30, 2018, the Company reclassified $0 and $37,028,102, net of $2,000,000 and $4,886,216 of fulfilled redemption requests, respectively, from temporary equity to permanent equity, which is included in additional paid-in capital on the accompanying consolidated balance sheets.
Distributions
The Company’s long-term goal is to pay distributions solely from cash flow from operations. However, because the Company may receive income from interest or rents at various times during the Company’s fiscal year and because the Company may need cash flow from operations during a particular period to fund capital expenditures and other expenses, the Company expects that at times during the Company’s operational stage, the Company will declare distributions in anticipation of cash flow that the Company expects to receive during a later period, and the Company expects to pay these distributions in advance of its actual receipt of these funds. The Company’s board of directors has the authority under its organizational documents, to the extent permitted by Maryland law, to fund distributions from sources such as borrowings, offering proceeds or advances and the deferral of fees and expense reimbursements by the Advisor, in its sole discretion. The Company has not established a limit on the amount of proceeds it may use to fund distributions from sources other than cash flow from operations. If the Company pays distributions from sources other than cash flow from operations, the Company will have fewer funds available and stockholders’ overall return on their investment in the Company may be reduced.
To maintain the Company’s qualification as a REIT, the Company must make aggregate annual distributions to its stockholders of at least 90% of its REIT taxable income (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). If the Company meets the REIT qualification requirements, the Company generally will not be subject to federal income tax on the income that the Company distributes to its stockholders each year.

23


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

Distributions Declared
The Company’s board of directors approved a cash distribution that accrues at a rate of $0.002466 per day for each share of the Company’s common stock during each of the three and six months ended June 30, 2019 and 2018, which, if paid over a 365-day period is equivalent to a 6.0% annualized distribution rate based on a purchase price of $15.00 per share of the Company’s common stock. The distributions declared accrue daily to stockholders of record as of the close of business on each day and are payable in cumulative amounts on or before the third day of each calendar month with respect to the prior month. There is no guarantee that the Company will continue to pay distributions at this rate or at all.
Distributions declared for the three and six months ended June 30, 2019, were $11,684,723 and $23,196,260, including $5,286,618 and $10,630,544, or 333,752 and 685,789 shares of common stock, respectively, attributable to the DRP.
Distributions declared for the three and six months ended June 30, 2018 were $11,485,650 and $22,798,113, including $5,698,302 and $11,369,398, or 375,382 and 757,274 shares of common stock, respectively, attributable to the DRP.
As of June 30, 2019 and December 31, 2018, $3,856,773 and $3,953,499 of distributions declared were payable, which included $1,734,110 and $1,860,828, or 109,477 shares and 122,584 shares of common stock, attributable to the DRP, respectively.
Distributions Paid
For the three and six months ended June 30, 2019, the Company paid cash distributions of $6,419,268 and $12,535,724, which related to distributions declared for each day in the period from March 1, 2019 through May 31, 2019 and December 1, 2018 through May 31, 2019, respectively. Additionally, for the three and six months ended June 30, 2019, 339,564 shares and 693,883 shares of common stock were issued pursuant to the DRP for gross offering proceeds of $5,378,696 and $10,757,262, respectively. For the three and six months ended June 30, 2019, the Company paid total distributions of $11,797,964 and $23,292,986, respectively. 
For the three and six months ended June 30, 2018, the Company paid cash distributions of $5,824,954 and $11,422,475, which related to distributions declared for each day in the period from March 1, 2018 through May 31, 2018 and December 1, 2017 through May 31, 2018, respectively. Additionally, for the three and six months ended June 30, 2018, 382,875 shares and 766,783 shares of common stock were issued pursuant to the DRP for gross offering proceeds of $5,768,910 and $11,469,940, respectively. For the three and six months ended June 30, 2018, the Company paid total distributions of $11,593,864 and $22,892,415, respectively.
7.          Related Party Arrangements
The Company has entered into the Advisory Agreement with the Advisor. Pursuant to the Advisory Agreement, the Company is obligated to pay the Advisor specified fees upon the provision of certain services related to the investment of funds in real estate and real estate-related investments and the management of the Company’s investments and for other services (including, but not limited to, the disposition of investments). Subject to the limitations described below, the Company is also obligated to reimburse the Advisor and its affiliates for organization and offering costs incurred by the Advisor and its affiliates on behalf of the Company, as well as acquisition and origination expenses and certain operating expenses incurred on behalf of the Company or incurred in connection with providing services to the Company.

24


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

Amounts attributable to the Advisor and its affiliates incurred (earned) for the three and six months ended June 30, 2019 and 2018, and amounts attributable to the Advisor and its affiliates that are payable (prepaid) as of June 30, 2019 and December 31, 2018, are as follows:
 
 
Incurred (Earned) For the
 
Incurred (Earned) For the
 
Payable (Prepaid) as of
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
2019
 
2018
 
2019
 
2018
 
June 30, 2019
 
December 31, 2018
Consolidated Statements of Operations:
 
 
 
 
 
 
 
 
 
 
 
 
Expensed
 
 
 
 
 
 
 
 
 
 
 
 
Investment management fees(1)
 
$
4,174,176

 
$
4,281,765

 
$
8,334,328

 
$
8,544,018

 
$
947,431

 
$
55,865

Acquisition expenses(2)
 
92,661

 

 
92,661

 

 

 

Property management:
 
 
 
 
 
 
 
 
 
 
 
 
Fees(1)
 
1,245,150

 
1,221,040

 
2,479,427

 
2,412,207

 
416,484

 
410,424

Reimbursement of onsite personnel(3)
 
3,776,431

 
3,653,858

 
7,504,136

 
7,216,593

 
732,049

 
768,107

Reimbursement of other(1)
 
846,632

 
323,898

 
1,517,851

 
667,156

 
103,973

 
41,989

Reimbursement of property operations(3)
 
26,600

 
22,994

 
49,742

 
46,643

 

 

Reimbursement of property G&A(2)
 
26,845

 
10,388

 
61,832

 
19,687

 

 

Other operating expenses(2)
 
413,043

 
279,690

 
828,151

 
541,101

 
173,507

 
93,740

Insurance proceeds(4)
 

 

 

 

 

 
(75,000
)
     Property insurance(5)
 
359,663

 
379,095

 
641,978

 
758,189

 

 
(101,573
)
        Rental revenue(6)
 
(14,745
)
 

 
(29,490
)
 

 

 

Consolidated Balance Sheets:
 
 
 
 
 
 
 
 
 
 
 
 
Capitalized
 
 
 
 
 
 
 
 
 
 
 
 
     Acquisition fees(7)
 
48,343

 

 
48,343

 

 

 

     Acquisition expenses(8)
 
154,477

 

 
218,712

 

 
20,000

 
1,607

     Capital expenditures(9)
 

 
1,673

 

 
7,295

 

 

        Construction management:
 
 
 
 
 
 
 
 
 
 
 
 
    Fees(9)
 
303,518

 
51,659

 
461,417

 
188,102

 
44,231

 
10,281

    Reimbursement of labor costs(9)
 
110,945

 
267,796

 
261,305

 
500,387

 
11,211

 
29,203

Additional paid-in capital
 
 
 
 
 
 
 
 
 
 
 
 
Selling commissions
 

 

 

 

 
185,954

 
299,952

 
 
$
11,563,739

 
$
10,493,856

 
$
22,470,393

 
$
20,901,378

 
$
2,634,840

 
$
1,534,595

_____________________
(1)
Included in fees to affiliates in the accompanying consolidated statements of operations.
(2)
Included in general and administrative expenses in the accompanying consolidated statements of operations.
(3)
Included in operating, maintenance and management in the accompanying consolidated statements of operations.
(4)
Included in other income in the accompanying consolidated statements of operations.

25


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

(5)
Property related insurance expense and the amortization of the prepaid insurance deductible account are included in general and administrative expenses in the accompanying consolidated statements of operations. The amortization of the prepaid property insurance is included in operating, maintenance and management expenses in the accompanying consolidated statements of operations. The prepaid insurance is included in other assets in the accompanying consolidated balance sheets upon payment.
(6)
Included in rental income in the accompanying consolidated statements of operations.
(7)
Included in real estate held for development in the accompanying consolidated balance sheets.
(8)
Included in total real estate, net in the accompanying consolidated balance sheets following the adoption of ASU 2017-01 as of January 1, 2017.
(9)
Included in building and improvements in the accompanying consolidated balance sheets.
Investment Management Fee
The Company pays the Advisor a monthly investment management fee equal to one-twelfth of 1.0% of (1) the cost of investments in real properties and real estate-related assets acquired directly by the Company or (2) the Company’s allocable cost of each investment in real property or real estate related asset acquired through a joint venture. The investment management fee is calculated including the amount actually paid or budgeted to fund acquisition fees, acquisition expenses, cost of development, construction or improvement and any debt attributable to such investments, or the Company’s proportionate share thereof in the case of investments made through joint ventures.
Acquisition Fees and Expenses
The Company pays the Advisor an acquisition fee equal to 1.0% of the cost of investment, which includes the amount actually paid or budgeted to fund the acquisition, origination, development, construction or improvement of any real property or real estate-related asset acquired. In addition to acquisition fees, the Company reimburses the Advisor for amounts directly incurred by the Advisor and amounts the Advisor pays to third parties in connection with the selection, evaluation, acquisition and development of a property or acquisition of real estate-related assets, whether or not the Company ultimately acquires the property or the real estate-related assets.
The Charter limits the Company’s ability to pay acquisition fees if the total of all acquisition fees and expenses relating to the purchase would exceed 4.5% of the contract purchase price. Under the Charter, a majority of the Company’s board of directors, including a majority of the independent directors, is required to approve any acquisition fees (or portion thereof) that would cause the total of all acquisition fees and expenses relating to an acquisition to exceed 4.5% of the contract purchase price. In connection with the purchase of securities, the acquisition fee may be paid to an affiliate of the Advisor that is registered as a Financial Industry Regulatory Authority, Inc. (“FINRA”) member broker-dealer if applicable FINRA rules would prohibit the payment of the acquisition fee to a firm that is not a registered broker-dealer. 
Loan Coordination Fee
The Company pays the Advisor or its affiliate a loan coordination fee equal to 1.0% of the initial amount of the new debt financed or outstanding debt assumed in connection with the acquisition, development, construction, improvement or origination of a property or a real estate-related asset. In addition, in connection with any financing or the refinancing of any debt (in each case, other than identified at the time of the acquisition of a property or a real estate-related asset), the Company pays the Advisor or its affiliate a loan coordination fee equal to 0.75% of the amount of debt financed or refinanced.
Property Management Fees and Expenses
The Company has entered into property management agreements (each, as amended from time to time, a “Property Management Agreement”) with Steadfast Management Company, Inc., an affiliate of the Sponsor (the “Property Manager”), in connection with the management of each of the Company’s properties. At June 30, 2019, the property management fee payable

26


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

with respect to each property under the Property Management Agreements ranged from 2.50% to 3.0% of the annual gross revenue collected at the property, as determined by the Advisor and approved by a majority of the Company’s board of directors, including a majority of the independent directors. Each Property Management Agreement has an initial one-year term and continues thereafter on a month-to-month basis unless either party gives 60-days’ prior notice of its desire to terminate the Property Management Agreement, provided that the Company may terminate the Property Management Agreement at any time upon a determination of gross negligence, willful misconduct or bad acts of the Property Manager or its employees or upon an uncured breach of the Property Management Agreement upon 30 days’ prior written notice to the Property Manager.
In addition to the property management fee, the Property Management Agreements also specify certain other reimbursements payable to the Property Manager for benefit administration, information technology infrastructure, licenses, support and training services and capital expenditures. The Company also reimburses the Property Manager for the salaries and related benefits of on-site property management employees.
Construction Management Fees and Expenses 
The Company has entered into construction management agreements (each, a “Construction Management Agreement”) with Pacific Coast Land & Construction, Inc., an affiliate of the Sponsor (the “Construction Manager”), in connection with capital improvements and renovation or value-enhancement projects for certain properties the Company acquires. The construction management fee payable with respect to each property under the Construction Management Agreements ranges from 8.0% to 12.0% of the costs of the improvements for which the Construction Manager has planning and oversight authority. Generally, each Construction Management Agreement can be terminated by either party with 30 days’ prior written notice to the other party. Construction management fees are capitalized to the respective real estate properties in the period in which they are incurred as such costs relate to capital improvements and renovations for apartment homes taken out of service while they undergo the planned renovation.
The Company may also reimburse the Construction Manager for the salaries and related benefits of certain of its employees for time spent working on capital improvements and renovations.
Development Services Agreement
In some instances, the Company may enter into a Development Services Agreement with Steadfast Multifamily Development, Inc., an affiliate of the Advisor, (the “Developer”), in connection with a development project, pursuant to which the Developer will receive a development fee and reimbursement for certain expenses for overseeing the development project. The Company entered into a Development Services Agreement with the Developer in connection with the Victory Station development project that provided for a development fee equal to 4% of the hard and soft costs of the development project as specified in the Development Services Agreement. 75% of the development fee will be paid in 14 monthly installments and the remaining 25% will be paid upon delivery by the Developer to us of a certificate of occupancy. As of June 30, 2019, no amounts had been paid pursuant to the Development Services Agreement.
Property Insurance
The Company deposits amounts with an affiliate of the Sponsor to fund a prepaid insurance deductible account to cover the cost of required insurance deductibles across all properties of the Company and other affiliated entities. Upon filing a major claim, proceeds from the insurance deductible account may be used by the Company or another affiliate of the Sponsor. In addition, the Company deposits amounts with an affiliate of the Sponsor to cover the cost of property and property related insurance across certain properties of the Company.
Other Operating Expense Reimbursement
In addition to the various fees paid to the Advisor, the Company is obligated to pay directly or reimburse all expenses incurred by the Advisor in providing services to the Company, including the Company’s allocable share of the Advisor’s overhead, such as rent, employee costs, utilities and information technology costs. The Company will not reimburse the Advisor for employee costs in connection with services for which the Advisor or its affiliates receive acquisition fees or disposition fees or for the salaries the Advisor pays to the Company’s executive officers.

27


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

The Charter limits the Company’s total operating expenses during any four fiscal quarters to the greater of 2% of the Company’s average invested assets or 25% of the Company’s net income for the same period (the “2%/25% Limitation”). The Company may reimburse the Advisor, at the end of each fiscal quarter, for operating expenses incurred by the Advisor; provided, however, that the Company shall not reimburse the Advisor at the end of any fiscal quarter for operating expenses that exceed the 2%/25% Limitation unless the independent directors have determined that such excess expenses were justified based on unusual and non-recurring factors. The Advisor must reimburse the Company for the amount by which the Company’s operating expenses for the preceding four fiscal quarters then ended exceed the 2%/25% Limitation, unless approved by the independent directors. For purposes of determining the 2%/25% Limitation amount, “average invested assets” means the average monthly book value of the Company’s assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, bad debts reserves or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by the Company that are in any way related to the Company’s operation, including the Company’s allocable share of Advisor overhead, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, listing and registration of shares of the Company’s common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain in the sale of the Company’s assets; (f) acquisition fees and acquisition expenses (including expenses relating to potential acquisitions that the Company does not close) and investment management fees; (g) real estate commissions on the resale of investments; and (h) other expenses connected with the acquisition, disposition, management and ownership of investments (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of real property).
As of June 30, 2019, the Company’s total operating expenses, as defined above, did not exceed the 2%/25% Limitation.
Disposition Fee
If the Advisor or its affiliates provide a substantial amount of services in connection with the sale of a property or real estate-related asset as determined by a majority of the Company’s independent directors, the Company will pay the Advisor or its affiliates a fee equivalent to one-half of the brokerage commissions paid, but in no event to exceed 1% of the sales price of each property or real estate-related asset sold. To the extent the disposition fee is paid upon the sale of any assets other than real property, it will be included as an operating expense for purposes of the 2%/25% Limitation. In connection with the sale of securities, the disposition fee may be paid to an affiliate of the Advisor that is registered as a FINRA member broker-dealer if applicable FINRA rules would prohibit the payment of the disposition fee to a firm that is not a registered broker-dealer. As of June 30, 2019, the Company had not sold or otherwise disposed of any properties or any real estate-related assets. Accordingly, the Company had not incurred any disposition fees as of June 30, 2019
Selling Commissions and Dealer Manager Fees
The Company entered into the Dealer Manager Agreement with the Dealer Manager in connection with the Public Offering. The Company paid the Dealer Manager up to 7% and 3% of the gross offering proceeds from the Primary Offering as selling commissions and dealer manager fees, respectively. The Dealer Manager reallowed 100% of sales commissions earned to participating broker-dealers. The Dealer Manager could also reallow to any participating broker-dealer a portion of the dealer manager fee that was attributable to that participating broker-dealer for certain marketing costs of that participating broker-dealer. The Dealer Manager negotiated the reallowance of the dealer manager fee on a case-by-case basis with each participating broker-dealer subject to various factors associated with the cost of the marketing program. The Company allowed a participating broker-dealer to elect to receive the 7% selling commissions at the time of sale or elect to have the selling commission paid on a trailing basis. A participating broker-dealer that elected to receive a trailing selling commission is paid as follows: 3% at the time of sale and the remaining 4% paid ratably (1% per year) on each of the first four anniversaries of the sale. A reduced selling commission and dealer manager fee was paid in connection with volume discounts and certain other categories of sales. No selling commissions or dealer manager fee was paid with respect to shares of common stock issued pursuant to the DRP. The Company terminated the Public Offering on March 24, 2016, and as of June 30, 2019 and

28


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

December 31, 2018, expects to pay trailing selling commissions of $185,954 and $299,952, respectively, which were charged to additional paid-in capital and included within amounts due to affiliates in the accompanying consolidated balance sheets.
8.          Incentive Award Plan and Independent Director Compensation
The Company has adopted an incentive award plan (the “Incentive Award Plan”) that provides for the grant of equity awards to its employees, directors and consultants and those of the Company’s affiliates. The Incentive Award Plan authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards or cash-based awards.
Under the Company’s independent directors’ compensation plan, which is a sub-plan of the Incentive Award Plan, each of the Company’s independent directors received 3,333 shares of restricted common stock once the Company raised $2,000,000 in gross offering proceeds in the Public Offering. Each subsequent independent director that joins the Company’s board of directors receives 3,333 shares of restricted common stock upon election to the Company’s board of directors. In addition, on the date following an independent director’s re-election to the Company’s board of directors, he or she receives 1,666 shares of restricted common stock. One-fourth of the shares of restricted common stock generally vest and become non-forfeitable upon issuance and the remaining portion will vest in three equal annual installments beginning on the date of grant and ending on the third anniversary of the date of grant; provided, however, that the restricted stock will become fully vested and become non-forfeitable on the earlier to occur of (1) the termination of the independent director’s service as a director due to his or her death or disability or (2) a change in control of the Company. These restricted stock awards entitle the holders to participate in distributions even if the shares are not fully vested.
The Company recorded stock-based compensation expense of $13,896 and $27,792 for the three and six months ended June 30, 2019 and $13,839 and $27,678 for the three and six months ended June 30, 2018, respectively, related to the independent directors’ restricted common stock.
In addition to the stock awards, the Company pays each of its independent directors an annual retainer of $55,000, prorated for any partial term (the audit committee chairperson receives an additional $10,000 annual retainer, prorated for any partial term). The independent directors are also paid for attending meetings as follows: (i) $2,500 for each board meeting attended in person, (ii) $1,500 for each committee meeting attended in person in such director’s capacity as a committee member, (iii) $1,000 for each board meeting attended via teleconference (not to exceed $4,000 for any one set of meetings attended on any given day). All directors also receive reimbursement of reasonable out of pocket expenses incurred in connection with attendance at meetings of the board of directors. Director compensation is an operating expense of the Company that is subject to the operating expense reimbursement obligation of the Advisor discussed in Note 7 (Related Party Arrangements). The Company recorded an operating expense of $99,750 and $252,000 for the three and six months ended June 30, 2019, and $61,750 and $117,500 for the three and six months ended June 30, 2018, related to the independent directors’ annual retainer and attending board and committee meetings, which is included in general and administrative expenses in the accompanying consolidated statements of operations. As of June 30, 2019 and December 31, 2018, $99,750 and $151,750, respectively, related to the independent directors’ annual retainer and board meetings attendance is included in accounts payable and accrued liabilities in the consolidated balance sheets.
9.          Commitments and Contingencies
Economic Dependency 
The Company is dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase and disposition of real estate and real estate-related investments; management of the daily operations of the Company’s real estate and real estate-related investment portfolio; and other general and administrative responsibilities. In the event that the Advisor is unable to provide such services, the Company will be required to obtain such services from other sources. The Company may not be able to retain services from such other sources on favorable terms or at all.

29


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

Concentration of Credit Risk
The geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the Atlanta, Georgia, Dallas/Fort Worth, Texas and Nashville, Tennessee apartment markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, relocations of businesses, increased competition from other apartment communities, decrease in demand for apartments or any other changes, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.
Legal Matters
From time to time, the Company is subject, or party, to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on the Company’s results of operations or financial condition nor is the Company aware of any such legal proceedings contemplated by government agencies.
10.          Derivative Financial Instruments
The Company uses interest rate derivatives with the objective of managing exposure to interest rate movements thereby minimizing the effect of interest rate changes and the effect they could have on future cash flows. Interest rate cap agreements are used to accomplish this objective. The following table provides the terms of the Company’s interest rate derivative instruments that were in effect at June 30, 2019 and December 31, 2018:
June 30, 2019
Type
 
Maturity Date Range
 
Based on
 
Number of Instruments
 
Notional Amount
 
Variable Rate
 
Weighted Average Rate Cap
 
Fair Value
Interest Rate Cap
 
7/1/2019 - 8/1/2021
 
One-Month LIBOR
 
17
 
$
559,157,350

 
2.40%
 
3.47%
 
$
8,046

December 31, 2018
Type
 
Maturity Date Range
 
Based on
 
Number of Instruments
 
Notional Amount
 
Variable Rate
 
Weighted Average Rate Cap
 
Fair Value
Interest Rate Cap
 
1/1/2019 - 8/1/2021
 
One-Month LIBOR
 
22
 
$
713,237,850

 
2.52%
 
3.46%
 
$
207,769

The interest rate cap agreements are not designated as effective cash flow hedges. Accordingly, the Company records any changes in the fair value of the interest rate cap agreements as interest expense. The change in the fair value of the interest rate cap agreements for the three and six months ended June 30, 2019, resulted in an unrealized loss of $20,107 and $199,723 and for the three and six months ended June 30, 2018, resulted in an unrealized gain of $131,281 and $578,894, respectively, which is included in interest expense in the accompanying consolidated statements of operations. During the three and six months ended June 30, 2019 and 2018, the Company did not acquire any interest rate cap agreements or receive any settlement proceeds. The fair value of the interest rate cap agreements of $8,046 and $207,769 as of June 30, 2019 and December 31, 2018, respectively, is included in other assets on the accompanying consolidated balance sheets.

30


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

11.          Subsequent Events
Distributions Paid
On July 1, 2019, the Company paid distributions of $3,856,773, which related to distributions declared for each day in the period from June 1, 2019 through June 30, 2019 and consisted of cash distributions paid in the amount of $2,122,663 and $1,734,110 in shares issued pursuant to the DRP.
On August 1, 2019, the Company paid distributions of $3,993,908, which related to distributions declared for each day in the period from July 1, 2019 through July 31, 2019 and consisted of cash distributions paid in the amount of $2,208,277 and $1,785,631 in shares issued pursuant to the DRP.
Shares Repurchased
On July 31, 2019, the Company repurchased 135,389 shares of its common stock for a total repurchase value of $2,000,000, or $14.77 per share, pursuant to the Company’s share repurchase plan.
Stoneridge Farms Financing
On July 30, 2019, one of the Company’s indirect wholly-owned subsidiaries entered into a loan agreement with Berkeley Point Capital LLC, d/b/a Newmark Knight Frank (“Berkeley Point”) for the principal amount of $45,711,000. The loan agreement provides for a term loan with a maturity date of August 1, 2029, unless the maturity date is accelerated pursuant to the loan terms. The loan accrues interest at a fixed rate of 3.36% per annum. The entire outstanding principal balance and any accrued and unpaid interest on the loan is due on the maturity date. Interest only payments on the loan are payable monthly in arrears on specified dates as set forth in the loan agreement and interest and principal payments are due beginning September 1, 2024. Monthly payments are due and payable on the first day of each month, commencing September 1, 2019. The loan is secured by Stoneridge Farms Apartments, a 336 unit property located in Smyrna, Tennessee. The Company paid $228,555 in loan origination fees to Berkeley Point in connection with the financing, and paid the Advisor a loan coordination fee of $342,833.
Distributions Declared
On August 6, 2019, the Company’s board of directors approved and authorized a daily distribution to stockholders of record as of the close of business on each day of the period commencing on October 1, 2019 and ending on December 31, 2019. The distributions will be equal to $0.002466 per share of the Company’s common stock per day. The distributions for each record date in October 2019, November 2019 and December 2019 will be paid in November 2019, December 2019 and January 2020, respectively. The distributions will be payable to stockholders from legally available funds therefor.
Proposed Mergers with Steadfast Income REIT, Inc. and Steadfast Apartment REIT, Inc.
On August 5, 2019, the Company entered into the Merger Agreements (as defined herein) to acquire each of Steadfast Income REIT, Inc. (“SIR”) and Steadfast Apartment REIT III, Inc. (“STAR III”). Both mergers are stock-for-stock transactions whereby each of SIR and STAR III will be merged into a wholly-owned subsidiary of the Company. The consummation of the Company’s merger with SIR is not contingent upon the completion of the merger with STAR III, and the consummation of the Company’s merger with STAR III is not contingent upon the completion of the Company’s merger with SIR.
The combined company after the mergers (the “Combined Company”) will retain the name “Steadfast Apartment REIT, Inc.” Each merger is intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code. If the mergers were to occur today, the Combined Company’s portfolio would consist of 71 properties in 14 states with an average effective rent of $1,158. Based on occupancy as of June 30, 2019, the Combined Company’s portfolio would have an occupancy rate of 94%, an average age of 20 years and gross real estate assets of $3.3 billion.


31


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

Proposed SIR Merger
On August 5, 2019, the Company, the Operating Partnership, SIR, Steadfast Income REIT Operating Partnership, L.P., the operating partnership of SIR, and SI Subsidiary, LLC, a wholly-owned subsidiary of the Company (“SIR Merger Sub”), entered into an Agreement and Plan of Merger (the “SIR Merger Agreement”). Subject to the terms and conditions of the SIR Merger Agreement, SIR will merge with and into SIR Merger Sub (the “SIR Merger”), with SIR Merger Sub surviving the SIR Merger, such that following the SIR Merger, the surviving entity will continue as a wholly-owned subsidiary of the Company. In accordance with the applicable provisions of the Maryland General Corporation Law (the “MGCL”), the separate existence of SIR shall cease.
At the effective time of the SIR Merger and subject to the terms and conditions of the SIR Merger Agreement, each issued and outstanding share of SIR’s common stock (or a fraction thereof), $0.01 par value per share (the “SIR Common Stock”), will be converted into the right to receive 0.5934 shares of STAR’s common stock, $0.01 par value per share (the “STAR Common Stock”).
The obligation of each party to consummate the SIR Merger is subject to a number of conditions, including receipt of the approval of the SIR Merger by the holders of a majority of the outstanding shares of the SIR Common Stock (the “SIR Stockholder Approval”) and of an amendment to SIR’s charter to delete certain provisions regarding roll-up transactions.
SIR (with the prior approval of its special committee) may terminate the SIR Merger Agreement in order to enter into an “Alternative Acquisition Agreement” with respect to a “Superior Proposal” (each as defined in the SIR Merger Agreement) at any time prior to receipt by SIR of the SIR Stockholder Approval pursuant to the terms of the SIR Merger Agreement. The Company may terminate the SIR Merger Agreement at any time prior to the receipt of the SIR Stockholder Approval, in certain limited circumstances, including upon an “Adverse Recommendation Change” (as defined in the SIR Merger Agreement).
If the SIR Merger Agreement is terminated in connection with SIR’s acceptance of a Superior Proposal or making an Adverse Recommendation Change, then SIR must pay to the Company a termination fee of (i)(A) $8,694,218 if such termination occurs no later than seven (7) business days after (x) 11:59 p.m. New York City time on September 5, 2019 (the “SIR Go Shop Period End Time”) or (y) the end of the specified period for negotiations with the Company following notice (received within five (5) business days of the SIR Go Shop Period End Time) that SIR intends to enter into a Superior Proposal or (B) $20,866,122 if it occurred thereafter and (ii) up to $2,000,000 as reimbursement for the Company’s Expenses (as defined in the SIR Merger Agreement).
Proposed STAR III Merger
On August 5, 2019, the Company, the Operating Partnership, STAR III, Steadfast Apartment REIT III Operating Partnership, L.P., the operating partnership of STAR III, and SIII Subsidiary, LLC, a wholly-owned subsidiary of the Company (“STAR III Merger Sub”), entered into an Agreement and Plan of Merger (the “STAR III Merger Agreement” and together with the SIR Merger Agreement, the “Merger Agreements”). Subject to the terms and conditions of the STAR III Merger Agreement, STAR III will merge with and into STAR III Merger Sub (the “STAR III Merger” and together with SIR Merger, the “Mergers”), with STAR III Merger Sub surviving the STAR III Merger, such that following the STAR III Merger, the surviving entity will continue as a wholly-owned subsidiary of the Company. In accordance with the applicable provisions of the MGCL, the separate existence of STAR III shall cease.
At the effective time of the STAR III Merger and subject to the terms and conditions of the STAR III Merger Agreement, each issued and outstanding share of STAR III’s common stock (or a fraction thereof),$0.01 par value per share (the “STAR III Common Stock”), will be converted into the right to receive 1.430 shares of STAR Common Stock.
The obligation of each party to consummate the STAR III Merger is subject to a number of conditions, including receipt of the approval of the STAR III Merger by the holders of a majority of the outstanding shares of STAR III Common Stock (the

32


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)

“STAR III Stockholder Approval”) and of an amendment to STAR III’s charter to delete certain provisions regarding roll-up transactions.
STAR III (with the prior approval of its special committee) may terminate the STAR III Merger Agreement in order to enter into an “Alternative Acquisition Agreement” with respect to a “Superior Proposal” (each as defined in the STAR III Merger Agreement) at any time prior to receipt by STAR III of the STAR III Stockholder Approval pursuant to the terms of the STAR III Merger Agreement. The Company may terminate the STAR III Merger Agreement at any time prior to the receipt of the STAR III Stockholder Approval, in certain limited circumstances, including upon an “Adverse Recommendation Change” (as defined in the STAR III Merger Agreement).
If the STAR III Merger Agreement is terminated in connection with STAR III’s acceptance of a Superior Proposal or making an Adverse Recommendation Change, then STAR III must pay to the Company a termination fee of (i)(A) $2,660,000 if such termination occurs no later than five (5) business days after (x) 11:59 p.m. New York City time on September 19, 2019 (the “STAR III Go Shop Period End Time”) or (y) the end of the specified period for negotiations with the Company following notice (received within five (5) business days of the STAR III Go Shop Period End Time) that STAR III intends to enter into a Superior Proposal or (B) $5,320,000 if it occurred thereafter.
Amended and Restated Advisory Agreement
Concurrently with the entry into the Merger Agreements, the Company and the Advisor entered into the Amended and Restated STAR Advisory Agreement (the “Amended STAR Advisory Agreement”), which shall become effective at the effective time of the earlier of the SIR Merger or the STAR III Merger. The Amended STAR Advisory Agreement will amend the Company’s existing Advisory Agreement to lower certain fees and to change the form of consideration for the Investment Management Fee (as defined therein) so that such fees are paid 50% in cash and 50% in STAR Common Stock. In addition, the Amended STAR Advisory Agreement provides for a Subordinated Incentive Listing Fee and Subordinated Share of Net Sales Proceeds (each as defined therein) to be payable to the STAR Advisor.
Pursuant to the Merger Agreement, the Advisor may request to receive a new class of convertible stock in exchange for the Convertible Stock owned in lieu of the incentive and performance fees provided for in the Amended STAR Advisory Agreement; provided that such request must be made prior to the consummation of either of the Mergers.
Amended and Restated Share Repurchase Plan
In connection with the proposed Mergers, on August 5, 2019, the Company’s board of directors approved the Amended and Restated Share Repurchase Plan (the “Amended & Restated SRP”), which will become effective September 5, 2019, and will apply beginning with repurchases made on the repurchase date (as defined in the Amended & Restated SRP) with respect to the third quarter of 2019. Under the Amended & Restated SRP, the Company will only repurchase shares of common stock in connection with the death or qualifying disability (as determined by the Company’s board in its sole discretion) of a stockholder, subject to certain terms and conditions specified in the Amended & Restated SRP. Repurchases pursuant to the Amended and Restated SRP will continue to be limited to $2,000,000 per quarter. The Company expects that the board of directors of the Combined Company will determine the terms of the share repurchase plan at a later date following consummation of the Mergers.



33


PART I — FINANCIAL INFORMATION (continued)


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements of Steadfast Apartment REIT, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Steadfast Apartment REIT, Inc., a Maryland corporation, and, as required by context, Steadfast Apartment REIT Operating Partnership, L.P., a Delaware limited partnership, which we refer to as our “operating partnership,” and to their subsidiaries.
Certain statements regarding future estimates and expectations may not be applicable to the extent the Merger (as defined herein) is completed.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to:
the fact that we have a limited operating history and commenced operations on May 22, 2014;
the fact that we have had a net loss for each quarterly and annual period since inception; 
changes in economic conditions generally and the real estate and debt markets specifically; 
our ability to secure resident leases for our multifamily properties at favorable rental rates; 
risks inherent in the real estate business, including resident defaults, potential liability relating to environmental matters and the lack of liquidity of real estate investments; 
the fact that we pay fees and expenses to our advisor and its affiliates that were not negotiated on an arm’s length basis and the fact that the payment of these fees and expenses increases the risk that our stockholders will not earn a profit on their investment in us; 
our ability to retain our executive officers and other key personnel of our advisor, our property manager and other affiliates of our advisor; 
our ability to generate sufficient cash flows to pay distributions for our stockholders;
legislative or regulatory changes (including changes to the laws governing the taxation of real estate investment trusts, or REITs); 
the availability of capital; 
changes in interest rates; and 
changes to generally accepted accounting principles, or GAAP.
Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this quarterly report. All forward-looking statements are made as of the date of this quarterly report and the risk that actual results will differ materially from the expectations expressed in this

34


PART I — FINANCIAL INFORMATION (continued)


quarterly report will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this quarterly report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this quarterly report, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this quarterly report will be achieved.
All forward looking statements included herein should be read in connection with the risks identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission, or the SEC, on March 14, 2019.
Overview
We were formed on August 22, 2013, as a Maryland corporation that elected to be taxed as, and qualifies as, a REIT. As described in more detail below, we own and manage a diverse portfolio of 34 multifamily properties, located in the United States comprising a total of 11,601 apartment homes and one parcel of land held for the development of apartment homes. We may acquire additional multifamily properties or pursue multifamily development projects in the future.
On December 30, 2013, we commenced an initial public offering of up to 66,666,667 shares of common stock at an initial price of $15.00 per share and up to 7,017,544 shares of common stock pursuant to our distribution reinvestment plan at an initial price of $14.25 per share. On March 24, 2016, we terminated our initial public offering. As of March 24, 2016, we had sold 48,625,651 shares of common stock for gross offering proceeds of $724,849,631, including 1,011,561 shares of common stock issued pursuant to our distribution reinvestment plan for gross offering proceeds of $14,414,752. Following the termination of our initial public offering, we have continued to offer shares of our common stock pursuant to our distribution reinvestment plan. As of June 30, 2019, we had sold 53,615,560 shares of common stock for gross proceeds of $799,097,238, including 6,001,533 shares of common stock issued pursuant to our distribution reinvestment plan for gross offering proceeds of $88,662,359.
On March 12, 2019, our board of directors approved an estimated value per share of our common stock of $15.84 as of December 31, 2018. In connection with the determination of an estimated value per share, our board of directors determined a price per share for the distribution reinvestment plan of $15.84, effective April 1, 2019. In the future, our board of directors may, in its sole discretion and from time to time, change the price at which we offer shares pursuant to our distribution reinvestment plan to reflect changes in our estimated value per share and other factors that our board of directors deems relevant.
Subject to certain restrictions and limitations, Steadfast Apartment Advisor, LLC, which we refer to as our “advisor,” manages our day-to-day operations and our portfolio of properties and real estate-related assets. Our advisor sources and presents investment opportunities to our board of directors. Our advisor also provides investment management, marketing, investor relations and other administrative services on our behalf.
Substantially all of our business is conducted through Steadfast Apartment REIT Operating Partnership, L.P., our operating partnership. We are the sole general partner of our operating partnership and one of our wholly-owned subsidiaries is the only limited partner of our operating partnership. As we accepted subscriptions for shares of common stock in our initial public offering, we transferred substantially all of the net proceeds to our operating partnership as a capital contribution. The limited partnership agreement of our operating partnership provides that our operating partnership will be operated in a manner that will enable us to (1) satisfy the requirements for being classified as a REIT for federal income tax purposes, (2) avoid any federal income or excise tax liability and (3) ensure that our operating partnership will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, which classification could result in our operating partnership being taxed as a corporation, rather than as a disregarded entity. In addition to the administrative and operating costs and expenses incurred by our operating partnership in acquiring and operating our investments, our operating partnership will pay all of our administrative costs and expenses, and such expenses will be treated as expenses of our operating partnership.
We elected to be taxed as a REIT under the Internal Revenue Code commencing with our taxable year ended December 31, 2014. As a REIT, we generally will not be subject to federal income tax to the extent that we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate rates and would not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Failing to qualify as a REIT could materially and adversely affect our net income and results of operations.

35


PART I — FINANCIAL INFORMATION (continued)




Market Outlook
We believe economic and demographic trends will benefit our existing portfolio and that we have unique future investment opportunities in the multifamily sector. Home ownership rates are at near all-time lows. Demographic and economic factors favor the flexibility of rental housing and discourage the potential financial burden associated with home ownership. Additionally, Millennials and Baby Boomers, the two largest demographic groups comprising roughly half of the total population in the United States, are increasingly choosing rental housing over home ownership. Demographic studies suggest that Baby Boomers are downsizing their suburban homes and relocating to multifamily apartments. Millennials are renting multifamily apartments due to high levels of student debt and increased credit standards in order to qualify for a home mortgage. According to the Federal Reserve Bank of New York, aggregate student debt has surpassed automotive, home equity lines of credit and credit card debt. Millennials are also getting married and having children later and are choosing to live in apartment communities until their mid-30s. Today, 30% of Millennials are still living with their parents or are still in school. When they get a job, Millennials will likely rent moderate income apartments based upon an average income of $45,000 to $65,000. Our plan is to provide rental housing for these generational groups as they age. We believe these factors will continue to contribute to the demand for multifamily housing.
Our Real Estate Portfolio
As of June 30, 2019, we owned the 34 multifamily apartment communities and one parcel of land held for the development of apartment homes listed below:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Monthly Occupancy(1)
 
Average Monthly Rent(2)
 
 
Property Name
 
Location
 
Purchase Date
 
Number of Units
 
Contract Purchase Price
 
Mortgage Debt Outstanding(3)
 
Jun 30, 2019
 
Dec 31, 2018
 
Jun 30, 2019
 
Dec 31, 2018
1
 
Villages at Spring Hill Apartments
 
Spring Hill, TN
 
5/22/2014
 
176

 
$
14,200,000

 
(4 
) 
 
95.5
%
 
94.9
%
 
$
1,109

 
$
996

2
 
Harrison Place Apartments
 
Indianapolis, IN
 
6/30/2014
 
307

 
27,864,250

 
(4 
) 
 
93.8
%
 
95.4
%
 
964

 
971

3
 
Club at Summer Valley
 
Austin, TX
 
8/28/2014
 
260

 
21,500,000

 
(4 
) 
 
92.7
%
 
92.3
%
 
925

 
913

4
 
Terrace Cove Apartment Homes
 
Austin, TX
 
8/28/2014
 
304

 
23,500,000

 
(4 
) 
 
95.7
%
 
95.7
%
 
944

 
918

5
 
The Residences on McGinnis Ferry
 
Suwanee, GA
 
10/16/2014
 
696

 
98,500,000

 
(4 
) 
 
92.8
%
 
93.0
%
 
1,321

 
1,282

6
 
The 1800 at Barrett Lakes
 
Kennesaw, GA
 
11/20/2014
 
500

 
49,000,000

 
40,602,493

 
92.6
%
 
95.2
%
 
1,069

 
1,035

7
 
The Oasis
 
Colorado Springs, CO
 
12/19/2014
 
252

 
40,000,000

 
39,473,348

 
94.8
%
 
93.7
%
 
1,398

 
1,349

8
 
Columns on Wetherington
 
Florence, KY
 
2/26/2015
 
192

 
25,000,000

 
(4 
) 
 
95.8
%
 
94.3
%
 
1,155

 
1,153

9
 
Preston Hills at Mill Creek
 
Buford, GA
 
3/10/2015
 
464

 
51,000,000

 
(4 
) 
 
92.5
%
 
93.5
%
 
1,169

 
1,113

10
 
Eagle Lake Landing Apartments
 
Speedway, IN
 
3/27/2015
 
277

 
19,200,000

 
(4 
) 
 
94.6
%
 
94.6
%
 
898

 
865

11
 
Reveal on Cumberland
 
Fishers, IN
 
3/30/2015
 
220

 
29,500,000

 
21,629,192

 
95.0
%
 
94.5
%
 
1,121

 
1,104

12
 
Randall Highlands Apartments
 
North Aurora, IL
 
3/31/2015
 
146

 
32,115,000

 
(4 
) 
 
95.9
%
 
93.2
%
 
1,881

 
1,786

13
 
Heritage Place Apartments
 
Franklin, TN
 
4/27/2015
 
105

 
9,650,000

 
8,582,203

 
95.2
%
 
96.2
%
 
1,147

 
1,130

14
 
Rosemont at East Cobb
 
Marietta, GA
 
5/21/2015
 
180

 
16,450,000

 
13,248,521

 
93.3
%
 
92.8
%
 
1,065

 
991

15
 
Ridge Crossings Apartments
 
Hoover, AL
 
5/28/2015
 
720

 
72,000,000

 
57,637,226

 
91.5
%
 
94.7
%
 
987

 
979

16
 
Bella Terra at City Center
 
Aurora, CO
 
6/11/2015
 
304

 
37,600,000

 
(4 
) 
 
95.7
%
 
91.8
%
 
1,174

 
1,150


36


PART I — FINANCIAL INFORMATION (continued)


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Monthly Occupancy(1)
 
Average Monthly Rent(2)
 
 
Property Name
 
Location
 
Purchase Date
 
Number of Units
 
Contract Purchase Price
 
Mortgage Debt Outstanding(3)
 
Jun 30, 2019
 
Dec 31, 2018
 
Jun 30, 2019
 
Dec 31, 2018
17
 
Hearthstone at City Center
 
Aurora, CO
 
6/25/2015
 
360

 
$
53,400,000

 
(4 
) 
 
95.6
%
 
92.2
%
 
$
1,237

 
$
1,224

18
 
Arbors at Brookfield
 
Mauldin, SC
 
6/30/2015
 
702

 
66,800,000

 
(4 
) 
 
90.3
%
 
93.0
%
 
990

 
929

19
 
Carrington Park
 
Kansas City, MO
 
8/19/2015
 
298

 
39,480,000

 
(4 
) 
 
95.0
%
 
94.0
%
 
1,011

 
1,013

20
 
Delano at North Richland Hills
 
North Richland Hills, TX
 
8/26/2015
 
263

 
38,500,000

 
29,811,378

 
95.1
%
 
94.3
%
 
1,442

 
1,439

21
 
Meadows at North Richland Hills
 
North Richland Hills, TX
 
8/26/2015
 
252

 
32,600,000

 
25,454,227

 
92.1
%
 
93.7
%
 
1,345

 
1,339

22
 
Kensington by the Vineyard
 
Euless, TX
 
8/26/2015
 
259

 
46,200,000

 
34,099,645

 
95.8
%
 
95.0
%
 
1,489

 
1,485

23
 
Monticello by the Vineyard
 
Euless, TX
 
9/23/2015
 
354

 
52,200,000

 
41,194,774

 
94.9
%
 
95.2
%
 
1,332

 
1,336

24
 
The Shores
 
Oklahoma City, OK
 
9/29/2015
 
300

 
36,250,000

 
23,800,425

 
93.7
%
 
94.0
%
 
1,004

 
1,000

25
 
Lakeside at Coppell
 
Coppell, TX
 
10/7/2015
 
315

 
60,500,000

 
45,230,507

 
96.2
%
 
94.6
%
 
1,697

 
1,687

26
 
Meadows at River Run
 
Bolingbrook, IL
 
10/30/2015
 
374

 
58,500,000

 
42,753,594

 
91.2
%
 
91.4
%
 
1,428

 
1,408

27
 
PeakView at T-Bone Ranch
 
Greeley, CO
 
12/11/2015
 
224

 
40,300,000

 
(4 
) 
 
94.6
%
 
95.5
%
 
1,347

 
1,295

28
 
Park Valley Apartments
 
Smyrna, GA
 
12/11/2015
 
496

 
51,400,000

 
44,720,619

 
94.0
%
 
92.9
%
 
1,029

 
1,012

29
 
PeakView by Horseshoe Lake
 
Loveland, CO
 
12/18/2015
 
222

 
44,200,000

 
33,715,890

 
95.0
%
 
94.1
%
 
1,387

 
1,388

30
 
Stoneridge Farms
 
Smyrna, TN
 
12/30/2015
 
336

 
47,750,000

 

 
94.3
%
 
93.8
%
 
1,201

 
1,178

31
 
 Fielder’s Creek
 
Englewood, CO
 
3/23/2016
 
217

 
32,400,000

 

 
94.9
%
 
95.9
%
 
1,198

 
1,193

32
 
Landings of Brentwood
 
Brentwood, TN
 
5/18/2016
 
724

 
110,000,000

 
(5 
) 
 
96.1
%
 
95.9
%
 
1,219

 
1,191

33
 
1250 West Apartments
 
Marietta, GA
 
8/12/2016
 
468

 
55,772,500

 
(4 
) 
 
92.5
%
 
90.4
%
 
1,032

 
1,008

34
 
Sixteen50 @ Lake Ray Hubbard
 
Rockwall, TX
 
9/29/2016
 
334

 
66,050,000

 
(4 
) 
 
94.0
%
 
94.6
%
 
1,503

 
1,492

35
 
Victory Station Development(5)
 
Murfreesboro, TN
 
5/30/2019
 

 
2,576,467

 

 
%
 
%
 

 

 
 
 
 
 
 
 
 
11,601

 
$
1,501,958,217

 
$
501,954,042

 
93.8
%
 
93.9
%
 
$
1,189

 
$
1,163

________________
(1)
As of June 30, 2019, our portfolio was approximately 96.0% leased, calculated using the number of occupied and contractually leased units divided by total units.
(2)
Average monthly rent is based upon the effective rental income after considering the effect of vacancies, concessions and write-offs.
(3)
Mortgage debt outstanding is net of deferred financing costs associated with the loans for each individual property listed above but excludes the principal balance of $551,669,000 and associated deferred financing costs of $3,412,202 related to the refinancings pursuant to our Master Credit Facility Agreement, or MCFA.
(4)
Properties secured under the terms of the MCFA.
(5)
We acquired the Victory Station property on May 30, 2019, which included unimproved land, currently zoned as a Planned Unit Development, or PUD. The current zoning permits the development of the property into a multifamily community including 176 units of 1, 2 and 3-bedroom units with a typical unit mix for this market.


37


PART I — FINANCIAL INFORMATION (continued)


Pending Mergers with Steadfast Income REIT, Inc. and Steadfast Apartment REIT III, Inc.

On August 5, 2019, we entered into the Merger Agreements (as defined herein) to acquire each of Steadfast Income REIT, Inc., or SIR, and Steadfast Apartment REIT III, Inc., or STAR III. As described in greater detail below, both mergers are stock-for-stock transactions whereby each of SIR and STAR III will be merged into one of our wholly-owned subsidiaries. The consummation of the merger with SIR is not contingent upon the completion of our merger with STAR III, and the consummation of the merger with STAR III is not contingent upon the completion of our merger with SIR. For additional information on the mergers, see our Current Report on Form 8-K filed with the SEC on August 6, 2019.

Proposed SIR Merger

On August 5, 2019, we, SIR, our operating partnership, Steadfast Income REIT Operating Partnership, L.P., the operating partnership of SIR, and SI Subsidiary, LLC, our wholly-owned subsidiary, or SIR Merger Sub, entered into an Agreement and Plan of Merger, or the SIR Merger Agreement. Subject to the terms and conditions of the SIR Merger Agreement, SIR will merge with and into SIR Merger Sub, or the SIR Merger, with SIR Merger Sub surviving the SIR Merger, such that following the SIR Merger, the surviving entity will continue as a wholly-owned subsidiary of ours. In accordance with the applicable provisions of the Maryland General Corporation Law, or MGCL, the separate existence of SIR shall cease.

At the effective time of the SIR Merger and subject to the terms and conditions of the SIR Merger Agreement, each issued and outstanding share of SIR’s common stock (or a fraction thereof), $0.01 par value per share, or the SIR Common Stock, will be converted into the right to receive 0.5934 shares of our common stock, $0.01 par value per share.

The obligations of each party to consummate the SIR Merger is subject to a number of conditions, including receipt of the approval of the SIR Merger by the holders of a majority of the outstanding shares of SIR Common Stock and of an amendment to SIR’s charter to delete certain provisions regarding roll-up transactions.

Pursuant to the terms of the SIR Merger Agreement, during the period beginning on the date of the SIR Merger Agreement and continuing until 11:59 p.m. New York City time on September 5, 2019, SIR and its subsidiaries and representatives may initiate, solicit, provide information and enter into discussions concerning proposals relating to alternative business combination transactions.

Proposed STAR III Merger

On August 5, 2019, we, STAR III, our operating partnership, Steadfast Apartment REIT III Operating Partnership, L.P., the operating partnership of STAR III, and SIII Subsidiary, LLC, our wholly-owned subsidiary, or the STAR III Merger Sub, entered into an Agreement and Plan of Merger, or the STAR III Merger Agreement. Subject to the terms and conditions of the STAR III Merger Agreement, STAR III will merge with and into STAR III Merger Sub, or the STAR III Merger, with STAR III Merger Sub surviving the STAR III Merger, such that following the STAR III Merger, the surviving entity will continue as a wholly-owned subsidiary of ours. In accordance with the applicable provisions of the MGCL, the separate existence of STAR III shall cease.

At the effective time of the STAR III Merger and subject to the terms and conditions of the STAR III Merger Agreement, each issued and outstanding share of STAR III’s common stock (or a fraction thereof), $0.01 par value per share, or the STAR III Common Stock, will be converted into the right to receive 1.430 shares of our common stock.

The obligations of each party to consummate the STAR III Merger is subject to a number of conditions, including receipt of the approval of the STAR III Merger by the holders of a majority of the outstanding shares of STAR III Common Stock and of an amendment to STAR III’s charter to delete certain provisions regarding roll-up transactions.

Pursuant to the terms of the STAR III Merger Agreement, during the period beginning on the date of the STAR III Merger Agreement and continuing until 11:59 p.m. New York City time on September 19, 2019, STAR III and its subsidiaries and representatives may initiate, solicit, provide information and enter into discussions concerning proposals relating to alternative business combination transactions.




38


PART I — FINANCIAL INFORMATION (continued)


Combined Company

The combined company after the mergers will retain the name “Steadfast Apartment REIT, Inc.” Each merger is intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code.

39


PART I — FINANCIAL INFORMATION (continued)


Critical Accounting Policies 
The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 14, 2019. There have been no significant changes to our accounting policies during the period covered by this report, except as discussed in Note 2 (Summary of Significant Accounting Policies), to our condensed consolidated unaudited financial statements in this quarterly report.
Income Taxes
We have elected to be taxed as a REIT under the Internal Revenue Code and have operated as such commencing with the taxable year ended December 31, 2014. To continue to qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to our stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, we generally will not be subject to federal income tax to the extent we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate income tax rates and generally would not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe we are organized and operate in such a manner as to qualify for treatment as a REIT.
We follow the income tax guidance under GAAP to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of June 30, 2019 and December 31, 2018, we did not have any liabilities for uncertain tax positions that we believe should be recognized in our consolidated financial statements. We have not been assessed material interest or penalties by any major tax jurisdictions. Our evaluation was performed for all open tax years through December 31, 2018.
Distributions
Our board of directors has declared daily distributions that are paid on a monthly basis. We expect to continue paying monthly distributions unless our results of operations, our general financial condition, general economic conditions or other factors prohibit us from doing so. We may declare distributions in excess of our cash flow from operations. As a result, our distribution rate and payment frequency may vary from time to time. However, to qualify as a REIT for tax purposes, we must make distributions equal to at least 90% of our “REIT taxable income” each year.
Distributions declared (1) accrue daily to our stockholders of record as of the close of business on each day, (2) are payable in cumulative amounts on or before the third day of each calendar month with respect to the prior month and (3) were calculated at a rate of $0.002466 per share per day during the period from January 1, 2018 through June 30, 2019, which if paid over a 365-day period is equivalent to a 6.0% annualized distribution rate based on a purchase price of $15.00 per share of common stock.

40


PART I — FINANCIAL INFORMATION (continued)


The distributions declared and paid during the first and second fiscal quarters of 2019, along with the amount of distributions reinvested pursuant to the distribution reinvestment plan were as follows:
 
 
 
 
 
 
Distributions Paid(3)
 
Sources of Distributions Paid
 
 
Period
 
Distributions Declared(1)
 
Distributions Declared Per Share(1)(2)
 
Cash
 
Reinvested
 
Total
 
Cash Flow From Operations
 
Cash and Cash Equivalents
 
Net Cash Provided by Operating Activities
First Quarter 2019
 
$
11,511,537

 
$
0.222

 
$
6,116,456

 
$
5,378,566

 
$
11,495,022

 
$
2,276,063

 
$
9,218,959

 
$
2,276,063

Second Quarter 2019
 
11,684,723

 
0.224

 
6,419,268

 
5,378,696

 
11,797,964

 
8,905,513

 
2,892,451

 
8,905,513

 
 
$
23,196,260

 
$
0.446

 
$
12,535,724

 
$
10,757,262

 
$
23,292,986

 
$
11,181,576

 
$
12,111,410

 
$
11,181,576

____________________
(1)
Distributions during the three and six months ended June 30, 2019, were based on daily record dates and calculated at a rate of $0.002466 per share per day.
(2)
Assumes each share was issued and outstanding each day during the period presented.
(3)
Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid approximately three days following month end.
For the three and six months ended June 30, 2019, we paid aggregate distributions of $11,797,964 and $23,292,986, including $6,419,268 and $12,535,724 of distributions paid in cash and 339,564 and 693,883 shares of our common stock issued pursuant to our distribution reinvestment plan for $5,378,696 and $10,757,262, respectively. For the three and six months ended June 30, 2019, our net loss was $11,993,010 and $24,352,282, we had funds from operations, or FFO, of $6,522,625 and $12,445,645 and net cash provided by operations of $8,905,513 and $11,181,576, respectively. For the three and six months ended June 30, 2019, we funded $8,905,513 and $11,181,576, or 75% and 48%, and $2,892,451 and $12,111,410, or 25% and 52%, of total distributions paid, including shares issued pursuant to our distribution reinvestment plan, from net cash provided by operating activities and from cash and cash equivalents, respectively. Since inception, of the $174,981,714 in total distributions paid through June 30, 2019, including shares issued pursuant to our distribution reinvestment plan, 68% of such amounts were funded from cash flow from operations, 13% were funded from proceeds from our refinancings, 12% were funded from net public offering proceeds and 7% were funded from cash and cash equivalents. For information on how we calculate FFO and the reconciliation of FFO to net loss, see “—Funds from Operations and Modified Funds from Operations.”
Our long-term policy is to pay distributions solely from cash flow from operations. Because we may receive income from interest or rents at various times during our fiscal year and because we may need cash flow from operations during a particular period to fund capital expenditures and other expenses, we expect that from time to time during our operational stage, we will declare distributions in anticipation of cash flow that we expect to receive during a later period, and we expect to pay these distributions in advance of our actual receipt of these funds. In these instances, our board of directors has the authority under our organizational documents, to the extent permitted by Maryland law, to fund distributions from sources such as borrowings, offering proceeds or advances and the deferral of fees and expense reimbursements by our advisor, in its sole discretion. We have not established a limit on the amount of proceeds we may use from sources other than cash flow from operations to fund distributions. If we pay distributions from sources other than cash flow from operations, we will have fewer funds available for investments.
Inflation
Substantially all of our multifamily property leases are for a term of one year or less. In an inflationary environment, this may allow us to realize increased rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally will minimize our risk from the adverse effects of inflation, although these leases generally permit residents to leave at the end of the lease term and therefore will expose us to the effects of a decline in market rents. In a deflationary rent environment, we may be exposed to declining rents more quickly under these shorter term leases.
With respect to other commercial properties we may own, we expect in the future to include provisions in our leases designed to protect us from the impact of inflation. These provisions may include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements, or in some cases annual reimbursement of operating expenses above a certain allowance.
As of June 30, 2019, we had not entered into any material leases as a lessee.

41


PART I — FINANCIAL INFORMATION (continued)


REIT Compliance
To qualify as a REIT for tax purposes, we are required to distribute at least 90% of our REIT taxable income (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP) to our stockholders. We must also meet certain asset and income tests, as well as other requirements. We monitor the operations and transactions that may potentially impact our REIT status. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates.
Liquidity and Capital Resources
We use secured borrowings, and intend to use in the future secured and unsecured borrowings. At June 30, 2019, our debt was approximately 58% of the value of our properties, as determined by the most recent valuations performed by an independent third-party appraiser as of December 31, 2018. Going forward, we expect that our borrowings will be approximately 55% to 60% of the value of our properties (after debt amortization) and other real estate-related assets. Under our Articles of Amendment and Restatement, or the Charter, we are prohibited from borrowing in excess of 300% of the value of our net assets, which generally approximates to 75% of the aggregate cost of our assets, though we may exceed this limit only under certain circumstances.
In addition to making investments in accordance with our investment objectives, we use our capital resources to make certain payments to our advisor and its affiliates. During our organization and offering stage, we made payments to the dealer manager for sales commissions and dealer manager fees and payments to our advisor for reimbursement of certain organization and offering expenses. Currently, during our operating stage, we make payments to our advisor in connection with the acquisition of investments, the management of our assets and costs incurred by our advisor in providing services to us.
Our principal demand for funds will be to fund value-enhancement and other capital improvement projects, to pay operating expenses and interest on our outstanding indebtedness and to make distributions to our stockholders. Over time, we intend to generally fund our cash needs, other than asset acquisitions, from operations. Otherwise, we expect that our principal sources of working capital will include:
current unrestricted cash balance, which was $43,745,735 as of June 30, 2019;
various forms of secured and unsecured financing, including the financing of our unencumbered properties;
borrowings under master repurchase agreements;
equity capital from joint venture partners; and
proceeds from our distribution reinvestment plan.
Over the short term, we believe that our sources of capital, specifically our cash balances, cash flow from operations, our ability to raise equity capital from joint venture partners and our ability to obtain various forms of secured and unsecured financing will be adequate to meet our liquidity requirements and capital commitments.
Over the longer term, in addition to the same sources of capital we will rely on to meet our short-term liquidity requirements, we may also conduct additional public or private offerings of our securities, refinance debt or dispose of assets to fund our operating activities, debt service, distributions and future property acquisitions and development projects. We expect these resources will be sufficient to fund our ongoing operating activities as well as providing capital for investment in future development and other joint ventures along with potential forward purchase commitments.
Line of Credit
On May 18, 2016, we entered into a secured revolving line of credit, or the line of credit, with PNC Bank in an amount not to exceed $65,000,000. The line of credit provided for advances solely for the purpose of financing the costs in connection with acquisitions and development of real estate projects and for general corporate purposes (subject to certain debt service and loan to value requirements). The line of credit had a maturity date of May 17, 2019, subject to extension, as further described in the loan agreement entered into by certain of our wholly-owned subsidiaries with PNC Bank in connection with the acquisition of the Landings of Brentwood property. We terminated the line of credit on January 9, 2019. For additional information on our line of credit, see Note 5 (Debt) to the unaudited consolidated financial statements contained in this quarterly report.

42


PART I — FINANCIAL INFORMATION (continued)


Master Credit Facility
On July 31, 2018, or the closing date, 16 of our indirect wholly-owned subsidiaries terminated the existing mortgage loans with their lenders for an aggregate principal amount of $479,318,649 and entered into the MCFA with Newmark Group, Inc., or the facility lender, for an aggregate principal amount of $551,669,000. The MCFA provides for three tranches: (1) a fixed rate loan in the aggregate principal amount of $331,001,400 that accrues interest at 4.43% per annum; (2) a fixed rate loan in the aggregate principal amount of $137,917,250 that accrues interest at 4.57%; and (3) a variable rate loan in the aggregate principal amount of $82,750,350 that accrues interest at the one-month LIBOR plus 1.70%. The loans have a maturity date of August 1, 2028, unless the maturity date is accelerated in accordance with the terms of the loan documents. Interest only payments are payable monthly through August 1, 2025, with interest and principal payments due monthly thereafter. We paid $1,930,842 in the aggregate in loan origination fees to the facility lender in connection with the refinancings, and paid our advisor a loan coordination fee of $2,758,345.
CME Loans
Additionally, on the closing date, five of our indirect wholly-owned subsidiaries terminated the existing mortgage loans with their lenders for an aggregate principal amount of $131,318,742 and entered into new loan agreements with PNC Bank, for an aggregate principal amount of $160,850,000. Each loan agreement provides for a term loan, or a CME Loan and, collectively, the CME Loans, with a maturity date of August 1, 2028, unless the maturity date is accelerated with the loan terms. Each CME Loan accrues interest at a fixed rate of 4.43% per annum. The entire outstanding principal balance and any accrued and unpaid interest on each of the CME Loans are due on the maturity date. Interest only payments on the CME Loans are payable monthly in arrears on specified dates as set forth in each loan agreement and interest and principal payments are due beginning September 1, 2023. Monthly payments are due and payable on the first day of each month, commencing September 1, 2018. We paid $643,400 in the aggregate in loan origination fees to PNC Bank in connection with the refinancings, and paid our advisor a loan coordination fee of $804,250.
Cash Flows Provided by Operating Activities
During the six months ended June 30, 2019, net cash provided by operating activities was $11,181,576, compared to $18,777,385 for the six months ended June 30, 2018. The change in net cash provided by operating activities is primarily due to the increase in net loss and decrease in accounts payable and accrued liabilities, partially offset by increases in depreciation and amortization, due to affiliates, other assets and the change in the fair value of interest rate cap agreements. We expect to continue to generate cash flows from operations as we stabilize the operations of our property portfolio and complete our value-enhancement program.
Cash Flows Used in Investing Activities
During the six months ended June 30, 2019, net cash used in investing activities was $12,130,356, compared to $7,664,456 during the six months ended June 30, 2018. The increase in net cash used in investing activities was the result of the acquisition of real estate held for development and an increase in additions to real estate investments during the six months ended June 30, 2019, compared to the six months ended June 30, 2018. Net cash used in investing activities during the six months ended June 30, 2019, consisted of the following:
$2,158,815 of cash used for the acquisition of real estate held for development;
$9,883,640 of cash used for improvements to real estate investments;
$102,284 of cash used for additions to real estate held for development;
$700,100 of cash used for escrow deposits of pending real estate acquisitions; and
$714,483 of cash provided by proceeds from insurance claims.
Cash Flows Used in Financing Activities
During the six months ended June 30, 2019 and 2018, net cash used in financing activities was $17,130,438, and$16,701,572, respectively. The increase in net cash used in financing activities was primarily due to the increase in distributions paid to common stockholders during the six months ended June 30, 2019 compared to the same prior year period, partially offset by the decrease in repurchases of common stock from $4,886,216 during the six months ended June 30, 2018, to

43


PART I — FINANCIAL INFORMATION (continued)


$4,000,000 during the six months ended June 30, 2019. Net cash used in financing activities during the six months ended June 30, 2019, consisted of the following:
$480,716 of principal payments on mortgage notes payable;
$113,998 of payments of commissions on sales of common stock;
$12,535,724 of net cash distributions to our stockholders, after giving effect to distributions reinvested by stockholders of $10,757,262; and
$4,000,000 of cash paid for the repurchase of common stock.
Contractual Commitments and Contingencies
We use secured debt, and intend to use in the future secured and unsecured debt. We believe that the careful use of borrowings will help us achieve our diversification goals and potentially enhance the returns on our investments. At June 30, 2019, our debt was approximately 58% of the value of our properties, as determined by the most recent valuations performed by an independent third-party appraiser as of December 31, 2018. Going forward, we expect that our borrowings will be approximately 55% to 60% of the value of our properties (after debt amortization) and other real estate-related assets. Under our Charter, we are prohibited from borrowing in excess of 300% of our net assets, which generally approximates to 75% of the aggregate cost of our assets unless such excess is approved by a majority of the independent directors and disclosed to stockholders, along with a justification for such excess, in our next quarterly report. In such event, we will monitor our debt levels and take action to reduce any such excess as practicable. Our aggregate borrowings are reviewed by our board of directors at least quarterly. As of June 30, 2019, our aggregate borrowings were not in excess of 300% of the value of our net assets.
In addition to using our capital resources for investing purposes and meeting our debt obligations, we expect to use our capital resources to make certain payments to our advisor in connection with the management of our asset portfolio and costs incurred by our advisor in providing services to us.
As of June 30, 2019, we had indebtedness totaling $1,050,210,840, comprised of an aggregate principal amount of $1,056,747,617 and net deferred financing costs of $6,536,777. The following is a summary of our contractual obligations as of June 30, 2019:
 
 
 
 
Payments due by period
Contractual Obligations
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Interest payments on outstanding debt obligations(1)
 
$
206,079,810

 
$
23,742,832

 
$
69,911,625

 
$
44,233,454

 
$
68,191,899

Principal payments on outstanding debt obligations(2)
 
1,056,747,617

 
486,230

 
6,387,998

 
11,415,302

 
1,038,458,087

Total
 
$
1,262,827,427

 
$
24,229,062

 
$
76,299,623

 
$
55,648,756

 
$
1,106,649,986

________________
(1)
Scheduled interest payments on outstanding debt obligations are based on the outstanding principal amounts and interest rates in effect at June 30, 2019. We incurred interest expense of $12,165,781 and $24,399,076 during the three and six months ended June 30, 2019, including amortization of deferred financing costs totaling $246,432 and $494,204, net unrealized losses from the change in fair value of interest rate cap agreements of $20,107 and $199,723, and credit facility commitment fees of $0 and $2,137, respectively.
(2)
Scheduled principal payments on outstanding debt obligations are based on the terms of the notes payable agreements. Amounts exclude the amortization of the net deferred financing costs associated with certain notes payable.
Our debt obligations contain customary financial and non-financial debt covenants. As of June 30, 2019, and December 31, 2018, we were in compliance with all debt covenants.

44


PART I — FINANCIAL INFORMATION (continued)


Results of Operations
Overview
The discussion that follows is based on our consolidated results of operations for the three and six months ended June 30, 2019 and 2018. The ability to compare one period to another is affected by the implementation of our value-enhancement strategy. As of June 30, 2019, we owned 34 multifamily properties and one parcel of land held for the development of apartment homes. The increase in rents is the primary cause of the increase in operating income and expenses, as further discussed below.
Our results of operations for the three and six months ended June 30, 2019 and 2018, are not indicative of those expected in future periods. For the three and six months ended June 30, 2019, we continued to perform value-enhancement projects, which may have an impact on our future results of operations. In general, we expect that our revenues and expenses related to our portfolio will increase in future periods as a result of organic rent increases, anticipated value-enhancement projects and the completion of real estate under development.
To provide additional insight into our operating results, we are also providing a detailed analysis of same-store net operating income, or NOI. For more information on NOI and a reconciliation of NOI (a non-GAAP financial measure) to net loss, see “—Net Operating Income.”
Consolidated Results of Operations for the Three Months Ended June 30, 2019, Compared to the Three Months Ended June 30, 2018
The following table summarizes the consolidated results of operations for the three months ended June 30, 2019 and 2018:
 
 
For the Three Months Ended June 30,
 
 
 
 
 
 
2019
 
2018
 
Change $
 
Change %
Total revenues
 
$
43,956,613

 
$
42,475,166

 
$
1,481,447

 
3
 %
Operating, maintenance and management
 
(10,496,086
)
 
(10,439,849
)
 
(56,237
)
 
(1
)%
Real estate taxes and insurance
 
(6,443,394
)
 
(5,962,503
)
 
(480,891
)
 
(8
)%
Fees to affiliates
 
(6,265,958
)
 
(5,826,703
)
 
(439,255
)
 
(8
)%
Depreciation and amortization
 
(18,515,635
)
 
(17,629,793
)
 
(885,842
)
 
(5
)%
Interest expense
 
(12,165,781
)
 
(10,231,952
)
 
(1,933,829
)
 
(19
)%
General and administrative expenses
 
(2,062,769
)
 
(1,330,544
)
 
(732,225
)
 
(55
)%
Net loss
 
$
(11,993,010
)
 
$
(8,946,178
)
 
$
(3,046,832
)
 
(34
)%
 
 
 
 
 
 
 
 
 
NOI(1)
 
$
24,183,565

 
$
24,341,208

 
$
(157,643
)
 
(1
)%
FFO(2)
 
$
6,522,625

 
$
8,683,615

 
$
(2,160,990
)
 
(25
)%
MFFO(2)
 
$
6,992,443

 
$
8,552,334

 
$
(1,559,891
)
 
(18
)%
______________
(1)
NOI is a non-GAAP financial measure used by investors and our management to evaluate and compare the performance of our properties and to determine trends in earnings. However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, interest income and other expense, acquisition costs (those that did not meet the criteria for capitalization under ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of business, or ASU 2017-01), certain fees to affiliates, depreciation and amortization expense and gains or losses from the sale of our properties and other gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs, all of which are significant economic costs. For additional information on how we calculate NOI and a reconciliation of NOI to net loss, see “—Net Operating Income.”
(2)
GAAP basis accounting for real estate assets utilizes historical cost accounting and assumes real estate values diminish over time. In an effort to overcome the difference between real estate values and historical cost accounting for real estate assets the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, established the measurement tool of FFO. Since its introduction, FFO has become a widely used non-GAAP financial

45


PART I — FINANCIAL INFORMATION (continued)


measure among REITs. Additionally, we use modified funds from operations, or MFFO, as defined by the Institute for Portfolio Alternatives (formerly known as the Investment Program Association), or IPA, as a supplemental measure to evaluate our operating performance. MFFO is based on FFO but includes certain adjustments we believe are necessary due to changes in accounting and reporting under GAAP since the establishment of FFO. Neither FFO nor MFFO should be considered as alternatives to net loss or other measurements under GAAP as indicators of our operating performance, nor should they be considered as alternatives to cash flow from operating activities or other measurements under GAAP as indicators of liquidity. For additional information on how we calculate FFO and MFFO and a reconciliation of FFO and MFFO to net loss, see “—Funds From Operations and Modified Funds From Operations.”
Net loss
For the three months ended June 30, 2019, we had a net loss of $11,993,010, compared to a net loss of $8,946,178 for the three months ended June 30, 2018. The increase in net loss of $3,046,832 over the comparable prior year period was due to the increase in operating, maintenance and management expenses of $56,237, the increase in real estate taxes and insurance of $480,891, the increase in fees to affiliates of $439,255, the increase in depreciation and amortization expense of $885,842, the increase in interest expense of $1,933,829 and the increase in general and administrative expenses of $732,225, partially offset by the increase in total revenues of $1,481,447.
Total revenues
Total revenues were $43,956,613 for the three months ended June 30, 2019, compared to $42,475,166 for the three months ended June 30, 2018. The increase of $1,481,447 was primarily due to increases in average monthly rents as a result of ordinary monthly rent increases and monthly rent increases driven by our value-enhancement projects. Average monthly rents per unit increased from $1,153 as of June 30, 2018, to $1,189 as of June 30, 2019. We expect rental and other income to increase in future periods as a result of ordinary monthly rent increases, improved occupancy and the implementation of our value-enhancement strategy.
Operating, maintenance and management expenses
Operating, maintenance and management expenses for the three months ended June 30, 2019, were $10,496,086, compared to $10,439,849 for the three months ended June 30, 2018. The increase of $56,237 was primarily due to increases in repairs, maintenance, turnover, payroll and utility costs, partially offset by a decrease in credit card processing fees during the three months ended June 30, 2019, compared to the three months ended June 30, 2018. We expect that these amounts will decrease as a percentage of total revenues as we implement operational efficiencies at our multifamily properties.
Real estate taxes and insurance
Real estate taxes and insurance expenses were $6,443,394 for the three months ended June 30, 2019, compared to $5,962,503 for the three months ended June 30, 2018. The increase of $480,891 was primarily due to increases in taxes as a result of increases in assessed real estate tax values. We expect these amounts may increase in future periods as a result of municipal property tax rate increases as well as increases in the assessed value of our property portfolio.
Fees to affiliates
Fees to affiliates were $6,265,958 for the three months ended June 30, 2019, compared to $5,826,703 for the three months ended June 30, 2018. The increase of $439,255 was primarily due to the increase in the reimbursement of software costs during the three months ended June 30, 2019, and to a lesser extent from an increase in property management fees as a result of the increase in revenue. We expect fees to affiliates related to the on-going management of our real estate portfolio to increase in future periods as a result of increased investment management fees from anticipated increases in the cost of investments and increased property management fees from anticipated increases in future rental income.
Depreciation and amortization
Depreciation and amortization expenses were $18,515,635 for the three months ended June 30, 2019, compared to $17,629,793 for the three months ended June 30, 2018. The increase of $885,842 was primarily due to the net increase in depreciable and amortizable assets of $20,099,118 since June 30, 2018, due to capital improvements. We expect these amounts to increase slightly in future periods as a result of anticipated future enhancements to our real estate portfolio.


46


PART I — FINANCIAL INFORMATION (continued)


Interest expense
Interest expense for the three months ended June 30, 2019, was $12,165,781, compared to $10,231,952 for the three months ended June 30, 2018. The increase of $1,933,829 was primarily due to the increase in the notes payable, net balance of $56,412,386 since June 30, 2018, due to financing incurred in connection with the refinancing of 21 multifamily properties since June 30, 2018, and increases in LIBOR from June 30, 2018 to June 30, 2019, that impacted the interest rate on our variable rate loans. Included in interest expense is the amortization of deferred financing costs of $246,432 and $246,966, the unrealized loss (gain) on derivative instruments of $20,107 and $(131,281), credit facility commitment fees of $0 and $7,479 and amortization of loan discounts of $0 and $88,746 for the three months ended June 30, 2019 and 2018, respectively. Our interest expense in future periods will vary based on the impact of changes to LIBOR, or the adoption of a replacement to LIBOR, our level of future borrowings, which will depend on the availability and cost of debt financing and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives.
General and administrative expenses
General and administrative expenses for the three months ended June 30, 2019, were $2,062,769, compared to $1,330,544 for the three months ended June 30, 2018. These general and administrative costs consisted primarily of legal fees, insurance premiums, audit fees, other professional fees and independent director compensation. The increase of $732,225 was primarily due to increases in director meeting fees as a result of an increase in the number of meetings compared to the prior year period and legal costs incurred during the three months ended June 30, 2019. We expect general and administrative expenses to decrease as a percentage of total revenues.
Consolidated Results of Operations for the Six Months Ended June 30, 2019, Compared to the Six Months Ended June 30, 2018
The following table summarizes the consolidated results of operations for the six months ended June 30, 2019 and 2018:
 
 
For the Six Months Ended June 30,
 
 
 
 
 
 
2019
 
2018
 
Change $
 
Change %
Total revenues
 
$
86,723,223

 
$
83,842,192

 
$
2,881,031

 
3
 %
Operating, maintenance and management
 
(20,537,351
)
 
(20,414,684
)
 
(122,667
)
 
(1
)%
Real estate taxes and insurance
 
(13,024,583
)
 
(11,647,883
)
 
(1,376,700
)
 
(12
)%
Fees to affiliates
 
(12,331,606
)
 
(11,623,381
)
 
(708,225
)
 
(6
)%
Depreciation and amortization
 
(36,797,927
)
 
(35,065,143
)
 
(1,732,784
)
 
(5
)%
Interest expense
 
(24,399,076
)
 
(19,346,307
)
 
(5,052,769
)
 
(26
)%
Loss on debt extinguishment
 
(41,609
)
 

 
(41,609
)
 
(100
)%
General and administrative expenses
 
(3,943,353
)
 
(2,709,066
)
 
(1,234,287
)
 
(46
)%
Net loss
 
$
(24,352,282
)
 
$
(16,964,272
)
 
$
(7,388,010
)
 
(44
)%
 
 
 
 
 
 
 
 
 
NOI(1)
 
$
48,240,842

 
$
48,326,499

 
$
(85,657
)
 
 %
FFO(2)
 
$
12,445,645

 
$
18,100,871

 
$
(5,655,226
)
 
(31
)%
MFFO(2)
 
$
13,495,445

 
$
17,521,977

 
$
(4,026,532
)
 
(23
)%
_____________
(1)
See “—Net Operating Income” below for a reconciliation of NOI to net loss.
(2)
See “—Funds From Operations and Modified Funds From Operations” below for a reconciliation of FFO and MFFO to net loss.
Net loss
For the six months ended June 30, 2019, we had a net loss of $24,352,282, compared to $16,964,272 for the six months ended June 30, 2018. The increase in net loss of $7,388,010 over the comparable prior year period was primarily due to the increase in operating, maintenance and management expenses of $122,667, the increase in real estate taxes and insurance of $1,376,700, the increase in fees to affiliates of $708,225, the increase in depreciation and amortization expense of $1,732,784,

47


PART I — FINANCIAL INFORMATION (continued)


the increase in interest expense of $5,052,769, the increase in loss on debt extinguishment of $41,609, and the increase in general and administrative expenses of $1,234,287, partially offset by the increase in total revenues of $2,881,031
Total revenues
Total revenues were $86,723,223 for the six months ended June 30, 2019, compared to $83,842,192 for the six months ended June 30, 2018. The increase of $2,881,031 was primarily due to increases in average monthly rents as a result of ordinary monthly rent increases and monthly rent increases driven by our value-enhancement projects. Average monthly rents per unit increased from $1,153 as of June 30, 2018, to $1,189 as of June 30, 2019. We expect rental and other income to increase in future periods as a result of ordinary monthly rent increases and the continuing implementation of our value-enhancement strategy.
Operating, maintenance and management expenses
Operating, maintenance and management expenses were $20,537,351 for the six months ended June 30, 2019, compared to $20,414,684 for the six months ended June 30, 2018. The increase of $122,667 was primarily due to increases in payroll and utility costs during the six months ended June 30, 2019, compared to the six months ended June 30, 2018. We expect that these amounts will decrease as a percentage of total revenues as we implement operational efficiencies at our multifamily properties.
Real estate taxes and insurance
Real estate taxes and insurance expenses were $13,024,583 for the six months ended June 30, 2019, compared to $11,647,883 for the six months ended June 30, 2018. The increase of $1,376,700 was due to increases in taxes as a result of increases in assessed real estate tax values. We expect these amounts may increase in future periods as a result of municipal property tax rate increases as well as increases in the assessed value of our property portfolio.
Fees to affiliates
Fees to affiliates were $12,331,606 for the six months ended June 30, 2019, compared to $11,623,381 for the six months ended June 30, 2018. The increase of $708,225 was primarily due to the increase in the reimbursement of software costs during the six months ended June 30, 2019, compared to the six months ended June 30, 2018, and to a lesser extent from an increase in property management fees as a result of the increase in revenue. We expect fees to affiliates related to the on-going management of our real estate portfolio to increase in future periods as a result of increased investment management fees from anticipated increases in the cost of investments and increased property management fees from anticipated increases in future rental income.
Depreciation and amortization
Depreciation and amortization expenses were $36,797,927 for the six months ended June 30, 2019, compared to $35,065,143 for the six months ended June 30, 2018. The increase of $1,732,784 was primarily due to the net increase in depreciable and amortizable assets of $20,099,118 since June 30, 2018, due to capital improvements. We expect these amounts to increase slightly in future periods as a result of anticipated future enhancements to our real estate portfolio.
Interest expense
Interest expense for the six months ended June 30, 2019, was $24,399,076, compared to $19,346,307 for the six months ended June 30, 2018. The increase of $5,052,769 was primarily due to the increase in the notes payable, net balance of $56,412,386 since June 30, 2018, due to financing incurred in connection with the refinancing of 21 multifamily properties and increases in LIBOR from June 30, 2018 to June 30, 2019, that impacted the interest rate on our variable rate loans. Included in interest expense is the amortization of deferred financing costs of $494,204 and $493,241, unrealized loss (gain) on derivative instruments of $199,723 and $(578,894), amortization of loan discount of $0 and $177,491 and credit facility commitment fees of $2,137 and $14,877 for the six months ended June 30, 2019 and 2018, respectively. Our interest expense in future periods will vary based on the impact of changes to LIBOR, or the adoption of a replacement to LIBOR, our level of future borrowings, which will depend on the availability and cost of debt financing and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives.
Loss on debt extinguishment
Loss on debt extinguishment for the six months ended June 30, 2019, was $41,609, compared to $0 for the six months ended June 30, 2018. These expenses consisted of deferred financing costs, net related to extinguishment of the line of credit during the six months ended June 30, 2019. The loss on debt extinguishment will vary in future periods if we repay the remaining outstanding principal prior to the scheduled maturity dates of the notes payable.

48


PART I — FINANCIAL INFORMATION (continued)


General and administrative expenses
General and administrative expenses for the six months ended June 30, 2019, were $3,943,353, compared to $2,709,066 for the six months ended June 30, 2018. These general and administrative costs consisted primarily of legal fees, insurance premiums, audit fees, other professional fees and independent director compensation. The increase of $1,234,287 was primarily due to the increases in director meeting fees as a result of an increase in the number of meetings compared to the prior year period and legal costs incurred during the six months ended June 30, 2019. We expect general and administrative expenses to decrease as a percentage of total revenues in future periods.
Property Operations for the Three Months Ended June 30, 2019, Compared to the Three Months Ended June 30, 2018
For purposes of evaluating comparative operating performance, we categorize our properties as “same-store” or “non-same-store.” A “same-store” property is a property that was owned at April 1, 2018. A “non-same-store” property is a property that was acquired, placed into service or disposed of after April 1, 2018. As of June 30, 2019, 34 properties were categorized as same-store properties.
The following table presents the same-store results from operations for the three months ended June 30, 2019 and 2018:
 
 
For the Three Months Ended June 30,
 
 
 
 
 
 
2019
 
2018
 
Change $
 
Change %
Same-store properties:
 
 
 
 
 
 
 
 
Revenues
 
$
43,214,828

 
$
42,288,498

 
$
926,330

 
2.2
 %
Operating expenses
 
19,031,263

 
17,947,290

 
1,083,973

 
6.0
 %
Net operating income
 
24,183,565

 
24,341,208

 
(157,643
)
 
(0.6
)%
 
 
 
 
 
 
 
 
 
Non-same-store properties:
 
 
 
 
 
 
 
 
Net operating income
 

 

 

 
 
 
 
 
 
 
 
 
 
 
Total Net operating income(1)
 
$
24,183,565

 
$
24,341,208

 
$
(157,643
)
 
 
________________
(1)
See “—Net Operating Income” below for a reconciliation of NOI to net loss.
Net Operating Income
Same-store net operating income for the three months ended June 30, 2019, was $24,183,565, compared to $24,341,208 for the three months ended June 30, 2018. The 0.6% decrease in same-store net operating income was a result of a 2.2% increase in same-store rental revenues offset by a 6.0% increase in same-store operating expenses.
Revenues
Same-store revenues for the three months ended June 30, 2019, were $43,214,828, compared to $42,288,498 for the three months ended June 30, 2018. The 2.2% increase in same-store revenues was primarily due to average rent increases at the same-store properties from $1,153 as of June 30, 2018, to $1,189 as of June 30, 2019, as a result of ordinary monthly rent increases and monthly rent increases and the completion of value-enhancement projects, partially offset by a same-store occupancy decrease from 94.4% as of June 30, 2018, to 93.8% as of June 30, 2019.
Operating Expenses
Same-store operating expenses for the three months ended June 30, 2019, were $19,031,263, compared to $17,947,290 for the three months ended June 30, 2018. The increase in same-store operating expenses was primarily attributable to higher real estate taxes, general and administrative costs, payroll and insurance costs during the three months ended June 30, 2019, compared to the three months ended June 30, 2018.

49


PART I — FINANCIAL INFORMATION (continued)


Net Operating Income
NOI is a non-GAAP financial measure of performance. NOI is used by investors and our management to evaluate and compare the performance of our properties, to determine trends in earnings and to compute the fair value of our properties as it is not affected by (1) the cost of funds, (2) acquisition costs, (3) non-operating fees to affiliates, (4) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP or (5) general and administrative expenses and other gains and losses that are specific to us. The cost of funds is eliminated from net income (loss) because it is specific to our particular financing capabilities and constraints. The cost of funds is also eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital which may have changed or may change in the future. Acquisition costs (those that did not meet the criteria for capitalization under ASU 2017-01) and non-operating fees to affiliates are eliminated because they do not reflect continuing operating costs of the property owner.
Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our multifamily properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale which will usually change from period to period. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed purchases or sales. We believe that eliminating these costs from net income (loss) is useful because the resulting measure captures the actual revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs.
However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, interest income and other expense, acquisition costs (those that did not meet the criteria for capitalization under ASU 2017-01), certain fees to affiliates, depreciation and amortization expense and gains or losses from the sale of properties, and other gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income which further limits its usefulness.
NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income (loss) as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income (loss) computed in accordance with GAAP and discussions elsewhere in “—Results of Operations” regarding the components of net income (loss) that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.
The following is a reconciliation of our NOI to net loss for the three and six months ended June 30, 2019 and 2018 computed in accordance with GAAP:
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Net loss
 
$
(11,993,010
)
 
$
(8,946,178
)
 
$
(24,352,282
)
 
$
(16,964,272
)
Fees to affiliates(1)
 
4,174,176

 
4,281,765

 
8,334,328

 
8,544,018

Depreciation and amortization
 
18,515,635

 
17,629,793

 
36,797,927

 
35,065,143

Interest expense
 
12,165,781

 
10,231,952

 
24,399,076

 
19,346,307

Loss on debt extinguishment
 

 

 
41,609

 

General and administrative expenses
 
2,062,769

 
1,330,544

 
3,943,353

 
2,709,066

Other gains(2)
 
(741,786
)
 
(186,668
)
 
(923,169
)
 
(373,763
)
Net operating income
 
$
24,183,565

 
$
24,341,208

 
$
48,240,842

 
$
48,326,499

____________________

50


PART I — FINANCIAL INFORMATION (continued)


(1)
Fees to affiliates for the three and six months ended June 30, 2019, exclude property management fees of $1,245,150 and $2,479,427 and other reimbursements of $846,632 and $1,517,851, respectively, that are included in NOI. Fees to affiliates for the three and six months ended June 30, 2018, exclude property management fees of $1,221,040 and $2,412,207 and other reimbursements of $323,898 and $667,156, respectively, that are included in NOI.
(2)
Other gains for the three and six months ended June 30, 2019 and 2018, includes non-recurring insurance claim recoveries and interest income that are not included in NOI.
Funds from Operations and Modified Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, NAREIT, an industry trade group, has promulgated a measure known as FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income (loss) as determined under GAAP.
We define FFO, a non-GAAP financial measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in December 2018, or the White Paper. The White Paper defines FFO as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property and non-cash impairment charges of real estate related investments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indications exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges. Our FFO calculation complies with NAREIT’s policy described above.
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. We adopted ASU 2016-02, Leases, or ASU 2016-02 on January 1, 2019, which requires us, as a lessee, to recognize a liability for obligations under a lease contract and a right-of-use asset. The carrying amount of the right-of-use asset is amortized over the term of the lease. Because we have no ownership rights (current or residual) in the underlying asset, NAREIT concluded that the amortization of the right-of-use asset should not be added back to GAAP net income (loss) in calculating FFO. This amortization expense is included in FFO. However, FFO, and MFFO as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.
Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that

51


PART I — FINANCIAL INFORMATION (continued)


are typically accounted for as operating expenses. Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that public, non-listed REITs, like us, are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases. Our board of directors will determine to pursue a liquidity event when it believes that the then-current market conditions are favorable. However, our board of directors does not anticipate evaluating a liquidity event (i.e., listing of our common stock on a national exchange, a merger or sale of our company or another similar transaction) until five years after the completion of our offering stage. Thus, as a limited life REIT, we will not continuously purchase assets and will have a limited life.
Due to the above factors and other unique features of publicly registered, non-listed REITs, the IPA, an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a public, non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that are not capitalized, as discussed below, and affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our offering has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired.
We define MFFO, a non-GAAP financial measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we rely on our advisor for managing interest rate, hedge and foreign exchange risk, we do not retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such non-recurring gains and losses in calculating MFFO, as such gains and losses are not reflective of on-going operations.
Our MFFO calculation complies with the IPA’s Practice Guideline described above, except with respect to certain acquisition fees and expenses as discussed below. In calculating MFFO, we exclude acquisition related expenses, amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests. Historically under GAAP, acquisition fees and expenses were characterized as operating expenses in determining operating net income. However, following the recent publication of ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of business (“ASU 2017-01”), acquisition fees and expenses are capitalized and depreciated under certain conditions. We elected to early adopt ASU 2017-01 but did not experience a material impact from adopting this guidance. These expenses are paid in cash by us. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash

52


PART I — FINANCIAL INFORMATION (continued)


flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. The acquisition of properties, and the corresponding acquisition fees and expenses, is the key operational feature of our business plan to generate operational income and cash flow to fund distributions to its stockholders. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance.
Our management uses MFFO and the adjustments used to calculate MFFO in order to evaluate our performance against other public, non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate MFFO allow us to present our performance in a manner that reflects certain characteristics that are unique to public, non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. By excluding expensed acquisition costs, that are not capitalized, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.
Presentation of this information is intended to provide useful information to investors as they compare the operating performance to that of other public, non-listed REITs, although it should be noted that not all public, non-listed REITs calculate FFO and MFFO the same way, so comparisons with other public, non-listed REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. MFFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining MFFO.
Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and in response to such standardization we may have to adjust our calculation and characterization of FFO or MFFO accordingly.
Our calculation of FFO and MFFO is presented in the following table for the three and six months ended June 30, 2019 and 2018:
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Reconciliation of net loss to MFFO:
 
 
 
 
 
 
 
 
Net loss
 
$
(11,993,010
)
 
$
(8,946,178
)
 
$
(24,352,282
)
 
$
(16,964,272
)
  Depreciation of real estate assets
 
18,515,635

 
17,629,793

 
36,797,927

 
35,065,143

FFO
 
6,522,625

 
8,683,615

 
12,445,645

 
18,100,871

  Acquisition fees and expenses(1)(2)
 
449,711

 

 
808,468

 

  Unrealized loss (gain) on derivative instruments
 
20,107

 
(131,281
)
 
199,723

 
(578,894
)
  Loss on debt extinguishment
 

 

 
41,609

 

MFFO
 
$
6,992,443

 
$
8,552,334

 
$
13,495,445

 
$
17,521,977

________________

53


PART I — FINANCIAL INFORMATION (continued)


(1)
By excluding expensed acquisition costs that are not capitalized, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our advisor or third parties. Historically under GAAP, acquisition fees and expenses were considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. Following the publication of ASU 2017-01, acquisition fees and expenses are capitalized and depreciated under certain conditions. We elected to early adopt ASU 2017-01, but did not experience a material impact from adopting this new guidance. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property. The acquisition of properties, and the corresponding acquisition fees and expenses, is the key operational feature of our business plan to generate operational income and cash flow to fund distributions to its stockholders.
(2)
Acquisition fees and expenses for the three and six months ended June 30, 2019 and 2018 include acquisition expenses of $449,711 and $808,468 and $0 and $0, respectively, that did not meet the criteria for capitalization under ASU 2017-01 and are recorded in general and administrative expenses in the accompanying consolidated statements of operations.
FFO and MFFO may be used to fund all or a portion of certain capitalizable items that are excluded from FFO and MFFO, such as tenant improvements, building improvements and deferred leasing costs.
Off-Balance Sheet Arrangements
As of June 30, 2019, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Related-Party Transactions and Agreements
We have entered into agreements with our advisor and its affiliates, whereby we pay certain fees to, or reimburse certain expenses of, our advisor or its affiliates for acquisition and advisory fees and expenses, financing coordination fees, organization and offering costs, sales commissions, dealer manager fees, asset and property management fees and expenses, leasing fees and reimbursement of certain operating costs. Refer to Note 7 (Related Party Arrangements) to the unaudited consolidated financial statements included in this quarterly report for a discussion of the various related-party transactions, agreements and fees.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We may be exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity and to fund the acquisition, expansion and refinancing of our real estate investment portfolio and operations. We may be also exposed to the effects of changes in interest rates as a result of the acquisition and origination of mortgage, mezzanine, bridge and other loans. Our profitability and the value of our investment portfolio may be adversely affected during any period as a result of interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs. We have managed and will continue to manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that floating rate exposure is kept at an acceptable level. In addition, we may utilize a variety of financial instruments, including interest rate caps, collars, floors and swap agreements, in order to limit the effects of changes in interest rates on our operations. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for distributions to holders of our common stock and that the losses may exceed the amount we invested in the instruments.
We borrow funds and make investments at a combination of fixed and variable rates. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. At June 30, 2019, the fair value of our fixed rate debt was $740,989,248 and the carrying value of our fixed rate debt was $692,116,090. The fair value estimate of our fixed rate debt was estimated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar

54


PART I — FINANCIAL INFORMATION (continued)


type and remaining maturity if the loans were originated at June 30, 2019. As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed rate instruments, would have a significant impact on our operations.
Conversely, movements in interest rates on our variable rate debt will change our future earnings and cash flows, but not significantly affect the fair value of those instruments. However, changes in required risk premiums will result in changes in the fair value of floating rate instruments. At June 30, 2019, the fair value of our variable rate debt was $355,217,634 and the carrying value of our variable rate debt was $358,094,751. Based on interest rates as of June 30, 2019, if interest rates are 100 basis points higher during the 12 months ending June 30, 2020, interest expense on our variable rate debt would increase by $3,661,855 and if interest rates are 100 basis points lower during the 12 months ending June 30, 2020, interest expense on our variable rate debt would decrease by $3,661,855.
At June 30, 2019, the weighted-average interest rate of our fixed rate debt and variable rate debt was 4.47% and 4.34%, respectively. The weighted-average interest rate of our blended fixed and variable rates was 4.42% at June 30, 2019. The weighted-average interest rate represents the actual interest rate in effect at June 30, 2019 (consisting of the contractual interest rate), using interest rate indices as of June 30, 2019, where applicable.
We may also be exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for us. If the fair value of a derivative contract is negative, we will owe the counterparty and, therefore, do not have credit risk. We will seek to minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties. As of June 30, 2019, we did not have counterparty risk on our interest rate cap agreements as the underlying variable rates for each of our interest rate cap agreements as of June 30, 2019 were not in excess of the capped rates. See also Note 10 (Derivative Financial Instruments) to our unaudited consolidated financial statements included in this quarterly report.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily are required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of June 30, 2019, was conducted under the supervision and with the participation of our management, including our chief executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and principal financial officer concluded that our disclosure controls and procedures, as of June 30, 2019, were effective at the reasonable assurance level.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

55


PART II — OTHER INFORMATION

PART II
Item 1. Legal Proceedings
From time to time, we are party to legal proceedings that arise in the ordinary course of our business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by government agencies.
Item 1A. Risk Factors
Except as set forth below there have been no material changes to the risk factors contained in Part I, Item 1A set forth in our Annual Report on Form 10-K filed with the SEC on March 14, 2019.

Our shares of common stock will not be listed on an exchange for the foreseeable future, if ever, and we are not required to provide for a liquidity event. Therefore, it may be difficult for stockholders to sell their shares and, if stockholders are able to sell their shares, they will likely sell them at a substantial discount.

There is currently no public market for our shares and there may never be one. Moreover, investors should not rely on our share repurchase plan as a method to sell shares promptly because our share repurchase plan includes numerous restrictions that limit stockholders’ ability to sell shares to us, and our board of directors may amend, reduce or terminate our share repurchase plan upon 30 days’ prior notice to our stockholders for any reason it deems appropriate. In particular, our board of directors amended and restated our share repurchase plan, to be effective on September 5, 2019, in connection with our announcement of the proposed SIR Merger and STAR III Merger. The amended and restated share repurchase plan, or Amended and Restated SRP, only provides stockholders with an opportunity to have their shares of common stock repurchased by us in connection with the death or qualifying disability of a stockholder, subject to certain terms and conditions specified in the Amended & Restated SRP. We will not make any share repurchases unless we have sufficient funds available for repurchase, which could include other operating funds that may be authorized by our board of directors, and the applicable quarterly limitations described in the Amended & Restated SRP have not been reached, and to the extent the total number of shares for which repurchase is requested does not exceed 5% of the number of shares of our common stock outstanding on December 31st of the previous calendar year. Our board of directors may reject any request for repurchase of shares. Therefore, stockholders may not have the opportunity to make a repurchase request under the Amended & Restated SRP and stockholders may not be able to sell any of their shares of common stock back to us pursuant to the Amended & Restated SRP. Moreover, if stockholders are able to sell their shares back to us, it may not be for the same price they paid for the shares of common stock being repurchased. In the event the mergers are consummated, we expect to communicate the terms of the combined company’s share repurchase plan, which will be determined by the board of directors at a future time. Investor suitability standards imposed by certain states may also make it more difficult to sell shares to someone in those states. The shares should be purchased as a long-term investment only.

In the future, our board of directors may consider various forms of liquidity, each of which is referred to as a liquidity event, including, but not limited to: (1) dissolution and winding up our assets; (2) merger or sale of all or substantially all of our assets; or (3) the listing of shares on a national securities exchange. However, because our charter does not require us to pursue a liquidity event by a specified date, investors should be prepared to hold your shares for an indefinite period of time.

Completion of each merger is subject to many conditions and if these conditions are not satisfied or waived, such merger will not be completed.

The SIR Merger Agreement and the STAR III Merger Agreement each are subject to many conditions that must be satisfied or waived in order to complete the respective mergers. The mutual conditions of the parties to each merger agreement include, among others: (i) the approval of the merger and respective charter amendments with SIR and STAR III by the holders of a majority of the outstanding shares of SIR common stock or STAR III common stock, as applicable; (ii) the absence of any law or order that would prohibit, restrain, enjoin, or make illegal either merger or any of the transactions contemplated by either merger agreement; and (iii) the receipt of all consents, authorizations, orders or approvals of each governmental authority necessary for the consummation of each merger and the other transactions contemplated by each merger agreement. In addition, each party’s obligation to consummate the SIR Merger or the STAR III Merger, as applicable, is subject to certain other conditions, including, among others: (y) the accuracy of the other party’s representations and warranties (subject to customary

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PART II — OTHER INFORMATION (continued)

materiality qualifiers and other customary exceptions); and (z) the other party’s compliance with its covenants and agreements contained in the respective merger agreement.

There can be no assurance that the conditions to closing of each merger will be satisfied or waived or that each merger will be completed. Failure to consummate either merger may adversely affect our results of operations and business prospects for the following reasons, among others: (i) we incurred, and will incur additional, transaction costs, regardless of whether each proposed merger closes, which could adversely affect our financial condition, results of operations and ability to make distributions to our stockholders; and (ii) the proposed mergers, whether or not each closes, will divert the attention of certain management and other key employees of our affiliates from ongoing business activities, including the pursuit of other opportunities that could be beneficial to us.

The mergers and the other transactions contemplated by the merger agreements are subject to approval by stockholders of SIR and STAR III, respectively.

In order for the mergers to be completed, SIR and STAR III’s stockholders, respectively, must approve the SIR Merger and the STAR III Merger, and the respective charter amendments to delete certain provisions regarding roll-up transactions. which requires the affirmative vote of holders of a majority of the outstanding shares of SIR’s common stock and STAR III’s common stock, as applicable, at the special meeting of SIR stockholders and STAR III stockholders. If each required vote is not obtained by April 30, 2020, the mergers may not be consummated.

There may be unexpected delays in the consummation of the mergers.

The mergers are each expected to close during the first quarter of 2020, assuming that all of the conditions in the respective merger agreements are satisfied or waived. The SIR Merger Agreement and the STAR III Merger Agreement provide that either we or, as applicable, SIR or STAR III may terminate the SIR Merger Agreement or the STAR III Merger Agreement if each respective merger has not occurred by April 30, 2020. Certain events may delay the consummation of each merger. Some of the events that could delay the consummation of the each merger includes difficulties in obtaining the approval of the SIR stockholders or the STAR III stockholders, as applicable, or satisfying the other closing conditions to which each merger is subject.

Development and construction risks could affect our profitability.

We intend to develop multifamily properties. These activities can include lengthy planning and entitlement timelines and can involve complex and costly activities, including significant environmental remediation or construction work in our markets. We may experience an increase in costs associated with trade disruptions and tariffs. We may abandon opportunities (including land that we have optioned for purchase) that we have already begun to explore for a number of reasons, including changes in local market conditions or increases in construction or financing costs, and, as a result, we may fail to recover expenses or option payments already incurred in exploring those opportunities. The occupancy rates and rents at a property 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 properties. We may be unable to obtain, or experience delays in obtaining, necessary zoning, occupancy, or other required governmental or third party permits and authorizations, which could result in increased costs or the delay or abandonment of opportunities and impairment charges.

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PART II — OTHER INFORMATION (continued)

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended June 30, 2019, we did not sell any equity securities that were not registered under the Securities Act.
 
 
Total Number of Shares Requested to be Repurchased(1)
 
Total Number of Shares Repurchased
 
Average Price Paid per Share(2)(3)
 
Approximate Dollar Value of Shares Available That May Yet Be Repurchased Under the Program
April 2019
 
97,417

 

 
$

 
(4) 
May 2019
 
183,346

 
135,885

 
14.72

 
(4) 
June 2019
 
74,844

 

 

 
(4) 
 
 
355,607

 
135,885

 
 
 
 
____________________
(1)
We generally repurchase shares approximately 30 days following the end of the applicable quarter in which requests were received. At June 30, 2019, we had $2,000,000, representing 135,389 shares of outstanding and unfulfilled repurchase requests, all of which were fulfilled on July 31, 2019.
(2)
We currently repurchase shares at prices determined as follows:
92.5% of the Share Repurchase Price for stockholders who have held their shares for at least one year;
95.0% of the Share Repurchase Price for stockholders who have held their shares for at least two years;
97.5% of the Share Repurchase Price for stockholders who have held their shares for at least three years; and
100% of the Share Repurchase Price for stockholders who have held their shares for at least four years.
The share repurchase price is 93% of the most recently determined estimated value per share. Notwithstanding the above, the repurchase price for repurchases sought upon a stockholder’s death, “qualifying disability” or “determination of incompetence” will be the amount the respective stockholder paid to acquire the shares from us.
(3)
From inception through June 30, 2019, our share repurchases have been funded exclusively from the net proceeds we received from the sale of shares under our distribution reinvestment plan.
(4)
The number of shares that may be repurchased pursuant to the share repurchase plan during any calendar year is limited to the lesser of (1) 5% of the weighted-average number of shares outstanding during the prior calendar year or the $2,000,000 limit for any quarter and (2) those that can be funded from net proceeds we received from the sale of shares under the distribution reinvestment plan during the prior calendar year, plus such additional funds as may be reserved for that purpose by our board of directors.
Item 3. Defaults Upon Senior Securities
None.
Item 4.  Mine Safety Disclosures
Not applicable.
Item 5.  Other Information
None.

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PART II — OTHER INFORMATION (continued)

Item 6.   Exhibits
EXHIBIT LIST
Exhibit
 
Description
2.1

 
2.2

 
3.1

 
3.2

 
4.1

 
4.2

 
4.3

 
4.5

 
4.6

 
10.1

 
99.1

 
______________
*
 
Filed herewith.
**
 
In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.



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SIGNATURES 
Pursuant to the requirements of Section 13 or 15(d) 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.
 
 
Steadfast Apartment REIT, Inc.
 
 
 
 
 
 
Date:
August 13, 2019
By:
/s/ Rodney F. Emery
 
 
 
Rodney F. Emery
 
 
 
Chief Executive Officer and Chairman of the Board
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
August 13, 2019
By:
/s/ Kevin J. Keating
 
 
 
Kevin J. Keating
 
 
 
Chief Financial Officer and Treasurer
 
 
 
(Principal Financial and Accounting Officer)



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