10-Q 1 ck0001592745-10q_20170930.htm 10-Q ck0001592745-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2017

OR

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 333-200221

 

NexPoint Multifamily Capital Trust, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Maryland

 

46-4106316

(State or other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

300 Crescent Court, Suite 700, Dallas, Texas

 

75201

(Address of Principal Executive Offices)

 

(Zip Code)

(972) 628-4100

(Telephone Number, Including Area Code)

N/A

(Former name, former address or former fiscal year, if changed since last report)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      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

 

Accelerated Filer

Non-Accelerated Filer

      (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

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

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

As of November 9, 2017, the registrant had 1,143,186 shares of Class A common stock, $0.01 par value, outstanding and 0 shares of Class T common stock, $0.01 par value, outstanding.

 

 

 

 

 


 

NEXPOINT MULTIFAMILY CAPITAL TRUST, INC.

Form 10-Q

September 30, 2017

 

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION

 

 

 

Page

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016

2

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)

3

 

 

 

 

Consolidated Statement of Equity for the Nine Months Ended September 30, 2017 (unaudited)

4

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)

5

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

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

36

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

 

 

 

Item 4.

Controls and Procedures

54

 

 

 

PART II—OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

55

 

 

 

Item 1A.

Risk Factors

55

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

55

 

 

 

Item 3.

Defaults Upon Senior Securities

56

 

 

 

Item 4.

Mine Safety Disclosures

56

 

 

 

Item 5.

Other Information

56

 

 

 

Item 6.

Exhibits

56

 

 

 

Signatures

57

1


 

NEXPOINT MULTIFAMILY CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Operating Real Estate Investments

 

 

 

 

 

 

 

 

Land (including from VIEs of $5,080 and $5,080, respectively)

 

$

5,080

 

 

$

5,080

 

Buildings and improvements (including from VIEs of $35,511 and $35,432, respectively)

 

 

35,511

 

 

 

35,432

 

Construction in progress (including from VIEs of $32 and $44, respectively)

 

 

32

 

 

 

44

 

Furniture, fixtures and equipment (including from VIEs of $1,108 and $1,013, respectively)

 

 

1,108

 

 

 

1,013

 

Total Gross Operating Real Estate Investments

 

 

41,731

 

 

 

41,569

 

Accumulated depreciation and amortization (including from VIEs of $3,102 and $1,927, respectively)

 

 

(3,102

)

 

 

(1,927

)

Total Net Operating Real Estate Investments

 

 

38,629

 

 

 

39,642

 

Cash and cash equivalents (including from VIEs of $464 and $282, respectively)

 

 

1,117

 

 

 

456

 

Restricted cash (including from VIEs of $354 and $227, respectively)

 

 

354

 

 

 

227

 

Accounts receivable (including from VIEs of $21 and $39, respectively)

 

 

45

 

 

 

164

 

Prepaid and other assets (including from VIEs of $37 and $23, respectively)

 

 

694

 

 

 

87

 

Preferred equity investment

 

 

5,429

 

 

 

5,250

 

TOTAL ASSETS

 

$

46,268

 

 

$

45,826

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Mortgage payable, net (including from VIEs of $26,782 and $26,745, respectively)

 

 

26,782

 

 

 

26,745

 

Credit facility, net

 

 

11,000

 

 

 

10,944

 

Accounts payable and other accrued liabilities (including from VIEs of $123 and $171, respectively)

 

 

2,653

 

 

 

851

 

Accrued real estate taxes payable (including from VIEs of $295 and $193, respectively)

 

 

295

 

 

 

193

 

Accrued interest payable (including from VIEs of $70 and $58, respectively)

 

 

70

 

 

 

58

 

Security deposit liability (including from VIEs of $69 and $65, respectively)

 

 

69

 

 

 

65

 

Prepaid rents (including from VIEs of $47 and $47, respectively)

 

 

47

 

 

 

47

 

Distributions payable

 

 

68

 

 

 

52

 

Due to affiliates

 

 

227

 

 

 

227

 

Total Liabilities

 

 

41,211

 

 

 

39,182

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

12.5% Series A Cumulative Preferred stock, $.01 par value; 10,000,000 shares authorized; 125 and 0 shares issued and outstanding, respectively

 

 

 

 

 

 

Class A Common stock, $.01 par value; 500,000,000 shares authorized; 1,133,332 and 975,824 shares issued and outstanding, respectively

 

 

12

 

 

 

10

 

Class T Common stock, $.01 par value; 500,000,000 shares authorized; 0 shares issued and outstanding

 

 

 

 

 

 

Additional paid-in capital

 

 

11,055

 

 

 

9,483

 

Accumulated deficit

 

 

(6,589

)

 

 

(3,471

)

Accumulated other comprehensive loss

 

 

(25

)

 

 

(25

)

Total Stockholders' Equity

 

 

4,453

 

 

 

5,997

 

Noncontrolling interests

 

 

604

 

 

 

647

 

Total Equity

 

 

5,057

 

 

 

6,644

 

TOTAL LIABILITIES AND EQUITY

 

$

46,268

 

 

$

45,826

 

 

See Notes to Consolidated Financial Statements

2


 

NEXPOINT MULTIFAMILY CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

884

 

 

$

861

 

 

$

2,671

 

 

$

2,572

 

Other income

 

 

150

 

 

 

123

 

 

 

387

 

 

 

318

 

Total revenues

 

 

1,034

 

 

 

984

 

 

 

3,058

 

 

 

2,890

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

284

 

 

 

238

 

 

 

737

 

 

 

677

 

Real estate taxes and insurance

 

 

112

 

 

 

111

 

 

 

341

 

 

 

335

 

Property management fees (1)

 

 

31

 

 

 

29

 

 

 

92

 

 

 

87

 

Asset management fees (2)

 

 

89

 

 

 

93

 

 

 

262

 

 

 

175

 

Corporate general and administrative expenses

 

 

1,693

 

 

 

266

 

 

 

2,217

 

 

 

797

 

Organization expenses

 

 

 

 

 

1

 

 

 

14

 

 

 

16

 

Property general and administrative expenses

 

 

46

 

 

 

36

 

 

 

141

 

 

 

112

 

Depreciation and amortization

 

 

394

 

 

 

360

 

 

 

1,175

 

 

 

1,228

 

Total expenses

 

 

2,649

 

 

 

1,134

 

 

 

4,979

 

 

 

3,427

 

Operating loss

 

 

(1,615

)

 

 

(150

)

 

 

(1,921

)

 

 

(537

)

Interest expense

 

 

(404

)

 

 

(413

)

 

 

(1,130

)

 

 

(1,063

)

Equity in income of preferred equity investments

 

 

146

 

 

 

231

 

 

 

434

 

 

 

397

 

Net loss

 

 

(1,873

)

 

 

(332

)

 

 

(2,617

)

 

 

(1,203

)

Net income (loss) attributable to noncontrolling interests

 

 

(4

)

 

 

2

 

 

 

(4

)

 

 

(4

)

Net loss attributable to NexPoint Multifamily Capital Trust, Inc.

 

 

(1,869

)

 

 

(334

)

 

 

(2,613

)

 

 

(1,199

)

Net income attributable to Series A preferred stockholders

 

 

4

 

 

 

 

 

 

11

 

 

 

 

Net loss attributable to common stockholders

 

$

(1,873

)

 

$

(334

)

 

$

(2,624

)

 

$

(1,199

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on interest rate cap

 

 

 

 

 

(1

)

 

 

 

 

 

(7

)

Total comprehensive loss

 

 

(1,873

)

 

 

(333

)

 

 

(2,617

)

 

 

(1,210

)

Comprehensive income (loss) attributable to noncontrolling interests

 

 

(4

)

 

 

2

 

 

 

(4

)

 

 

(4

)

Comprehensive loss attributable to NexPoint Multifamily Capital Trust, Inc.

 

$

(1,869

)

 

$

(335

)

 

$

(2,613

)

 

$

(1,206

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average Class A common shares outstanding - basic

 

 

1,133

 

 

 

683

 

 

 

1,092

 

 

 

611

 

Weighted average Class A common shares outstanding - diluted

 

 

1,144

 

 

 

695

 

 

 

1,106

 

 

 

619

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per Class A common share - basic and diluted

 

$

(1.65

)

 

$

(0.49

)

 

$

(2.40

)

 

$

(1.96

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared per Class A common share

 

$

0.151

 

 

$

0.100

 

 

$

0.448

 

 

$

0.100

 

 

(1)

Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling interest members of the Company (see Notes 4 and 10).

(2)

Fees incurred to the Company’s advisor (see Notes 1 and 10).

See Notes to Consolidated Financial Statements

 

3


 

NEXPOINT MULTIFAMILY CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

(dollars in thousands)

(Unaudited)

 

 

 

Preferred Stock

 

 

Class A Common Stock

 

 

Class T Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

of Shares

 

 

Par

Value

 

 

Number

of Shares

 

 

Par

Value

 

 

Number

of Shares

 

 

Par

Value

 

 

Additional

Paid-

in Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Noncontrolling

Interests

 

 

Total

Equity

 

Balances, December 31, 2016

 

 

 

 

$

 

 

 

975,824

 

 

$

10

 

 

 

 

 

$

 

 

$

9,483

 

 

$

(3,471

)

 

$

(25

)

 

$

647

 

 

$

6,644

 

Issuance of Class A common stock

 

 

 

 

 

 

 

 

 

 

154,508

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

1,430

 

 

 

 

 

 

 

 

 

 

 

 

1,432

 

Issuance of Series A cumulative preferred stock

 

 

125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

125

 

 

 

 

 

 

 

 

 

 

 

 

125

 

Commissions on sales of Series A cumulative preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

(6

)

Vesting of stock-based compensation

 

 

 

 

 

 

 

 

 

 

3,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

 

 

 

23

 

Distributions declared on Class A common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(494

)

 

 

 

 

 

 

 

 

(494

)

Distributions declared on Series A cumulative preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11

)

 

 

 

 

 

 

 

 

(11

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(39

)

 

 

(39

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,613

)

 

 

 

 

 

(4

)

 

 

(2,617

)

Balances, September 30, 2017

 

 

125

 

 

$

 

 

 

1,133,332

 

 

$

12

 

 

 

 

 

$

 

 

$

11,055

 

 

$

(6,589

)

 

$

(25

)

 

$

604

 

 

$

5,057

 

 

See Notes to Consolidated Financial Statements

 

 

4


 

NEXPOINT MULTIFAMILY CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(2,617

)

 

$

(1,203

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,175

 

 

 

1,228

 

Equity in income of preferred equity investments

 

 

(434

)

 

 

(397

)

Distributions from preferred equity investments

 

 

314

 

 

 

397

 

Amortization of deferred financing costs

 

 

123

 

 

 

120

 

Vesting of stock-based compensation

 

 

23

 

 

 

13

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Operating assets

 

 

68

 

 

 

(183

)

Operating liabilities

 

 

1,304

 

 

 

597

 

Net cash provided by (used in) operating activities

 

 

(44

)

 

 

572

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Preferred equity investment originations

 

 

 

 

 

(11,250

)

Additions to operating real estate investment

 

 

(165

)

 

 

(882

)

Net cash used in investing activities

 

 

(165

)

 

 

(12,132

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Credit facility proceeds received

 

 

 

 

 

19,386

 

Bridge loan payments

 

 

 

 

 

(10,000

)

Deferred financing costs paid

 

 

(30

)

 

 

(145

)

Proceeds from issuance of Class A common stock

 

 

1,117

 

 

 

2,131

 

Payments of commissions on sale of Class A common stock and related dealer manager fees

 

 

 

 

 

(3

)

Proceeds from issuance of Series A cumulative preferred stock

 

 

125

 

 

 

 

Payments of commissions on sale of Series A cumulative preferred stock

 

 

(6

)

 

 

 

Distributions to Class A common stockholders

 

 

(163

)

 

 

(11

)

Distributions to Series A preferred stockholders

 

 

(7

)

 

 

 

Distributions to noncontrolling interests

 

 

(39

)

 

 

(22

)

Net cash provided by financing activities

 

 

997

 

 

 

11,336

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and restricted cash

 

 

788

 

 

 

(224

)

Cash and restricted cash, beginning of period

 

 

683

 

 

 

969

 

Cash and restricted cash, end of period

 

$

1,471

 

 

$

745

 

 

See Notes to Consolidated Financial Statements

 

 

5


 

NEXPOINT MULTIFAMILY CAPITAL TRUST, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

992

 

 

$

939

 

Supplemental Disclosure of Noncash Activities

 

 

 

 

 

 

 

 

Increase in distributions payable

 

 

16

 

 

 

35

 

Capitalized construction costs included in accounts payable and other accrued liabilities

 

 

42

 

 

 

87

 

Change in fair value on derivative instruments designated as hedges

 

 

 

 

 

7

 

Distributions paid to Class A common stockholders through common stock issuances pursuant to the distribution reinvestment plan (see Note 8)

 

 

319

 

 

 

23

 

Deferred offering costs included in prepaid and other assets and accounts payable and other accrued liabilities (see Note 2)

 

 

619

 

 

 

 

Noncash contribution by Advisor

 

 

 

 

 

501

 

 

See Notes to Consolidated Financial Statements

 

6


 

NEXPOINT MULTIFAMILY CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Description of Business

NexPoint Multifamily Capital Trust, Inc. (the “Company”) was incorporated on November 12, 2013 as a Maryland corporation, and intends to elect to be taxed as a real estate investment trust (“REIT”) beginning with its 2017 tax year. The Company is externally managed by NexPoint Real Estate Advisors II, L.P. (the “Advisor”) through an agreement, as amended, dated August 10, 2015, and renewed on August 10, 2017 for an additional one-year term set to expire on August 10, 2018 (the “Advisory Agreement”). Substantially all of the Company’s assets are owned by NexPoint Multifamily Operating Partnership, L.P. (the “OP”), the Company’s operating partnership. The Company is the sole general partner and a limited partner of the OP. The special limited partner of the OP is the Advisor.

The Company’s primary investment objectives are to provide current income for stockholders through the payment of cash distributions, preserve and return stockholders’ capital contributions and realize capital appreciation on the Company’s assets. All assets may be acquired and operated by the Company alone or jointly with another party.

On August 12, 2015, the Company’s registration statement on Form S-11 (File No. 333-200221) (the “Registration Statement”) for a continuous offering of a maximum of $1.1 billion of common stock, $0.01 par value per share (the “Continuous Offering”), which consisted of $1.0 billion in shares of common stock in the Company’s primary offering and $100 million in shares of common stock pursuant to the Company’s distribution reinvestment plan (the “DRIP”), was declared effective by the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”). The initial offering price for the shares sold in the primary offering was $10.00 per Class A share of common stock and $9.58 per Class T share of common stock. The initial offering price for the shares sold in the DRIP was $9.50 per Class A share of common stock and $9.10 per Class T share of common stock. Highland Capital Funds Distributor, Inc. (the “Dealer Manager”), an entity under common ownership with the Advisor, served as the dealer manager of the Continuous Offering.

On July 21, 2017, the Company filed a post-effective amendment to the Registration Statement to terminate the Continuous Offering and deregister all of its unsold shares of Class A common stock and Class T common stock. The post-effective amendment was declared effective by the SEC on July 26, 2017.

If the Company’s common stock is not listed on a national securities exchange by 150 days after March 24, 2018, or the second anniversary of the date the Company broke escrow in the Continuous Offering, the Company will provide its stockholders with an initial estimated net asset value (“NAV”) per share of its Class A common stock based on a valuation conducted by an independent third-party valuation firm. The Company may provide an estimated NAV based on a valuation prior to such date. 

Substantially all of the net proceeds of the Continuous Offering were used to directly or indirectly acquire, own, operate and selectively develop well-located “core” and “core-plus” multifamily properties in large cities and suburban markets of large cities, primarily in the Southeastern and Southwestern United States. The Company also originates preferred equity investments with operators of well-located “core” and “core-plus” multifamily properties. Investing in both direct property investments and preferred equity investments is designed to minimize potential losses during market downturns and maximize risk adjusted total returns to the Company’s stockholders in all market cycles. To the extent practical, the Company implements a modest value-add component on “core-plus” properties that consists, on average, of investing $1,000 - $4,000 per unit in the first 24-36 months of ownership, in an effort to add value to the asset’s exterior and interior. The Company’s modest value-add program is implemented at the direction and supervision of the Advisor. The Company may also seek to invest in multifamily housing debt and mezzanine debt in situations where the risk/return correlation is more attractive than direct investments in common equity and originations of preferred equity investments. The Company may also invest in common and preferred stock of both publicly traded and private real estate companies. As of September 30, 2017, the Company owned one multifamily property and had one preferred equity investment in a multifamily property.

Pursuant to the terms of the Continuous Offering, offering proceeds were held in an escrow account until the Company raised the minimum offering amount of $2.0 million (the “Minimum Offering Requirement”). On March 24, 2016, the Company met the Minimum Offering Requirement and the proceeds held in escrow were released to the Company, thus allowing the Company to commence material operations. As of September 30, 2017, the Company had received a total of $6.2 million of gross offering proceeds, including approximately $458,700 of distributions reinvested through the DRIP.

On April 7, 2016, the Company acquired from Highland Capital Management, L.P., the Company’s sponsor (the “Sponsor”), the Sponsor’s indirect 95% interest (valued at approximately $39.6 million) in a 330-unit multifamily residential community located in Phoenix, Arizona, known as Estates on Maryland (“Estates”). The Sponsor contributed Estates to the Company at the original cost to

7


 

the Sponsor of approximately $39.6 million, less assumed debt encumbering the property, in exchange for approximately 434,783 shares of the Company’s Class A common stock, $0.01 par value, at $9.20 per share, reflecting the fact that selling commissions and dealer manager fees were not paid in connection with the sale. The Company, pursuant to the agreement entered into for the acquisition of Estates (the “Contribution Agreement”), then transferred the acquired interests to the OP in exchange for approximately 434,783 partnership units in the OP.

As of September 30, 2017, the Company had issued 1,108,110 shares of Class A common stock, including 48,298 shares of Class A common stock issued pursuant to the DRIP.

On July 21, 2017, the Company filed a registration statement on Form S-11 (the "Underwritten Offering Registration Statement") to register shares of its common stock to be sold in an underwritten public offering (the "Underwritten Offering") and subsequently amended the Underwritten Offering Registration Statement. If declared effective by the SEC, there can be no assurance that the Company will be able to complete the Underwritten Offering. The Company has elected to not pursue the Underwritten Offering at this time (but may do so in the future) but rather is seeking equity capital through a private offering (the “Private Offering”), which the Company was actively pursuing as of September 30, 2017.

The Company has changed its investment strategy to primarily focus on originating and structuring mezzanine debt, preferred equity investments, alternative structured financing investments, bridge financing and first mortgage loans in properties benefiting from significant tenant diversification and short-term lease structures, including primarily multifamily and to a lesser extent, storage and select-service and extended-stay hospitality properties. The Company intends to target its structured financings in stabilized and well located properties, primarily located in large cities and suburban markets of large cities in the United States, which have been well-maintained, have few deferred maintenance issues and are owned by experienced and high quality operators. The Company expects the size of its investments will vary significantly, but generally expects them to range in value from $5 million to $20 million, with the average investment size being approximately $7 million. The Company believes that these investment opportunities best meet its primary investment objectives as they contractually provide a high percentage of total return from current pay, are structured to mitigate impairments in the investments, and potentially provide equity-like, long-term total return opportunities, with lower risk than a typical direct equity investment in real estate.

On September 11, 2017, the Company held its annual meeting of stockholders (the “Annual Meeting”). The matters voted on at the Annual Meeting were as follows: (1) reelection of directors for a one-year term expiring in 2018, (2) approval of a form of the Company’s articles of amendment and restatement, (3) approval of a form of the Company’s amended and restated advisory agreement, (4) approval of a form of a long-term incentive plan, and (5) ratification of appointment of KPMG LLP as the Company’s independent registered public accounting firm for 2017. All matters submitted for approval by the Company’s stockholders, as described in the Company’s proxy statement, were approved. The amendments to the Company’s charter and the advisory agreement and the adoption of the long-term incentive plan will become effective upon a capital raise pursuant to the Underwritten Offering or the Private Offering.

2. Summary of Significant Accounting Policies

Common Control

The contribution of Estates by the Sponsor was accounted for as a combination of entities under common control; therefore, the Company accounted for the acquisition at historical cost in a manner similar to the pooling of interest method. Information included in the accompanying unaudited consolidated financial statements is presented as if Estates had been combined throughout the periods presented in which common control existed; the amounts included relating to Estates were determined in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). As such, the acquisition of Estates by the Company was deemed to be made on the date it was purchased by the Sponsor, which was August 5, 2015 (the “Original Acquisition Date”). Therefore, the accompanying unaudited consolidated financial statements are presented reflecting the acquisition of Estates as if it occurred on the Original Acquisition Date, rather than on April 7, 2016, the date on which the Company actually acquired Estates from the Sponsor.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company were prepared in accordance with GAAP as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC. The accompanying unaudited consolidated financial statements include the accounts of the Company and the OP and its subsidiaries. Because the Company is the sole general partner and a limited partner of the OP and has unilateral control over its management and major operating decisions (even if additional limited partners are admitted to the OP), the accounts of the OP are consolidated in the Company’s consolidated financial statements. The Company consolidates entities in which it controls more than 50% of the voting equity. Investments in real estate joint ventures over which the Company has the ability to exercise significant influence, but for which it does not have financial or operating control, are accounted for using the equity method of accounting. The

8


 

Company has one investment accounted for using the equity method of accounting that is reflected on the accompanying unaudited consolidated financial statements as “Preferred equity investment.” All intercompany balances and transactions are eliminated in consolidation.

In addition, the Company evaluates relationships with other entities to identify whether there are variable interest entities (“VIEs”) as required by FASB ASC 810, Consolidation (“FASB ASC 810”), and to assess whether the Company is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the consolidated financial statements in accordance with FASB ASC 810.

On January 1, 2016, the Company adopted Accounting Standards Update (“ASU”) No. 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), which amends the current consolidation guidance affecting both the VIE and voting interest entity (“VOE”) consolidation models. The standard does not add or remove any of the characteristics in determining if an entity is a VIE or VOE, but rather enhances the way the Company assesses some of these characteristics. The OP meets the criteria as a VOE; and as the Company holds a majority of the voting interest of the OP, the Company consolidates the OP. Substantially all of the Company’s assets and liabilities represent those assets and liabilities of the OP. All of the Company’s debt is an obligation of the OP.

In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements include all adjustments and eliminations, consisting only of normal recurring items necessary for their fair presentation in conformity with GAAP. The financial statements of the Company’s subsidiaries are prepared using accounting policies consistent with those of the Company. The unaudited consolidated financial statements, and the notes thereto, included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2016 and notes thereto included in its annual report on Form 10-K, filed with the SEC on March 28, 2017. There have been no significant changes to the Company’s significant accounting policies during the nine months ended September 30, 2017. 

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Real Estate Investments

Upon acquisition of real estate investments, except from related parties, the purchase price and related acquisition costs (“total consideration”) are allocated to land, buildings, improvements, furniture, fixtures, and equipment, and intangible lease assets in accordance with FASB ASC 805, Business Combinations, and the recently adopted ASU 2017-01, Clarifying the Definition of a Business (Topic 805) (“ASU 2017-01”), which the Company adopted on January 1, 2017 (see “Recent Accounting Pronouncements” below). The Company believes most future acquisition costs will be capitalized in accordance with ASU 2017-01. Prior to the Company’s adoption of ASU 2017-01, acquisition costs were expensed as incurred.

The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (“ASC 820”) (see Note 9), is based on management’s estimate of the property’s “as-if” vacant fair value. The “as-if” vacant fair value is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. The allocation of the total consideration to intangible lease assets represents the value associated with the in-place leases, which may include lost rent, leasing commissions, legal and other related costs, which the Company, as buyer of the property, did not have to incur to obtain the residents. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of the debt is recorded as a premium or discount and amortized to interest expense over the life of the debt assumed. Preferred equity investments are recorded at the value invested by the Company at the date of origination and accounted for under the equity method of accounting.

9


 

Real estate assets, including land, buildings, improvements, furniture, fixtures and equipment, and intangible lease assets are stated at historical cost less accumulated depreciation and amortization. Costs associated with the development and improvement of the Company’s real estate assets are capitalized as incurred. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. Real estate-related depreciation and amortization are computed on a straight-line basis over the estimated useful lives as described in the following table: 

 

Land

 

Not depreciated

 

Buildings

 

30 years

 

 

Improvements

 

15 years

 

 

Furniture, fixtures, and equipment

 

3 years

 

 

Intangible lease assets

 

6 months

 

 

 

Impairment

Real estate assets are reviewed for impairment periodically whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such cases, the Company will evaluate the recoverability of such real estate asset based on estimated future cash flows and the estimated liquidation value of such real estate asset, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value.

The Company considers various factors to determine if a decrease in the value of its equity method investments is other-than-temporary. These factors include, but are not limited to, age of the investment, the Company’s intent and ability to retain its investment in the entity, the financial condition and long-term prospects of the entity, and the relationships with the other joint venture partners and its lenders. After determining an other-than-temporary decrease in the value of an equity method investment has occurred, the Company estimates the fair value of its investment by estimating the proceeds the Company would receive upon a hypothetical liquidation of the investment at the date of measurement.

For the three and nine months ended September 30, 2017 and 2016, the Company did not record any impairment charges related to real estate assets or equity method investments.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value and may consist of investments in money market accounts. There are no restrictions on the use of the Company’s cash balance.

Restricted Cash

Restricted cash is comprised of security deposits, operating escrows, and renovation value-add reserves. Security deposits are held until they are due to tenants and are credited against the balance. Operating escrows are required and held by the joint venture’s first mortgage lender(s) for items such as real estate taxes, insurance, and required repairs. Lender held escrows are released back to the joint venture upon the borrower’s proof of payment of such expenses. Renovation value-add reserves are funds identified to finance the Company’s value-add renovations at its properties and are not required to be held in escrow by a third party. The Company may reallocate these funds, at its discretion, to pursue other investment opportunities. The following is a summary of the restricted cash held as of September 30, 2017 and December 31, 2016 (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Security deposits

 

$

69

 

 

$

65

 

Operating escrows

 

 

285

 

 

 

162

 

 

 

$

354

 

 

$

227

 

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Noncontrolling Interests

Noncontrolling interests are comprised of the Company’s joint venture partners’ interests in the joint venture in the multifamily property that the Company consolidates. The Company reports its joint venture partners’ interests in its consolidated real estate joint ventures and other subsidiary interests held by third parties as noncontrolling interests. The Company records these noncontrolling interests at their initial fair value, adjusting the basis prospectively for their share of the respective consolidated investment’s net income or loss and equity contributions and distributions. These noncontrolling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are allocated to the noncontrolling interest holder based on its economic ownership percentage.

Accounting for Joint Ventures

The Company accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with FASB ASC 810. The Company first evaluates whether each entity is a VIE. Under the VIE model, the Company consolidates an entity when it has the power to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest.

Revenue Recognition

The Company’s primary operations consist of rental income earned from its residents under lease agreements with terms of typically one year or less. Rental income is recognized when earned. This policy effectively results in rental income recognition on the straight-line method over the related terms of the leases. Resident reimbursements and other income consist of charges billed to residents for utilities, carport and garage rental, pets, administrative, application and other fees and are recognized when earned.

Equity in Income

The Company recognizes equity in income earned on a stated investment return from preferred equity investments it originates. Equity in income on the Company’s preferred equity investments is recorded under the equity method of accounting. The Company does not recognize equity in income earned on its preferred equity investments if there is a reason to doubt the Company’s ability to collect such income.

Asset Management & Property Management Services

Asset management fee and property management fee expenses are recognized when incurred in accordance with the Advisory Agreement and the property management agreement, respectively (see Note 10).

Organization and Offering Expenses

Organization and offering expenses include all expenses (other than selling commissions, the dealer manager fee and the distribution fee) to be paid by the Company in connection with the Continuous Offering. Typically, organization and offering expenses were initially paid by the Advisor and its affiliates and were reimbursed by the Company with certain limitations discussed below. Organization and offering expenses include, but are not limited to: (1) legal, accounting, printing, mailing and filing fees; (2) charges of the Company’s escrow agent and transfer agent; and (3) due diligence expense reimbursements to participating broker-dealers.

Organization expenses, when recognized, are expensed by the Company on the accompanying unaudited consolidated statements of operations and comprehensive loss. Offering costs, when recognized, are treated as a reduction of the total proceeds. Until recognized, these expenses are deferred and will be paid to the Advisor and its affiliates from the proceeds of the Continuous Offering, but only to the extent the reimbursement would not exceed 1.0% of the gross offering proceeds. The Advisor is responsible for the payment of organization and offering expenses the Company incurs in excess of 1.0% of the gross offering proceeds.

For the period from November 12, 2013 (inception) to September 30, 2017, the Advisor and its affiliates incurred organization and offering expenses of approximately $2.7 million. For the period from November 12, 2013 (inception) to September 30, 2017, the Company recognized approximately $0.1 million of organization and offering expenses as reimbursable to the Advisor and its affiliates, the maximum amount allowed under the 1.0% of gross offering proceeds limitation on reimbursement to the Advisor and its affiliates under the terms of the Continuous Offering. The remaining organization and offering expenses of approximately $2.6 million have not been accrued on the Company’s consolidated balance sheet as of September 30, 2017 and are not reimbursable under the current Advisory Agreement since the Continuous Offering was terminated on July 26, 2017.

In connection with the Underwritten Offering and the Private Offering, the Company has incurred approximately $2.2 million of offering costs. The Company initially records these costs in prepaid and other assets on the consolidated balance sheet. Upon a

11


 

successful completion of the Underwritten Offering or the Private Offering, the portion of these costs that have not been expensed will be charged against the gross offering proceeds. If the Company decides to abort the Underwritten Offering or the Private Offering, these costs, and any subsequent offering costs incurred in connection with the offerings, will be reclassified to corporate general and administrative expenses on the consolidated statements of operations and comprehensive loss. As the Company is not pursuing the Underwritten Offering at this time (but may do so in the future), it has elected to expense the costs related exclusively to the Underwritten Offering. For the three and nine months ended September 30, 2017, the Company expensed approximately $1.6 million of these costs as corporate general and administrative expenses. As the Company continues to actively pursue the Private Offering, all costs associated with the Private Offering are recorded as prepaid and other assets on the consolidated balance sheet.

Operating Expenses

Operating expenses include, but are not limited to, payments of reimbursements to the Advisor and its affiliates for operating expenses paid on behalf of the Company, audit, legal, filing and tax fees, directors’ and officers’ liability insurance, board of director fees and offering costs incurred in connection with the Underwritten Offering which have been expensed. For more information on operating expenses and reimbursements to the Advisor and its affiliates, see Note 10.

Fees to Affiliates

Fees to affiliates include, but are not limited to, acquisition and disposition fees paid to the Advisor on qualifying assets that are acquired or sold, subject to certain limitations. For more information on fees to affiliates, see Note 10.

Income Taxes

The Company intends to elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with its 2017 tax year. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including requirements to pass the “closely-held test” (in order for the Company to qualify as a REIT, no more than 50% in value of its outstanding stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year, beginning with the last half of 2018 assuming a valid 2017 REIT election, which the Company refers to as the “closely-held test”), and to distribute annually at least 90% of its “REIT taxable income,” as defined by the Code, to its stockholders. As a REIT, the Company will be subject to federal income tax on its undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions it pays with respect to any calendar year are less than the sum of (a) 85% of its ordinary income, (b) 95% of its capital gain net income and (c) 100% of its undistributed income from prior years. The Company intends to operate in such a manner so as to qualify as a REIT, including creating taxable REIT subsidiaries to hold assets that generate material income that would not be consistent with the rules applicable for qualification as a REIT if held directly by the REIT, but no assurance can be given that the Company will operate in a manner so as to qualify as a REIT.

If the Company were to fail to meet these requirements, it could be subject to federal income tax on all of its taxable income at regular corporate rates for that year. The Company would not be able to deduct distributions paid to stockholders in any year in which it fails to qualify as a REIT. Additionally, the Company will also be disqualified from electing to be taxed as a REIT for the four taxable years following the year during which qualification was lost unless it is entitled to relief under specific statutory provisions.

The Company evaluates the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” (greater than 50 percent probability) of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. The Company’s management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. The Company has no examinations in progress and none are expected at this time.

If the Company does not meet the qualifications to be taxed as a REIT, it will be taxed as a corporation for U.S. federal income tax purposes. The Company did not meet the qualifications to be taxed as a REIT for its 2016 tax year and will be taxed as a corporation for U.S. federal income tax purposes for its 2016 tax year. As such, the Company provides for income taxes using the asset and liability method under ASC 740. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company recognizes its tax positions and evaluates them by determining whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Company will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

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The Company had no material unrecognized tax benefit or expense, accrued interest or penalties as of September 30, 2017. The Company and its subsidiaries may be subject to federal income tax as well as income tax of various state and local jurisdictions. When applicable, the Company recognizes interest and/or penalties related to uncertain tax positions on its consolidated statements of operations and comprehensive loss.

Deferred Tax Assets

Deferred income taxes arise principally from temporary differences between book and tax recognition of income, expenses, and losses relating to financing and other transactions. As of September 30, 2017 and December 31, 2016, the Company recognized total deferred tax assets, net of valuation allowances, based on the fact that the Company did not qualify as a REIT for the 2016 tax year. The deferred income taxes on the accompanying consolidated balance sheets at September 30, 2017 (unaudited) and December 31, 2016 are comprised of the following (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

Net operating loss

 

$

520

 

 

$

309

 

Partnership temporary differences

 

 

176

 

 

 

75

 

Unreimbursed expenses

 

 

651

 

 

 

32

 

Total deferred tax assets

 

 

1,347

 

 

 

416

 

Valuation allowance

 

 

(1,347

)

 

 

(416

)

Net deferred tax assets

 

$

 

 

$

 

The valuation allowances at September 30, 2017 and December 31, 2016 were primarily related to incurring cumulative net operating losses without generating sufficient future taxable income to recover the deferred tax assets. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable losses and projections for future taxable income over the periods in which the deferred tax assets are deductible; management believes it is more likely than not that the Company will not realize the benefits of these deductible differences at September 30, 2017.

Acquisition Costs

Acquisition costs include costs incurred to acquire assets and are expensed upon acquisition. The amount of acquisition costs incurred depends on the specific circumstances of each closing and are one-time costs associated with each acquisition. Upon the Company’s adoption of ASU 2017-01 on January 1, 2017, as discussed below in “Recent Accounting Pronouncements,” the Company believes most future transaction costs relating to acquisitions of operating properties will be capitalized.

Reportable Segments

The Company has two reportable segments, with activities related to owning and operating multifamily properties and originating preferred equity investments in multifamily properties. The Company organizes and analyzes the operations and results of each of these segments independently, due to inherently different considerations for each segment. For more information regarding the Company’s reportable segments, see Note 3.

With the change in the Company’s strategy, the Company expects to have a third reportable segment, with activities related to originating mezzanine, bridge, and mortgage loans in multifamily, storage and select-service hospitality properties.

Concentration of Credit Risk

The Company maintains cash balances with high quality financial institutions, including NexBank, SSB, an affiliate of the Advisor, and periodically evaluates the creditworthiness of such institutions and believes that the Company is not exposed to significant credit risk. Cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation.

Per Share Data

On August 12, 2015, the SEC declared effective the Company’s Registration Statement, as described above. The Company had no operating activities or earnings (loss) per share before August 12, 2015. In accordance with GAAP, the Company’s acquisition of Estates was determined to be a combination of entities under common control. As such, the acquisition of Estates by the Company (through the issuance of the Company’s Class A common stock) was deemed to be made on the date it was purchased by the Sponsor, which was August 5, 2015. In the accompanying unaudited consolidated financial statements, operations are shown from the Original Acquisition Date, although the Company did not commence material operations until March 24, 2016, the date the Company met the

13


 

Minimum Offering Requirement and broke escrow in the Continuous Offering, enabling it to commence material operations and reimburse the Advisor and its affiliates for certain expenses incurred on the Company’s behalf.

Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted earnings (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. Non-vested shares of the Company’s restricted Class A common stock give rise to potentially dilutive shares of the Company’s Class A common stock; such shares are excluded from the computation of diluted earnings (loss) per share if they are anti-dilutive.

Recent Accounting Pronouncements

Section 107 of the Jumpstart Our Business Startups Act (the “JOBS Act”) provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for complying with new or revised accounting standards applicable to public companies. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, the Company has elected to “opt out” of such extended transition period. Therefore, the Company intends to comply with new or revised accounting standards on the applicable dates on which the adoption of standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that the Company’s decision to opt out of such extended transition period for compliance with new or revised accounting standards is irrevocable.

In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”). The amendments in ASU 2015-01 eliminate from GAAP the concept of extraordinary items. Although the amendment will eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The Company implemented the provisions of ASU 2015-01 as of January 1, 2016, which did not have a material impact on its consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), which changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a VIE, and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. ASU 2015-02 also significantly changes how to evaluate voting rights for entities that are not similar to limited partnerships when determining whether the entity is a VIE, which may affect entities for which the decision making rights are conveyed through a contractual arrangement. The Company implemented the provisions of ASU 2015-02 as of January 1, 2016, as more fully described in Note 2 to the accompanying consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (“ASU 2015-03”), which changes the way reporting enterprises record debt issuance costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”). ASU 2015-15 supplements the requirements of ASU 2015-03 by allowing an entity to defer and present debt issuance costs related to a line of credit arrangement as an asset and subsequently amortize the deferred costs ratably over the term of the line of credit arrangement. The Company implemented the provisions of ASU 2015-03 and ASU 2015-15 as of January 1, 2016, which did not have a material impact on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern, and to provide disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The Company implemented the provisions of ASU 2014-15 as of December 31, 2016, which did not have a material impact on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which clarifies the presentation of restricted cash in the statements of cash flows. Under ASU 2016-18, restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The Company adopted ASU 2016-18 during the three months ended December 31, 2016 on a retrospective basis. As a result, net cash provided by operating activities increased by approximately $0.1 million in the nine months ended September 30, 2016. Net cash used in investing activities increased by approximately $0.2 million in the nine months ended

14


 

September 30, 2016. Beginning-of-period cash and restricted cash increased by $0.4 million in 2016. The following is a summary of the Company’s cash and restricted cash total as presented in the accompanying unaudited consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 (in thousands):

 

 

 

September 30, 2017

 

 

September 30, 2016

 

Cash and cash equivalents

 

$

1,117

 

 

$

513

 

Restricted cash

 

 

354

 

 

 

232

 

Total cash and restricted cash

 

$

1,471

 

 

$

745

 

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, accrual of compensation cost, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this standard must be applied prospectively, retrospectively, or as of the beginning of the earliest comparative period presented in the year of adoption, depending on the type of amendment. The Company implemented the provisions of ASU 2016-09 as of January 1, 2017, on a prospective basis, which did not have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, which clarifies the definition of a business and provides further guidance for evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. ASU 2017-01 provides a test to determine when a set of assets and activities acquired is not a business. When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. Under the updated guidance, an acquisition of a single property will likely be treated as an asset acquisition as opposed to a business combination and associated transaction costs will be capitalized rather than expensed as incurred. Additionally, assets acquired, liabilities assumed, and any noncontrolling interest will be measured at their relative fair values. The Company implemented the provisions of ASU 2017-01 as of January 1, 2017, which did not have a material impact on its consolidated financial statements. The Company believes most of its future acquisitions of properties will qualify as asset acquisitions and most future transaction costs associated with these acquisitions will be capitalized.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, which amends ASU 2014-09 to defer the effective date by one year. The new standard is effective for annual and interim periods in fiscal years beginning after December 15, 2017. The Company will implement the provisions of ASU 2014-09 as of January 1, 2018 at which time the Company expects to adopt the updated standard using the modified retrospective approach. However, as the majority of the Company’s revenue is from rental income related to leases, the Company does not expect ASU 2014-09 to have a material impact on its consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which changes certain recognition, measurement, presentation, and disclosure requirements for financial instruments. ASU 2016-01 requires all equity investments, except those accounted for under the equity method of accounting or resulting in consolidation, to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 also simplifies the impairment assessment for equity investments without readily determinable fair values, amends the presentation requirements for changes in the fair value of financial liabilities, requires presentation of financial instruments by measurement category and form of financial asset, and eliminates the requirement to disclose the methods and significant assumptions used in estimating the fair value of financial instruments. ASU 2016-01 is effective for annual and interim periods in fiscal years beginning after December 15, 2017. The Company will implement the provisions of ASU 2016-01 as of January 1, 2018. The Company does not expect ASU 2016-01 to have a material impact on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses specific cash flow items with the objective of reducing existing diversity in practice, including the treatment of distributions received from equity method investees. ASU 2016-15 is effective for annual and interim periods in fiscal years beginning after December 15, 2017 and must be applied retrospectively to all periods presented; early adoption is permitted. The Company will implement the provisions of ASU 2016-15 as of January 1, 2018 and has determined the new standard will not have a material impact on its consolidated financial statements.

15


 

In February 2016, the FASB issued ASU No. 2016-02, Leases. The standard amends the existing lease accounting guidance and requires lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of one year or less) on their balance sheets. Lessees will continue to recognize lease expense in a manner similar to current accounting. For lessors, accounting for leases under the new guidance is substantially the same as in prior periods, but eliminates current real estate-specific provisions and changes the treatment of initial direct costs. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparable period presented, with an option to elect certain transition relief. Full retrospective application is prohibited. The standard will be effective for the Company on January 1, 2019, with early adoption permitted. Based on a preliminary assessment, the Company expects most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in an immaterial increase in the assets and liabilities on its consolidated balance sheets.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard requires entities to estimate a lifetime expected credit loss for most financial assets, including trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, and to present the net amount of the financial instrument expected to be collected. The updated standard will be effective for the Company on January 1, 2020; early adoption is permitted on January 1, 2019. The Company is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

3. Segment Information

GAAP guidance requires that segment disclosures present the measure(s) used by the chief operating decision maker to decide how to allocate resources and for purposes of assessing such segments’ performance. The Company’s chief operating decision maker is comprised of several members of the Advisor’s investment committee who use several generally accepted industry financial measures to assess the performance of the business for its reportable operating segments.

The Company has two reportable segments, with activities related to owning and operating multifamily properties and originating preferred equity investments in multifamily properties. The Company’s operating multifamily properties segment generates rental income and other income through the operation of properties. The Company’s preferred equity investments segment earns equity in income on a stated investment return. The primary financial measure of segment profit and loss used by the chief operating decision maker is net operating income (“NOI”). NOI for the Company’s operating multifamily properties segment is defined as total revenues less total property operating expenses. NOI for the Company’s preferred equity investments segment is defined as equity in income of preferred equity investments less interest costs on debt used to finance such investments. Excluded from NOI for both of the Company’s reportable segments are: (1) asset management fees; (2) corporate general and administrative expenses; (3) fees to affiliates; (4) organization expenses; (5) acquisition costs; and (6) interest expense related to amortization of deferred financing costs and changes in fair value of derivative instruments designated as cash flow hedges. In addition to the aforementioned, excluded from NOI for the Company’s operating multifamily properties segment are: (1) certain property general and administrative expenses that are not reflective of the ongoing operations of the properties or are incurred on behalf of the Company at the properties; (2) depreciation and amortization; (3) interest costs on debt used to finance such acquisitions; and (4) equity in income of preferred equity investments.

The Company organizes and analyzes the operations and results of each of these segments independently, due to inherently different considerations for each segment. Such considerations include, but are not limited to, the nature and characteristics of the investment and investment strategies and objectives.

The following table presents the Company’s assets as of September 30, 2017 and December 31, 2016 by reportable segment (in thousands):

 

 

September 30, 2017

 

 

December 31, 2016

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Operating multifamily property

$

39,505

 

 

$

40,213

 

Preferred equity investment

 

5,429

 

 

 

5,250

 

Other assets (1)

 

1,334

 

 

 

363

 

TOTAL ASSETS

$

46,268

 

 

$

45,826

 

 

(1)

Other assets consist of cash and cash equivalents, accounts receivable, and prepaid and other assets held at the Company level.

16


 

The following table, which has not been adjusted for the effects of noncontrolling interests, reconciles the Company’s combined NOI for its reportable segments, as detailed in the tables below, for the three and nine months ended September 30, 2017 and 2016 to net loss, the most directly comparable GAAP financial measure (in thousands):

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Operating multifamily property

 

$

562

 

 

$

570

 

 

$

1,757

 

 

$

1,683

 

Preferred equity investments

 

 

77

 

 

 

157

 

 

 

238

 

 

 

280

 

Combined segment NOI

 

 

639

 

 

 

727

 

 

 

1,995

 

 

 

1,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile to net loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset management fees

 

 

89

 

 

 

93

 

 

 

262

 

 

 

175

 

Corporate general and administrative expenses

 

 

1,693

 

 

 

266

 

 

 

2,217

 

 

 

797

 

Organization expenses