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 March 31, 2023

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 001-36663

NexPoint Residential Trust, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland	47-1881359
(State or other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

300 Crescent Court, Suite 700, Dallas, Texas (Address of Principal Executive Offices)	75201
	(Zip Code)

(214) 276-6300

(Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	NXRT	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§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  ☒    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	☐	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 April 27, 2023, the registrant had 25,657,723 shares of its common stock, par value $0.01 per share, outstanding.

NEXPOINT RESIDENTIAL TRUST, INC.

Form 10-Q

Quarter Ended March 31, 2023

INDEX

			Page
Cautionary Statement Regarding Forward-Looking Statements			ii
	PART I—FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets as of March 31, 2023 (Unaudited) and December 31, 2022	1
		Consolidated Unaudited Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2023 and 2022	2
		Consolidated Unaudited Statements of Stockholders’ Equity for the Three Months Ended March 31, 2023 and 2022	3
		Consolidated Unaudited Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022	4
		Notes to Consolidated Unaudited Financial Statements	6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.		Controls and Procedures	47
	PART II—OTHER INFORMATION
Item 1.		Legal Proceedings	48
Item 1A.		Risk Factors	48
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.		Defaults Upon Senior Securities	48
Item 4.		Mine Safety Disclosures	48
Item 5.		Other Information	48
Item 6.		Exhibits	49
Signatures			50

i

Cautionary Statement Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. In particular, statements relating to our liquidity and capital resources, the performance of our properties and results of operations contain forward-looking statements. Furthermore, all of the statements regarding future financial performance (including market conditions and demographics) are forward-looking statements. We caution investors that any forward-looking statements presented in this quarterly report are based on management’s current beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “would,” “result” and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Forward-looking statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you therefore against relying on any of these forward-looking statements.

Some of the risks and uncertainties that may cause our actual results, performance, liquidity or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

• unfavorable changes in market and economic conditions in the United States and globally and in the specific markets where our properties are located;

• macroeconomic trends including inflation and rising interest rates may adversely affect our financial condition and results of operations;

• risks associated with ownership of real estate;

• limited ability to dispose of assets because of the relative illiquidity of real estate investments;

• our multifamily properties are concentrated in certain geographic markets in the Southeastern and Southwestern United States, which makes us more susceptible to adverse developments in those markets;

• increased risks associated with our strategy of acquiring value-enhancement multifamily properties rather than more conservative investment strategies;

• failure to succeed in new markets may have adverse consequences on our performance;

• potential reforms to the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”);

• competition could limit our ability to acquire attractive investment opportunities, which could adversely affect our profitability and impede our growth;

• competition and any increased affordability of residential homes could limit our ability to lease our apartments or increase or maintain rents;

• the relatively low residential mortgage rates may result in potential renters purchasing residences rather than leasing them, and as a result, cause a decline in our occupancy rates;

• the risk that we may fail to consummate future property acquisitions;

• failure of acquisitions to yield anticipated results;

• risks associated with increases in interest rates and our ability to issue additional debt or equity securities in the future;

• risks associated with selling apartment communities, which could limit our operational and financial flexibility;

• contingent or unknown liabilities related to properties or businesses that we have acquired or may acquire;

• lack of or insufficient amounts of insurance;

• the risk that our environmental assessments may not identify all potential environmental liabilities and our remediation actions may be insufficient;

• high costs associated with the investigation or remediation of environmental contamination, including asbestos, lead-based paint, chemical vapor, subsurface contamination and mold growth;

• high costs associated with the compliance with various accessibility, environmental, building and health and safety laws and regulations, such as the Americans with Disabilities Act of 1990 and the Fair Housing Act;

• risks associated with limited warranties we may obtain when purchasing properties;

ii

• exposure to decreases in market rents due to our short-term leases;

• risks associated with operating through joint ventures and funds;

• our dependence on information systems;

• risks associated with breaches of our data security;

• costs associated with being a public company, including compliance with securities laws;

• the risk that our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or internal control over financial reporting;

• risks associated with our substantial current indebtedness and indebtedness we may incur in the future;

• risks associated with derivatives or hedging activity;

• risks associated with representations and warranties made by us in connection with sales of our properties may subject us to liability that could result in losses and could harm our operating results and, therefore, distributions we make to our stockholders;

• loss of key personnel of NexPoint Advisors, L.P. (our “Sponsor”), NexPoint Real Estate Advisors, L.P. (our “Adviser”) and our property manager;

• the risk that we may not replicate the historical results achieved by other entities managed or sponsored by affiliates of our Adviser, members of our Adviser’s management team or by our Sponsor or its affiliates;

• risks associated with our Adviser’s ability to terminate the Advisory Agreement (as defined below);

• our ability to change our major policies, operations and targeted investments without stockholder consent;

• the substantial fees and expenses we pay to our Adviser and its affiliates;

• risks associated with any potential internalization of our management functions;

• conflicts of interest and competing demands for time faced by our Adviser, our Sponsor and their officers and employees;

• the risk that we may compete with other entities affiliated with our Sponsor or property manager for properties and tenants;

• failure to maintain our status as a REIT;

• failure of our operating partnership to be taxable as a partnership for federal income tax purposes, possibly causing us to fail to qualify for or to maintain REIT status;

• compliance with REIT requirements, which may limit our ability to hedge our liabilities effectively and cause us to forgo otherwise attractive opportunities, liquidate certain of our investments or incur tax liabilities;

• risks associated with our ownership of interests in taxable REIT subsidiaries;

• the recognition of taxable gains from the sale of properties as a result of the inability to complete certain like-kind exchanges in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”);

• the risk that the Internal Revenue Service may consider certain sales of properties to be prohibited transactions, resulting in a 100% penalty tax on any taxable gain;

• the ineligibility of dividends payable by REITs for the reduced tax rates available for some dividends;

• risks associated with the stock ownership restrictions of the Code for REITs and the stock ownership limit imposed by our charter;

• the ability of our board of directors to revoke our REIT qualification without stockholder approval;

• recent and potential legislative or regulatory tax changes or other actions affecting REITs;

• risks associated with the market for our common stock and the general volatility of the capital and credit markets;

• failure to generate sufficient cash flows to service our outstanding indebtedness or pay distributions at expected levels;

• risks associated with limitations of liability for and our indemnification of our directors and officers;

• the risk that legal proceedings we become involved in from time to time could adversely affect our business;

• the risk that acts of violence could decrease the value of our assets and have an adverse effect on our business and results of operations;

iii

• risks associated with the Highland Capital Management, L.P. (“Highland”) bankruptcy, including related litigation and potential conflicts of interest; and

• any other risks included under Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on February 24, 2023 or under Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. They are based on estimates and assumptions only as of the date of this quarterly report. We undertake no obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law.

iv

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	March 31, 2023			December 31, 2022
	(Unaudited)
ASSETS
Operating Real Estate Investments
Land	$	378,417		$	378,438
Buildings and improvements		1,764,796			1,760,782
Construction in progress		13,174			10,622
Furniture, fixtures and equipment		162,048			152,529
Total Gross Operating Real Estate Investments		2,318,435			2,302,371
Accumulated depreciation and amortization		(372,378	)		(349,276	)
Total Net Operating Real Estate Investments		1,946,057			1,953,095
Real estate held for sale, net of accumulated depreciation of $22,017 and $22,017, respectively		89,848			89,457
Total Net Real Estate Investments		2,035,905			2,042,552
Cash and cash equivalents		14,142			16,762
Restricted cash		32,933			35,037
Accounts receivable, net		18,522			17,121
Prepaid and other assets		8,113			10,425
Fair value of interest rate swaps		86,234			103,440
TOTAL ASSETS	$	2,195,849		$	2,225,337
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages payable, net	$	1,541,531		$	1,526,828
Mortgages payable held for sale, net		68,040			68,016
Credit facility, net		55,419			72,644
Accounts payable and other accrued liabilities		13,722			12,325
Accrued real estate taxes payable		8,655			7,232
Accrued interest payable		9,049			7,946
Security deposit liability		3,202			3,200
Prepaid rents		2,140			1,849
Total Liabilities		1,701,758			1,700,040
Redeemable noncontrolling interests in the Operating Partnership		6,058			5,631
Stockholders' Equity:
Preferred stock, $0.01 par value: 100,000,000 shares authorized; 0 shares issued		—			—
Common stock, $0.01 par value: 500,000,000 shares authorized; 25,657,723 and 25,549,319 shares issued and outstanding, respectively		256			255
Additional paid-in capital		405,847			405,376
Accumulated earnings (loss) less dividends		(3,084	)		11,880
Accumulated other comprehensive income		85,014			102,155
Total Stockholders' Equity		488,033			519,666
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,195,849		$	2,225,337

See Notes to Consolidated Financial Statements

1

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share amounts)

(Unaudited)

	For the Three Months Ended March 31,
	2023			2022
Revenues
Rental income	$	67,537		$	59,297
Other income		1,690			1,489
Total revenues		69,227			60,786
Expenses
Property operating expenses		13,266			13,596
Real estate taxes and insurance		10,020			8,720
Property management fees (1)		2,027			1,757
Advisory and administrative fees (2)		1,889			1,843
Corporate general and administrative expenses		3,367			3,486
Property general and administrative expenses		2,270			2,006
Depreciation and amortization		23,266			23,718
Total expenses		56,105			55,126
Operating income		13,122			5,660
Interest expense		(16,739	)		(10,636	)
Gain (loss) on extinguishment of debt and modification costs		122			—
Casualty gain (loss)		(814	)		128
Miscellaneous income		411			181
Net loss		(3,898	)		(4,667	)
Net loss attributable to redeemable noncontrolling interests in the Operating Partnership		(15	)		(14	)
Net loss attributable to common stockholders	$	(3,883	)	$	(4,653	)
Other comprehensive income (loss)
Unrealized gains (losses) on interest rate derivatives		(17,206	)		54,579
Total comprehensive income (loss)		(21,104	)		49,912
Comprehensive income (loss) attributable to redeemable noncontrolling interests in the Operating Partnership		(80	)		150
Comprehensive income (loss) attributable to common stockholders	$	(21,024	)	$	49,762
Weighted average common shares outstanding - basic		25,599			25,620
Weighted average common shares outstanding - diluted		25,599			25,620
Loss per share - basic	$	(0.15	)	$	(0.18	)
Loss per share - diluted	$	(0.15	)	$	(0.18	)

(1) Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the Company’s Operating Partnership (see Note 9).

(2) Fees incurred to the Adviser (see Note 10).

See Notes to Consolidated Financial Statements

2

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in thousands)

(Unaudited)

	Preferred Stock				Common Stock				Additional		Accumulated Earnings (Loss)			Accumulated Other
	Number of Shares		Par Value		Number of Shares		Par Value		Paid-in Capital		Less Dividends			Comprehensive Income (Loss)			Total
Balances, December 31, 2022		—	$	—		25,549,319	$	255	$	405,376	$	11,880		$	102,155		$	519,666
Net loss attributable to common stockholders		—		—		—		—		—		(3,883	)		—			(3,883	)
Vesting of stock-based compensation		—		—		108,404		1		471		—			—			472
Common stock dividends declared ($0.42 per share)		—		—		—		—		—		(10,940	)		—			(10,940	)
Other comprehensive loss		—		—		—		—		—		—			(17,141	)		(17,141	)
Adjustment to reflect redemption value of redeemable noncontrolling interests in the Operating Partnership		—		—		—		—		—		(141	)		—			(141	)
Balances, March 31, 2023		—	$	—		25,657,723	$	256	$	405,847	$	(3,084	)	$	85,014		$	488,033

	Preferred Stock				Common Stock				Additional			Accumulated Earnings (Loss)			Accumulated Other
	Number of Shares		Par Value		Number of Shares		Par Value		Paid-in Capital			Less Dividends			Comprehensive Income (Loss)		Total
Balances, December 31, 2021		—	$	—		25,500,567	$	255	$	407,803		$	59,209		$	2,578	$	469,845
Net loss attributable to common stockholders		—		—		—		—		—			(4,653	)		—		(4,653	)
Vesting of stock-based compensation		—		—		147,532		1		(881	)		—			—		(880	)
Issuance of common stock through at-the-market offering		—		—		52,091		1		4,137			—			—		4,138
Common stock dividends declared ($0.38 per share)		—		—		—		—		—			(9,976	)		—		(9,976	)
Other comprehensive income		—		—		—		—		—			—			54,415		54,415
Adjustment to reflect redemption value of redeemable noncontrolling interests in the Operating Partnership		—		—		—		—		—			(334	)		—		(334	)
Balances, March 31, 2022		—	$	—		25,700,190	$	257	$	411,059		$	44,246		$	56,993	$	512,555

See Notes to Consolidated Financial Statements

3

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	For the Three Months Ended March 31,
	2023			2022
Cash flows from operating activities
Net loss	$	(3,898	)	$	(4,667	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		23,266			23,718
Amortization/write-off of deferred financing costs		645			565
Change in fair value on derivative instruments included in interest expense		(9,175	)		2,384
Net cash received (paid) on derivative settlements		9,871			(3,646	)
Amortization/write-off of fair value adjustment of assumed debt		(27	)		(50	)
Provision for bad debts, net		2,325			1,248
Vesting of stock-based compensation		1,966			1,877
Casualty gain (loss)		202			94
Changes in operating assets and liabilities, net of effects of acquisitions:
Operating assets		(1,425	)		(6,413	)
Operating liabilities		4,173			(6,428	)
Net cash provided by operating activities		27,923			8,682
Cash flows from investing activities
Prepaid acquisition deposits		—			(1,615	)
Insurance proceeds received from casualty losses		1,494			273
Additions to real estate investments		(17,999	)		(9,120	)
Net cash used in investing activities		(16,505	)		(10,462	)
Cash flows from financing activities
Mortgage proceeds received		42,788			—
Mortgage payments		(28,181	)		(381	)
Credit facilities proceeds received		—			55,000
Credit facilities payments		(17,500	)		—
Deferred financing costs received (paid)		61			(415	)
Interest rate cap fees paid		(215	)		(10	)
Prepayment penalties on extinguished debt		(285	)		—
Proceeds from the issuance of common stock through at-the-market offering, net of offering costs		—			4,138
Payments for taxes related to net share settlement of stock-based compensation		(1,494	)		(2,757	)
Dividends paid to common stockholders		(11,267	)		(10,367	)
Distributions to redeemable noncontrolling interests in the Operating Partnership		(49	)		—
Net cash provided by (used in) financing activities		(16,142	)		45,208
Net increase (decrease) in cash, cash equivalents and restricted cash		(4,724	)		43,428
Cash, cash equivalents and restricted cash, beginning of period		51,799			88,696
Cash, cash equivalents and restricted cash, end of period	$	47,075		$	132,124

See Notes to Consolidated Financial Statements

4

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

Supplemental Disclosure of Cash Flow Information
Interest paid	$	24,071		$	7,442
Supplemental Disclosure of Noncash Activities
Issuance of operating partnership units for purchase of noncontrolling interests		415			—
Capitalized construction costs included in accounts payable and other accrued liabilities		5,091			2,846
Change in fair value on derivative instruments designated as hedges		(17,206	)		54,579
Decrease in dividends payable upon vesting of restricted stock units		(327	)		(391	)
Write-off of assets due to casualty losses		1,751			1,904
Write-off of fully amortized in-place leases		—			1,200
Write-off of deferred financing costs		38			—

See Notes to Consolidated Financial Statements

5

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

NexPoint Residential Trust, Inc. (the “Company”, “we”, “our”) was incorporated in Maryland on September 19, 2014, and has elected to be taxed as a real estate investment trust (“REIT”). The Company is focused on “value-add” multifamily investments primarily located in the Southeastern and Southwestern United States. Substantially all of the Company’s business is conducted through NexPoint Residential Trust Operating Partnership, L.P. (the “OP”), the Company’s operating partnership. The Company owns its properties (the “Portfolio”) through the OP and its wholly owned taxable REIT subsidiary (“TRS”). The OP owns approximately 99.9% of the Portfolio; the TRS owns approximately 0.1% of the Portfolio. The Company’s wholly owned subsidiary, NexPoint Residential Trust Operating Partnership GP, LLC (the “OP GP”), is the sole general partner of the OP. As of March 31, 2023, there were 26,055,458 common units in the OP (“OP Units”) outstanding, of which 25,951,154, or 99.6%, were owned by the Company and 104,304, or 0.4%, were owned by a noncontrolling limited partner (see Note 9).

The Company is externally managed by NexPoint Real Estate Advisors, L.P. (the “Adviser”), through an agreement dated March 16, 2015, as amended, and renewed on February 22, 2023 for a one-year term (the “Advisory Agreement”), by and among the Company, the OP and the Adviser. The Adviser conducts substantially all of the Company’s operations and provides asset management services for its real estate investments. The Company expects it will only have accounting employees while the Advisory Agreement is in effect. All of the Company’s investment decisions are made by the Adviser, subject to general oversight by the Adviser’s investment committee and the Company’s board of directors (the “Board”). The Adviser is wholly owned by NexPoint Advisors, L.P. (the “Sponsor”).

The Company’s investment objectives are to maximize the cash flow and value of properties owned, acquire properties with cash flow growth potential, provide quarterly cash distributions and achieve long-term capital appreciation for its stockholders through targeted management and a value-add program. Consistent with the Company’s policy to acquire assets for both income and capital gain, the Company intends to hold at least majority interests in its properties for long-term appreciation and to engage in the business of directly or indirectly acquiring, owning, and operating well-located multifamily properties with a value-add component in large cities and suburban submarkets of large cities primarily in the Southeastern and Southwestern United States consistent with its investment objectives. Economic and market conditions may influence the Company to hold properties for different periods of time. From time to time, the Company may sell a property if, among other deciding factors, the sale would be in the best interest of its stockholders.

The Company may allocate up to 30% of the Portfolio to investments in real estate-related debt and securities with the potential for high current income or total returns. These allocations may include first and second mortgages and subordinated, bridge, mezzanine, construction and other loans, as well as debt securities related to or secured by multifamily real estate and common and preferred equity securities, which may include securities of other REITs or real estate companies.

2. Summary of Significant Accounting Policies

Basis of Accounting

The accompanying unaudited consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation. There have been no significant changes to the Company’s significant accounting policies during the three months ended March 31, 2023.

The accompanying unaudited consolidated financial statements have been prepared according to the rules and regulations of the SEC.  Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.

In the opinion of management, all adjustments and eliminations necessary for the fair presentation of the Company’s financial position as of March 31, 2023 and December 31, 2022 and results of operations for the three months ended March 31, 2023 and 2022 have been included.  Such adjustments are normal and recurring in nature.  The unaudited information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2022 and notes thereto included in its Annual Report on Form 10-K filed with the SEC on February 24, 2023.

6

Principles of Consolidation

The Company accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation. The Company first evaluates whether each entity is a variable interest entity (“VIE”). Under the VIE model, the Company consolidates an entity when it has control 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. The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries, including the OP and its subsidiaries.

Revenue Recognition

The Company’s primary operations consist of rental income earned from its residents under lease agreements typically with terms of one year or less. Rental income is recognized when earned. This policy effectively results in income recognition on the straight-line method over the related terms of the leases. The Company records an allowance to reflect revenue that may not be collectable. This is recorded through a provision for bad debt which is included in rental income in the accompanying consolidated statements of operations and comprehensive income (loss). Resident reimbursements and other income consist of charges billed to residents for utilities, carport and garage rental, and pets, and administrative, application and other fees and are recognized when earned. 

Purchase Price Allocation

Upon acquisition of a property considered to be an asset acquisition, 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. Acquisition costs are capitalized in accordance with FASB ASC 805.

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 6), is based on management’s estimate of the property’s “as-if” vacant fair value and 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 debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.

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 incurred in making repairs and maintaining real estate assets are expensed as incurred. Expenditures for improvements, renovations, and replacements are capitalized at cost. 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

Construction in progress includes the cost of renovation projects being performed at the various properties. Once a project is complete, the historical cost of the renovation is placed into service in one of the categories above depending on the type of renovation project and is depreciated over the estimated useful lives as described in the table above.

7

Impairment

Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The key inputs into our impairment analysis include, but are not limited to, the holding period, net operating income, and capitalization rates. In such cases, the Company will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, 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’s impairment analysis identifies and evaluates events or changes in circumstances that indicate the carrying amount of a real estate investment may not be recoverable, including determining the period the Company will hold the rental property, net operating income, and the estimated capitalization rate for each respective real estate investment. As of March 31, 2023, the Company has not recorded any impairment on its real estate assets.

Held for Sale

The Company periodically classifies real estate assets as held for sale when certain criteria are met, in accordance with GAAP. At that time, the Company presents the net real estate assets and the net debt associated with the real estate held for sale separately in its consolidated balance sheet, and the Company ceases recording depreciation and amortization expense related to that property. Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell. As of March 31, 2023, there are two properties classified as held for sale. In addition to the net real estate and mortgages payable held for sale, the consolidated balance sheet also includes approximately $0.5 million of accounts receivable and prepaid and other assets, and approximately $1.8 million of accounts payable, real estate taxes payable, security deposits, prepaid rents, and other accrued liabilities.

Income Taxes

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and expects to continue to qualify as a REIT. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement 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 (1) 85% of its ordinary income, (2) 95% of its capital gain net income and (3) 100% of its undistributed income from prior years. The Company intends to operate in such a manner so as to qualify as a REIT, but no assurance can be given that the Company will operate in a manner so as to qualify as a REIT. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. The Company had no significant taxes associated with its TRS for the three months ended March 31, 2023 and 2022.

If the Company fails to meet these requirements, it could be subject to federal income tax on all of the Company’s 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 the Company is entitled to relief under specific statutory provisions. As of March 31, 2023, the Company believes it is in compliance with all applicable REIT requirements.

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.

The Company recognizes its tax positions and evaluates them using a two-step process. First, the Company determines 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. Second, 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.

The Company had no material unrecognized tax benefit or expense, accrued interest or penalties as of March 31, 2023. The Company and its subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2022, 2021 and 2020 tax years remain open to examination by tax jurisdictions to which the Company and its subsidiaries are subject. When applicable, the Company recognizes interest and/or penalties related to uncertain tax positions on its consolidated statements of operations and comprehensive income (loss).

8

Recent Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company has taken the ASC 848 elections needed to allow for the hedged forecasted transactions to transition while not discontinuing the associated hedge accounting designations. Application of these hedged accounting expedients preserves the presentation of derivatives consistent with past presentation.  The Company will continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur. In December 2022, the FASB issued ASU 2022-06, Deferral of the Sunset Date of Topic 848 ("ASU 2022-06") which was issued to defer the sunset date of Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform to December 31, 2024. ASU 2022-06 is effective immediately for all companies.

3. Investments in Subsidiaries

The Company conducts its operations through the OP, which owns properties through single asset limited liability companies that are special purpose entities (“SPEs”). The Company consolidates the SPEs that it controls as well as any VIEs where it is the primary beneficiary.  The Company controls and consolidates the OP as a VIE. In connection with its indirect equity investments in the properties acquired, the Company, through the OP and the TRS, directly or indirectly holds 100% of the membership interests in SPEs that directly own the properties. All of the properties the SPEs own are consolidated in the Company’s consolidated financial statements. The assets of each entity can only be used to settle obligations of that particular entity, and the creditors of each entity have no recourse to the assets of other entities or the Company.

Additionally, the Company has in the past and may in the future enter into purchase and sale transactions structured as reverse like-kind exchanges (“1031 Exchanges”) under Section 1031 of the Code. For a reverse 1031 Exchange in which the Company purchases a new property prior to selling the property to be matched in the like-kind exchange (the Company refers to the new property being acquired in the 1031 Exchange prior to the sale of the related property as a “Parked Asset”), legal title to the Parked Asset is held by an Exchange Accommodation Titleholder (“EAT”) engaged to execute the 1031 Exchange until the sale transaction and the 1031 Exchange are completed. The Company, through a wholly owned subsidiary, enters into a master lease agreement with the EAT whereby the EAT leases the acquired property and all other rights acquired in connection with the acquisition to the Company. The term of the master lease agreement is the earlier of the completion of the reverse 1031 Exchange or 180 days from the date that the property was acquired. The EAT is classified as a VIE as it does not have sufficient equity investment at risk to finance its activities without additional subordinated financial support. The Company consolidates the EAT as its primary beneficiary because it has the ability to control the activities that most significantly impact the EAT’s economic performance and the Company retains all of the legal and economic benefits and obligations related to the Parked Assets prior to completion of the 1031 Exchange. As such, the Parked Assets are included in the Company’s consolidated financial statements as VIEs until legal title and control is transferred to the Company upon either completion of the 1031 Exchange or termination of the master lease agreement, at which time they will be consolidated as wholly owned subsidiaries.

9

As of March 31, 2023, the Company, through the OP and the wholly owned TRS, owned 40 properties through SPEs. The following table represents the Company’s ownership in each property by virtue of its 100% ownership of the SPEs that directly own the title to each property as of March 31, 2023 and December 31, 2022:

				Effective Ownership Percentage at
Property Name		Location	Year Acquired	March 31, 2023			December 31, 2022
Arbors on Forest Ridge		Bedford, Texas	2014		100	%		100	%
Cutter's Point		Richardson, Texas	2014		100	%		100	%
Silverbrook		Grand Prairie, Texas	2014		100	%		100	%
The Summit at Sabal Park		Tampa, Florida	2014		100	%		100	%
Courtney Cove		Tampa, Florida	2014		100	%		100	%
Radbourne Lake		Charlotte, North Carolina	2014		100	%		100	%
Timber Creek		Charlotte, North Carolina	2014		100	%		100	%
Sabal Palm at Lake Buena Vista		Orlando, Florida	2014		100	%		100	%
Cornerstone		Orlando, Florida	2015		100	%		100	%
The Preserve at Terrell Mill		Marietta, Georgia	2015		100	%		100	%
Versailles		Dallas, Texas	2015		100	%		100	%
Seasons 704 Apartments		West Palm Beach, Florida	2015		100	%		100	%
Madera Point		Mesa, Arizona	2015		100	%		100	%
Venue at 8651		Fort Worth, Texas	2015		100	%		100	%
Parc500		West Palm Beach, Florida	2016		100	%		100	%
The Venue on Camelback		Phoenix, Arizona	2016		100	%		100	%
Old Farm	(1)	Houston, Texas	2016		100	%		100	%
Stone Creek at Old Farm	(1)	Houston, Texas	2016		100	%		100	%
Rockledge Apartments		Marietta, Georgia	2017		100	%		100	%
Atera Apartments		Dallas, Texas	2017		100	%		100	%
Crestmont Reserve		Dallas, Texas	2018		100	%		100	%
Brandywine I & II		Nashville, Tennessee	2018		100	%		100	%
Bella Vista		Phoenix, Arizona	2019		100	%		100	%
The Enclave		Tempe, Arizona	2019		100	%		100	%
The Heritage		Phoenix, Arizona	2019		100	%		100	%
Summers Landing		Fort Worth, Texas	2019		100	%		100	%
Residences at Glenview Reserve		Nashville, Tennessee	2019		100	%		100	%
Residences at West Place		Orlando, Florida	2019		100	%		100	%
Avant at Pembroke Pines		Pembroke Pines, Florida	2019		100	%		100	%
Arbors of Brentwood		Nashville, Tennessee	2019		100	%		100	%
Torreyana Apartments		Las Vegas, Nevada	2019		100	%		100	%
Bloom		Las Vegas, Nevada	2019		100	%		100	%
Bella Solara		Las Vegas, Nevada	2019		100	%		100	%
Fairways at San Marcos		Chandler, Arizona	2020		100	%		100	%
The Verandas at Lake Norman		Charlotte, North Carolina	2021		100	%		100	%
Creekside at Matthews		Charlotte, North Carolina	2021		100	%		100	%
Six Forks Station		Raleigh, North Carolina	2021		100	%		100	%
High House at Cary		Cary, North Carolina	2021		100	%		100	%
The Adair		Sandy Springs, Georgia	2022		100	%		100	%
Estates on Maryland		Phoenix, Arizona	2022		100	%		100	%

(1) Properties classified as held for sale as of March 31, 2023.

10

4. Real Estate Investments

As of March 31, 2023, the major components of the Company’s investments in multifamily properties were as follows (in thousands):

Operating Properties	Land		Buildings and Improvements			Construction in Progress		Furniture, Fixtures and Equipment			Totals
Arbors on Forest Ridge	$	2,330	$	11,815		$	13	$	2,057		$	16,215
Cutter's Point		3,330		13,196			—		7,783			24,309
Silverbrook		4,860		25,959			2,832		6,298			39,949
The Summit at Sabal Park		5,770		14,304			—		2,408			22,482
Courtney Cove		5,880		15,024			—		2,966			23,870
Radbourne Lake		2,440		23,060			4		3,504			29,008
Timber Creek		11,260		13,523			2,830		4,408			32,021
Sabal Palm at Lake Buena Vista		7,558		44,135			413		3,986			56,092
Cornerstone		1,500		31,042			133		4,637			37,312
The Preserve at Terrell Mill		10,170		53,601			41		12,176			75,988
Versailles		6,720		21,630			317		4,758			33,425
Seasons 704 Apartments		7,480		15,063			22		3,280			25,845
Madera Point		4,920		18,303			—		3,272			26,495
Venue at 8651		2,350		18,115			1,401		4,500			26,366
Parc500		3,860		21,366			4		5,026			30,256
The Venue on Camelback		8,340		38,965			—		4,476			51,781
Rockledge Apartments		17,451		97,660			1,155		8,653			124,919
Atera Apartments		22,371		38,963			9		3,016			64,359
Crestmont Reserve		4,124		20,791			15		2,067			26,997
Brandywine I & II		6,237		74,008			—		7,728			87,973
Bella Vista		10,942		37,502			22		3,523			51,989
The Enclave		11,046		30,865			—		3,169			45,080
The Heritage		6,835		35,299			—		3,203			45,337
Summers Landing		1,798		18,694			—		1,162			21,654
Residences at Glenview Reserve		3,367		42,640			2		4,215			50,224
Residences at West Place		3,345		52,703			571		3,507			60,126
Avant at Pembroke Pines		48,436		279,594			2,021		16,708			346,759
Arbors of Brentwood		6,346		54,289			38		3,390			64,063
Torreyana Apartments		23,824		43,881			—		2,102			69,807
Bloom		23,805		82,920			30		4,770			111,525
Bella Solara		12,605		52,379			155		2,849			67,988
Fairways at San Marcos		10,993		73,056			—		3,541			87,590
The Verandas at Lake Norman		9,510		53,165			—		1,938			64,613
Creekside at Matthews		11,514		45,795			78		2,318			59,705
Six Forks Station		11,357		61,287			791		2,551			75,986
High House at Cary		23,809		68,026			18		2,113			93,966
The Adair		8,361		57,032			154		2,027			67,574
Estates on Maryland		11,573		65,146			105		1,963			78,787
		378,417		1,764,796			13,174		162,048			2,318,435
Accumulated depreciation and amortization		—		(261,041	)		—		(111,337	)		(372,378	)
Total Operating Properties	$	378,417	$	1,503,755		$	13,174	$	50,711		$	1,946,057
Held For Sale Properties
Old Farm	$	11,078	$	71,360		$	98	$	4,849		$	87,385
Stone Creek at Old Farm		3,493		19,793			13		1,181			24,480
Accumulated depreciation and amortization		—		(17,339	)		—		(4,678	)		(22,017	)
Total Held For Sale Properties	$	14,571	$	73,814		$	111	$	1,352		$	89,848
Total	$	392,988	$	1,577,569		$	13,285	$	52,063		$	2,035,905

11

As of December 31, 2022, the major components of the Company’s investments in multifamily properties were as follows (in thousands):

Operating Properties	Land		Buildings and Improvements			Construction in Progress		Furniture, Fixtures and Equipment			Totals
Arbors on Forest Ridge	$	2,330	$	11,809		$	2	$	2,029		$	16,170
Cutter's Point		3,330		13,147			—		7,562			24,039
Silverbrook		4,860		25,927			1,962		6,201			38,950
The Summit at Sabal Park		5,770		13,990			38		2,326			22,124
Courtney Cove		5,880		14,920			—		2,883			23,683
Radbourne Lake		2,440		23,040			—		3,237			28,717
Timber Creek		11,260		13,504			2,823		4,337			31,924
Sabal Palm at Lake Buena Vista		7,580		42,809			314		3,776			54,479
Cornerstone		1,500		31,014			146		4,440			37,100
The Preserve at Terrell Mill		10,170		53,429			—		11,177			74,776
Versailles		6,720		21,594			124		4,618			33,056
Seasons 704 Apartments		7,480		15,042			9		3,095			25,626
Madera Point		4,920		18,294			—		3,174			26,388
Venue at 8651		2,350		17,977			1,036		4,394			25,757
Parc500		3,860		21,352			4		4,893			30,109
The Venue on Camelback		8,340		38,860			27		4,277			51,504
Rockledge Apartments		17,451		96,896			912		8,241			123,500
Atera Apartments		22,371		38,942			—		2,956			64,269
Crestmont Reserve		4,124		21,105			6		1,954			27,189
Brandywine I & II		6,237		73,920			—		7,156			87,313
Bella Vista		10,942		37,493			8		3,416			51,859
The Enclave		11,046		30,777			16		3,037			44,876
The Heritage		6,835		35,286			—		3,166			45,287
Summers Landing		1,798		18,669			—		1,124			21,591
Residences at Glenview Reserve		3,367		42,563			—		3,867			49,797
Residences at West Place		3,345		52,712			12		3,195			59,264
Avant at Pembroke Pines		48,436		278,736			2,139		15,780			345,091
Arbors of Brentwood		6,346		54,239			121		3,126			63,832
Torreyana Apartments		23,824		43,861			—		1,965			69,650
Bloom		23,803		82,802			37		4,226			110,868
Bella Solara		12,605		52,351			—		2,687			67,643
Fairways at San Marcos		10,993		73,007			—		3,397			87,397
The Verandas at Lake Norman		9,510		53,061			25		1,726			64,322
Creekside at Matthews		11,515		45,779			78		2,133			59,505
Six Forks Station		11,357		62,816			116		2,111			76,400
High House at Cary		23,809		67,855			52		1,789			93,505
The Adair		8,361		56,163			525		1,453			66,502
Estates on Maryland		11,573		65,041			90		1,605			78,309
		378,438		1,760,782			10,622		152,529			2,302,371
Accumulated depreciation and amortization		—		(245,093	)		—		(104,183	)		(349,276	)
Total Operating Properties	$	378,438	$	1,515,689		$	10,622	$	48,346		$	1,953,095
Held For Sale Properties
Old Farm	$	11,078	$	71,305		$	12	$	4,686		$	87,081
Stone Creek at Old Farm		3,493		19,772			3		1,125			24,393
Accumulated depreciation and amortization		—		(17,339	)		—		(4,678	)		(22,017	)
Total Held For Sale Properties	$	14,571	$	73,738		$	15	$	1,133		$	89,457
Total	$	393,009	$	1,589,427		$	10,637	$	49,479		$	2,042,552

12

Depreciation expense was $23.3 million and $22.6 million for the three months ended March 31, 2023 and 2022, respectively.

Amortization expense related to the Company’s intangible lease assets was $0.0 million and $1.1 million for the three months ended March 31, 2023 and 2022, respectively. Due to the six-month useful life attributable to intangible lease assets, the value of intangible lease assets on any acquisition prior to September 30, 2022 has been fully amortized and the assets and related accumulated amortization have been written off as of March 31, 2023.

Acquisitions

There were no acquisitions of real estate during the three months ended March 31, 2023 and 2022.

Dispositions

There were no dispositions of real estate during the three months ended March 31, 2023 and 2022.

Casualty Losses

As of March 31, 2022, seven of the Company’s properties, Silverbrook, Venue at 8651, Bloom, Old Farm, Timber Creek, The Preserve at Terrell Mill and Six Forks, suffered significant property damage as a result of fires and flooding.

As of March 31, 2023, nine of the Company’s properties, Silverbrook, Versailles, Parc500, Rockledge Apartments, Summers Landing, Avant at Pembroke Pines, Arbors of Brentwood, Bella Solara, and Six Forks Station, suffered significant property damages as a result of fires and water damage. As of March 31, 2023, 107 units were excluded from the Portfolio’s total unit count. Business interruption proceeds for lost rent are included in miscellaneous income in the consolidated statements of operations and comprehensive income (loss) in relation to these events. Cash flows from business interruption are included on the Company’s consolidated statements of cash flows as operating activities. Certain casualty proceeds from insurance are recorded in casualty gains (loss) on the consolidated statements of operations and comprehensive income (loss) in relation to these events. Events that are considered to be small, standard and not extraordinary are recorded through property operating expense. Insurance proceeds received from casualty losses are recognized on the Company’s consolidated statements of cash flows as investing activities. The Company differentiates proceeds received from business interruption and casualty gains/(losses) in accounting for the transactions. Business interruption proceeds are specifically insurance proceeds to recoup lost rents due to a qualifying event(s) (i.e., fires, floods, storms, water damage, etc.) as determined by the insurance policy. Casualty gains/(losses) are distinctly attributable to damage and subsequent write down of the property (loss), and the recoupment of funds from the insurance policy, as it relates to the damage. Such proceeds received from the damage to the property are accounted for as a gain to the Company, and potentially offset losses attributable to net write off of damaged assets. For the quarter ended March 31, 2023, the Company recognized $0.8 million in casualty loss and $0.4 million in business interruption income on the consolidated statement of operations and comprehensive income (loss).

13

5. Debt

Mortgage Debt

The following table contains summary information concerning the mortgage debt of the Company as of March 31, 2023 (dollars in thousands):

Operating Properties		Type	Term (months)		Outstanding Principal (1)				Interest Rate (2)	Maturity Date
Arbors on Forest Ridge	(3)	Floating		120	$	19,184			6.18%	12/1/2032
Cutter's Point	(3)	Floating		120		21,524			6.18%	12/1/2032
Silverbrook	(3)	Floating		120		46,088			6.18%	12/1/2032
The Summit at Sabal Park	(3)	Floating		120		30,826			6.18%	12/1/2032
Courtney Cove	(3)	Floating		120		36,146			6.18%	12/1/2032
The Preserve at Terrell Mill	(3)	Floating		120		71,098			6.18%	12/1/2032
Versailles	(3)	Floating		120		40,247			6.18%	12/1/2032
Seasons 704 Apartments	(3)	Floating		120		33,132			6.18%	12/1/2032
Madera Point	(3)	Floating		120		34,457			6.18%	12/1/2032
Venue at 8651	(3)	Floating		120		18,690			6.18%	12/1/2032
The Venue on Camelback	(4)	Floating		120		42,788			6.81%	2/1/2033
Timber Creek	(4)	Floating		84		24,100			6.12%	10/1/2025
Radbourne Lake	(4)	Floating		84		20,000			6.15%	10/1/2025
Sabal Palm at Lake Buena Vista	(4)	Floating		84		42,100			6.16%	9/1/2025
Cornerstone	(3)	Floating		120		46,804			6.72%	12/1/2032
Parc500	(3)	Floating		120		29,416			6.18%	12/1/2032
Rockledge Apartments	(3)	Floating		120		93,129			6.18%	12/1/2032
Atera Apartments	(3)	Floating		120		46,198			6.18%	12/1/2032
Crestmont Reserve	(4)	Floating		84		12,061			6.04%	10/1/2025
Brandywine I & II	(4)	Floating		84		43,835			6.04%	10/1/2025
Bella Vista	(4)	Floating		84		29,040			6.18%	2/1/2026
The Enclave	(4)	Floating		84		25,322			6.18%	2/1/2026
The Heritage	(4)	Floating		84		24,625			6.18%	2/1/2026
Summers Landing	(5)	Floating		84		10,109			6.04%	10/1/2025
Residences at Glenview Reserve	(6)	Floating		84		25,785			6.30%	10/1/2025
Residences at West Place	(6)	Fixed		120		33,817			4.24%	10/1/2028
Avant at Pembroke Pines	(4)	Floating		84		177,100			6.29%	9/1/2026
Arbors of Brentwood	(4)	Floating		84		34,237			6.29%	10/1/2026
Torreyana Apartments	(3)	Floating		120		50,580			6.18%	12/1/2032
Bloom	(3)	Floating		120		59,830			6.18%	12/1/2032
Bella Solara	(3)	Floating		120		40,328			6.18%	12/1/2032
Fairways at San Marcos	(3)	Floating		120		60,228			6.18%	12/1/2032
The Verandas at Lake Norman	(7)	Floating		84		34,925			6.48%	7/1/2028
Creekside at Matthews	(3)	Floating		120		29,648			6.18%	12/1/2032
Six Forks Station	(8)	Floating		120		41,180			6.35%	10/1/2031
High House at Cary	(7)	Floating		84		46,625			6.64%	1/1/2029
The Adair	(4)	Floating		84		35,115			6.60%	4/1/2029
Estates on Maryland	(4)	Floating		84		43,157			6.60%	4/1/2029
					$	1,553,474
Fair market value adjustment						583		(9)
Deferred financing costs, net of accumulated amortization of $2,936						(12,526	)
					$	1,541,531
Held For Sale Properties
Old Farm	(4)	Floating	84		$	52,886			6.54%	7/1/2024
Stone Creek at Old Farm	(4)	Floating	84			15,274			6.54%	7/1/2024
					$	68,160
Deferred financing costs, net of accumulated amortization of $553						(120	)
					$	68,040

(1) Mortgage debt that is non-recourse to the Company and encumbers the multifamily properties.

(2) Interest rate is based on a reference rate plus an applicable margin, except for fixed rate mortgage debt. References rates used in our Portfolio include one-month LIBOR and 30-Day Average Secured Overnight Financing Rate (“SOFR”). As of March 31, 2023, one-month LIBOR was 4.858% and SOFR was 4.630%.

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(3) Loan can be pre-paid in the first 24 months of the term in certain circumstances at par plus 5.00%. Starting in the 25th month of the term through the 117^th month of the term, the loan can be pre-paid at par plus 1.00% of the unpaid principal balance and at par during the last three months of the term.

(4) Loan can be pre-paid in the first 12 months of the term in certain circumstances at par plus 5.00%. Starting in the 13^th month of the term through the 81^st month of the term, the loan can be pre-paid at par plus 1.00% of the unpaid principal balance and at par during the last three months of the term.

(5) Debt was assumed upon acquisition of this property and recorded at approximated fair value.  It can be pre-paid in the first 12 months of the term in certain circumstances at par plus 5.00%. Starting in the 13th month of the term through the 81st month of the term, the loan can be pre-paid at par plus 1.00% of the unpaid principal balance and at par during the last three months of the term.

(6) Debt was assumed upon acquisition of this property and recorded at approximated fair value. The loan can be prepaid at the greater of par plus 1.00% of the unpaid principal balance or the product obtained by multiplying the present value of the principal being prepaid by the excess of the monthly fixed interest rate of the loan over a daily discount rate. The loan is open to pre-payment in the last three months of the term.

(7) Loan can be pre-paid in the first 24 months of the term in certain circumstances at par plus 5.00%.  Starting in the 25th month of the term through the 36th month of the term, the loan can be pre-paid at par plus 2% of the unpaid principal balance. Starting in the 37th month of the term, the loan can be pre-paid at par plus 1% of the unpaid principal balance. The loan is open to pre-payment in the last three months of the term.

(8) Loan can be pre-paid in the first 24 months of the term in certain circumstances at par plus 5.00%. Starting in the 25th month of the term through the 116th of the term, the loan can be pre-paid at par plus 1.00% of the unpaid principal balance and at par during the last four months of the term.

(9) The Company reflected a valuation adjustment on its fixed rate debt for Residences at West Place to adjust it to fair market value on their respective dates of acquisition for the difference between the fair value and the assumed principal amount of debt. The difference is amortized into interest expense over the remaining terms of the mortgages.

The weighted average interest rate of the Company’s mortgage indebtedness was 6.24% as of March 31, 2023 and 5.71% as of December 31, 2022. The increase between the periods is primarily related to an increase in one-month LIBOR of approximately 47 basis points to 4.858% as of March 31, 2023 from 4.39200% as of December 31, 2022, and an increase in 30-Day Average SOFR of approximately 57 basis points to 4.630% as of March 31, 2023, from 4.062% as of December 31, 2022. As of March 31, 2023, the Company had approximately $536 million, $1,051 million, and $34 million of LIBOR, SOFR, and fixed rate debt. As of March 31, 2023, the adjusted weighted average interest rate of the Company’s mortgage indebtedness was 3.51%. For purposes of calculating the adjusted weighted average interest rate of the outstanding mortgage indebtedness, the Company has included the weighted average fixed rate of 1.0682% for one-month LIBOR on its combined $1.2 billion notional amount of interest rate swap agreements, which effectively fix the interest rate on $1.2 billion of the Company’s floating rate mortgage debt (see Note 6).

Each of the Company’s mortgages is a non-recourse obligation subject to customary provisions. The loan agreements contain customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan, defaults in payments under any other security instrument covering any part of the property, whether junior or senior to the loan, and bankruptcy or other insolvency events. As of March 31, 2023, the Company believes it is in compliance with all provisions. 

Credit Facility

The following table contains summary information concerning the Company’s credit facility as of March 31, 2023 (dollars in thousands):

	Type	Term (months)		Outstanding Principal			Interest Rate (1)	Maturity Date
Corporate Credit Facility	Floating		36	$	57,000		6.88%	6/30/2025
Deferred financing costs, net of accumulated amortization of $1,426					(1,581	)
				$	55,419

(1) Interest rate is based on Term SOFR plus an applicable margin.  Term SOFR as of March 31, 2023 was 4.630%.

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On October 24, 2022, the Company exercised its option to extend the Corporate Credit Facility with respect to the revolving commitments for a single one-year term resulting in a maturity date of June 30, 2025. The Company may borrow up to $350.0 million under the Corporate Credit Facility. During the three months ended March 31, 2023, the Company paid down $17.5 million on the Corporate Credit Facility. As of March 31, 2023, there was $57.0 million in aggregate principal outstanding under the Corporate Credit Facility.

Advances under the Corporate Credit Facility accrue interest at a per annum rate equal to, at the Company’s election, either Term SOFR plus a margin of 1.90% to 2.40%, depending on the Company’s total leverage ratio, and a benchmark replacement adjustment of 0.1%, or a base rate determined according to the highest of (a) the prime rate, (b) the federal funds rate plus 0.50%, (c) Term SOFR plus 1.0% or (d) 0.0% plus a margin of 0.90% to 1.40%, depending on the Company’s total leverage ratio. An unused commitment fee at a rate of 0.15% or 0.25%, depending on the outstanding aggregate revolving commitments, applies to unutilized borrowing capacity under the Corporate Credit Facility. Amounts owing under the Corporate Credit Facility may be prepaid at any time without premium or penalty. The Corporate Credit Facility is guaranteed by the Company and the obligations under the Corporate Credit Facility are, subject to some exceptions, secured by a continuing security interest in substantially all of the assets of the Company. The Company is in compliance with all of the covenants required in its Corporate Credit Facility.

Deferred Financing Costs

The Company defers costs incurred in obtaining financing and amortizes the costs over the terms of the related loans using the straight-line method, which approximates the effective interest method. Deferred financing costs, net of amortization, are recorded as a reduction from the related debt on the Company’s consolidated balance sheets. Upon repayment of or in conjunction with a material change in the terms of the underlying debt agreement, any unamortized costs are charged to loss on extinguishment of debt and modification costs (see “Loss on Extinguishment of Debt and Modification Costs” below). For the three months ended March 31, 2023 and 2022, amortization of deferred financing costs of approximately $0.8 million and $0.6 million, respectively, is included in interest expense on the consolidated statements of operations and comprehensive income (loss).

Gain (loss) on Extinguishment of Debt and Modification Costs

Gain (loss) on extinguishment of debt and modification costs includes prepayment penalties and defeasance costs incurred on the early repayment of debt, costs incurred in a debt modification that are not capitalized as deferred financing costs and other costs incurred in a debt extinguishment. During the three months ended March 31, 2023 the Company completed a refinance of The Venue on Camelback and incurred a loss on extinguishment of approximately $0.3 million.

Schedule of Debt Maturities

The aggregate scheduled maturities, including amortizing principal payments, of total debt for the next five calendar years subsequent to March 31, 2023 are as follows (in thousands):

	Operating Properties		Held For Sale Property		Credit Facility		Total
2023	$	226	$	—	$	—	$	226
2024		391		68,160		—		68,551
2025		177,373		—		57,000		234,373
2026		290,324		—		—		290,324
2027		—		—		—		—
Thereafter		1,085,160		—		—		1,085,160
Total	$	1,553,474	$	68,160	$	57,000	$	1,678,634

6. Fair Value of Derivatives and Financial Instruments

Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy):

• Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

• Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals.

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• Level 3 inputs are the unobservable inputs for the asset or liability, which are typically based on an entity’s own assumption, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on input from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company utilizes independent third parties to perform the allocation of value analysis for each property acquisition and to perform the market valuations on its derivative financial instruments and has established policies, as described above, processes and procedures intended to ensure that the valuation methodologies for investments and derivative financial instruments are fair and consistent as of the measurement date.

Derivative Financial Instruments and Hedging Activities

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash payments principally related to the Company’s borrowings. In order to minimize counterparty credit risk, the Company enters into and expects to enter into hedging arrangements only with major financial institutions that have high credit ratings.

The Company utilizes an independent third party to perform the market valuations on its derivative financial instruments. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair values of interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both the Company’s own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of the Company’s derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the Company’s derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. The Company has determined that the significance of the impact of the credit valuation adjustments made to its derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of the Company’s derivatives held as of March 31, 2023 and December 31, 2022 were classified as Level 2 of the fair value hierarchy.

The Company’s main objective in using interest rate derivatives is to add stability to interest expense related to floating rate debt. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The interest rate swaps have terms ranging from four to five years. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. The interest rate caps have terms ranging from three to four years. During the three months ended March 31, 2023 and 2022, interest rate cap derivatives were used to hedge the variable cash flows associated with a portion of the Company’s floating rate debt.

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The interest rate cap agreements the Company has entered into effectively cap one-month LIBOR on $1.4 billion of the Company’s floating rate mortgage indebtedness at a weighted average rate of 5.82% as of March 31, 2023.

In order to fix a portion of, and mitigate the risk associated with, the Company’s floating rate indebtedness (without incurring substantial prepayment penalties or defeasance costs typically associated with fixed rate indebtedness when repaid early or refinanced), the Company, through the OP, has entered into six interest rate swap transactions with KeyBank National Association (“KeyBank”) and four with Truist Bank with a combined notional amount of $1.2 billion. The interest rate swaps the Company has entered into effectively replace the floating interest rate with respect to that amount with a weighted average fixed rate of 1.0682%. The Company has designated these interest rate swaps as cash flow hedges of interest rate risk.

As of March 31, 2023, the Company had the following outstanding interest rate swaps that were designated as cash flow hedges of interest rate risk (dollars in thousands):

Effective Date	Termination Date	Counterparty	Notional Amount		Fixed Rate (1)
June 1, 2019	June 1, 2024	KeyBank	$	50,000		2.0020	%
June 1, 2019	June 1, 2024	Truist		50,000		2.0020	%
September 1, 2019	September 1, 2026	KeyBank		100,000		1.4620	%
September 1, 2019	September 1, 2026	KeyBank		125,000		1.3020	%
January 3, 2020	September 1, 2026	KeyBank		92,500		1.6090	%
March 4, 2020	June 1, 2026	Truist		100,000		0.8200	%
June 1, 2021	September 1, 2026	KeyBank		200,000		0.8450	%
June 1, 2021	September 1, 2026	KeyBank		200,000		0.9530	%
March 1, 2022	March 1, 2025	Truist		145,000		0.5730	%
March 1, 2022	March 1, 2025	Truist		105,000		0.6140	%
			$	1,167,500		1.0682	%	(2)

(1) The floating rate option for the interest rate swaps is one-month LIBOR. As of March 31, 2023, one-month LIBOR was 4.858%.

(2) Represents the weighted average fixed rate of the interest rate swaps.

As of March 31, 2023, the Company had the following outstanding interest rate swaps that was designated as cash flow hedges of interest rate risk with future effective dates (dollars in thousands):

Effective Date	Termination Date	Counterparty	Notional Amount		Fixed Rate (1)
September 1, 2026	January 1, 2027	KeyBank	$	92,500		1.7980	%

(1) The floating rate option for the interest rate swaps is one-month LIBOR. As of March 31, 2023, one-month LIBOR was 4.858%.

(2) Represents the weighted average fixed rate of the interest rate swaps.

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements but either do not meet the strict requirements to apply hedge accounting in accordance with FASB ASC 815, Derivatives and Hedging, or the Company has elected not to designate such derivatives as hedges. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in net income (loss) as interest expense.

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As of March 31, 2023, the Company had the following outstanding interest rate caps outstanding that are not designated as cash flow hedges of interest rate risk (dollars in thousands):

Properties	Type	Notional		Strike Rate
Sabal Palm at Lake Buena Vista	Floating	$	42,100		6.20	%
Residences at Glenview Reserve	Floating		25,977		4.81	%
Timber Creek	Floating		24,100		4.99	%
Brandywine I & II	Floating		43,835		6.82	%
Radbourne Lake	Floating		20,000		6.46	%
Summers Landing	Floating		10,109		6.07	%
Crestmont Reserve	Floating		12,061		6.82	%
Fairways at San Marcos	Floating		46,464		3.37	%
The Verandas at Lake Norman	Floating		34,925		3.40	%
Creekside at Matthews	Floating		31,900		4.40	%
Six Forks Station	Floating		41,180		4.00	%
High House at Cary	Floating		46,625		2.74	%
Estates on Maryland	Floating		43,157		3.91	%
The Adair	Floating		35,115		3.91	%
Rockledge Apartments	Floating		93,129		6.45	%
The Preserve at Terrell Mill	Floating		71,098		6.45	%
Fairways at San Marcos	Floating		60,228		6.70	%
Bloom	Floating		59,830		6.70	%
Atera Apartments	Floating		46,198		6.45	%
Silverbrook	Floating		46,088		6.45	%
Torreyana Apartments	Floating		50,580		6.70	%
Cornerstone	Floating		46,804		6.66	%
Versailles	Floating		40,247		6.45	%
Bella Solara	Floating		40,328		6.70	%
Courtney Cove	Floating		36,146		6.70	%
Madera Point	Floating		34,457		6.70	%
Creekside at Matthews	Floating		29,648		6.45	%
Parc500	Floating		29,416		6.45	%
Seasons 704 Apartments	Floating		33,132		6.70	%
The Summit at Sabal Park	Floating		30,826		6.70	%
Cutter's Point	Floating		21,524		6.45	%
Venue at 8651	Floating		18,690		6.45	%
The Heritage	Floating		24,625		5.18	%
The Enclave	Floating		25,322		5.18	%
Bella Vista	Floating		29,040		5.18	%
Arbors on Forest Ridge	Floating		19,184		6.70	%
Venue on Camelback	Floating		42,788		6.07	%
		$	1,386,876		5.82	%

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of March 31, 2023 and December 31, 2022 (in thousands):

		Asset Derivatives				Liability Derivatives
	Balance Sheet Location	March 31, 2023		December 31, 2022		March 31, 2023		December 31, 2022
Derivatives designated as hedging instruments:
Interest rate swaps	Fair market value of interest rate swaps	$	86,234	$	103,440	$	—	$	—
Derivatives not designated as hedging instruments:
Interest rate caps	Prepaid and other assets		6,408		7,634		—		—
Total		$	92,642	$	111,074	$	—	$	—

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The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2023 and 2022 (in thousands):

	Amount of gain (loss) recognized in OCI					Location of gain (loss) reclassified from accumulated	Amount of gain (loss) reclassified from OCI into income
	2023			2022		OCI into income	2023		2022
Derivatives designated as hedging instruments:
For the three months ended March 31,
Interest rate products	$	(7,061	)	$	51,017	Interest expense	$	10,145	$	(3,562	)

	Location of gain (loss)	Amount of gain (loss) recognized in income
	recognized in income	2023			2022
Derivatives not designated as hedging instruments:
For the three months ended March 31,
Interest rate products	Interest expense	$	(970	)	$	1,184

Other Financial Instruments Carried at Fair Value

Redeemable noncontrolling interests in the OP have a redemption feature and are marked to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests in the OP (see Note 9). The redemption value is based on the fair value of the Company’s common stock at the redemption date, and therefore, is calculated based on the fair value of the Company’s common stock at the balance sheet date. Since the valuation is based on observable inputs such as quoted prices for similar instruments in active markets, redeemable noncontrolling interests in the OP are classified as Level 2 if they are adjusted to their redemption value.

Financial Instruments Not Carried at Fair Value

At March 31, 2023 and December 31, 2022, the fair values of cash and cash equivalents, restricted cash, accounts receivable, prepaid and other assets, excluding interest rate caps, accounts payable and other accrued liabilities, accrued real estate taxes payable, accrued interest payable, security deposits and prepaid rent approximated their carrying values because of the short term nature of these instruments. The estimated fair values of other financial instruments were determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.

Long-term indebtedness is carried at amounts that reasonably approximate their fair value. In calculating the fair value of its long-term indebtedness, the Company used interest rate and spread assumptions that reflect current credit worthiness and market conditions available for the issuance of long-term debt with similar terms and remaining maturities. These financial instruments utilize Level 2 inputs.

The table below presents the carrying value (outstanding principal balance) and estimated fair value of our debt at March 31, 2023 and December 31, 2022 (in thousands):

	March 31, 2023				December 31, 2022
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Fixed rate debt	$	33,817	$	32,131	$	33,817	$	31,857
Floating rate debt (1)	$	1,644,817	$	1,453,785	$	1,647,711	$	1,506,741

(1) Includes balances outstanding under our Corporate Credit Facility.

Real estate assets are reviewed for impairment 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 assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, 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. There can be no assurance that the estimates discussed herein, using Level 3 inputs, are indicative of the amounts the Company could realize on disposition of the real estate asset. For the three months ended March 31, 2023 and 2022, the Company did not record any impairment charges related to real estate assets.

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7. Stockholders’ Equity

Common Stock

During the three months ended March 31, 2023, the Company issued 108,404 shares of common stock pursuant to its long-term incentive plan (see “Long Term Incentive Plan” below).

As of March 31, 2023, the Company had 25,657,723 shares of common stock, par value $0.01 per share, issued and outstanding.

Share Repurchase Program

On June 15, 2016, the Board authorized the Company to repurchase up to $30.0 million of its common stock, par value $0.01 per share, during a two-year period that was set to expire on June 15, 2018 (the “Share Repurchase Program”). On April 30, 2018, the Board increased the Share Repurchase Program from $30.0 million to up to $40.0 million and extended it by an additional two years to June 15, 2020. On March 13, 2020, the Board further increased the Share Repurchase Program from $40.0 million to up to $100.0 million and extended it to March 12, 2023. On October 24, 2022, the Board authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $100.0 million during a two-year period that will expire on October 24, 2024. This authorization replaced the Board prior authorization. The Company may utilize various methods to affect the repurchases, and the timing and extent of the repurchases will depend upon several factors, including market and business conditions, regulatory requirements and other corporate considerations, including whether the Company’s common stock is trading at a significant discount to net asset value per share. Repurchases under this program may be discontinued at any time.

During the three months ended March 31, 2023 and 2022, the Company did not repurchase any shares of its common stock. Since the inception of the Share Repurchase Program through March 31, 2023, the Company had repurchased 2,550,628 shares of its common stock, par value $0.01 per share, at a total cost of approximately $72.3 million, or $28.36 per share.

Treasury Shares

From time to time, in accordance with the Company’s Share Repurchase Program, the Company may repurchase shares of its common stock in the open market. Until any such shares are retired, the cost of the shares is included in common stock held in treasury at cost on the consolidated balance sheet. The number of shares of common stock classified as treasury shares reduces the number of shares of the Company’s common stock outstanding and, accordingly, are considered in the weighted average number of shares outstanding during the period. During the three months ended March 31, 2023 and 2022, the Company retired no shares of its common stock held in treasury. As of March 31, 2023, the Company did not have any shares of common stock held in treasury.

Long Term Incentive Plan

On June 15, 2016, the Company’s stockholders approved a long-term incentive plan (the “2016 LTIP”) and the Company filed a registration statement on Form S-8 registering 2,100,000 shares of common stock, par value $0.01 per share, which the Company may issue pursuant to the 2016 LTIP. The 2016 LTIP authorizes the compensation committee of the Board to provide equity-based compensation in the form of stock options, appreciation rights, restricted shares, restricted stock units, performance shares, performance units and certain other awards denominated or payable in, or otherwise based on, the Company’s common stock or factors that may influence the value of the Company’s common stock, plus cash incentive awards, for the purpose of providing the Company’s directors, officers and other key employees (and those of the Adviser and the Company’s subsidiaries), the Company’s non-employee directors, and potentially certain non-employees who perform employee-type functions, incentives and rewards for performance.

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Restricted Stock Units

Under the 2016 LTIP, restricted stock units may be granted to the Company’s directors, officers and other key employees (and those of the Adviser and the Company’s subsidiaries) and typically vest over a three to five-year period for officers, employees and certain key employees of the Adviser and annually for directors. Beginning on the date of grant, restricted stock units earn dividends that are payable in cash on the vesting date. On February 21, 2019, pursuant to the 2016 LTIP, the Company granted 186,662 restricted stock units to its directors, officers, employees and certain key employees of the Adviser. On February 20, 2020, pursuant to the 2016 LTIP, the Company granted 168,183 restricted stock units to its directors, officers, employees and certain key employees of the Adviser. On May 11, 2020, pursuant to the 2016 LTIP, the Company granted 116,852 restricted stock units to its directors, officers, employees and certain key employees of the Adviser. On February 18, 2021, pursuant to the 2016 LTIP, the Company granted 204,663 restricted stock units to its directors, officers, employees and certain key employees of the Adviser. On February 17, 2022, pursuant to the 2016 LTIP, the Company granted 142,159 restricted stock units to its directors, officers, employees and certain key employees of the Adviser. On March 28, 2023, pursuant to the 2016 LTIP, the Company granted 260,709 restricted stock units to its directors, officers, employees and certain key employees of the Adviser. The following table includes the number of restricted stock units granted, vested, forfeited and outstanding as of March 31, 2023:

	2023
	Number of Units				Weighted Average Grant Date Fair Value
Outstanding January 1,		527,926			$	52.66
Granted		260,709				39.64
Vested		(138,932	)	(1)		52.75
Forfeited		(213	)			83.88
Outstanding March 31,		649,490			$	47.41

(1) Certain key employees of the Adviser elected to net the taxes owed upon vesting against the shares issued resulting in 108,404 shares being issued as shown on the Consolidated Statement of Stockholders’ Equity.

The following table contains information regarding the vesting of restricted stock units under the 2016 LTIP for the next five calendar years subsequent to March 31, 2023:

	Shares Vesting
	February			March		May		Total
2023		—	(1)		—		21,879		21,879
2024		132,526			63,329		21,877		217,732
2025		97,635			49,349		21,877		168,861
2026		65,939			49,348		—		115,287
2027		27,048			49,348		—		76,396
2028		—			49,335		—		49,335
Total		323,148			260,709		65,633		649,490

(1) Shares vested prior to March 31, 2023.

As of March 31, 2023, the Company had issued 965,614 shares of common stock under the 2016 LTIP. For the three months ended March 31, 2023 and 2022, the Company recognized approximately $2.0 million and $1.9 million, respectively, of equity-based compensation expense related to grants of restricted stock units.  As of March 31, 2023, the Company had recognized a liability of approximately $1.4 million related to dividends earned on restricted stock units that are payable in cash upon vesting.

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At-the-Market Offering

On March 4, 2020, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of Jefferies LLC (“Jefferies”), Raymond James & Associates, Inc. (“Raymond James”), KeyBanc Capital Markets Inc. (“KeyBanc”) and Truist Securities (f/k/a SunTrust Robinson Humphrey, Inc., “SunTrust,” and together with Jefferies, Raymond James and KeyBanc, the “ATM Sales Agents”), pursuant to which the Company may issue and sell from time to time when an effective registration statement is available shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $225,000,000 (the “2020 ATM Program”).  Sales of shares of common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act, including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange, to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices.  In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies, KeyBanc and Raymond James, or their respective affiliates, through the 2020 ATM Program.  During the three months ended March 31, 2022, the Company issued 52,091 shares of common stock at an average price of $83.16 per share for gross proceeds of $4.3 million under the ATM Program. The Company paid approximately $0.1 million in fees to the 2020 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $0.1 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. During the three months ended March 31, 2023, no shares were issued under the 2020 ATM Program. The following table contains summary information of the 2020 ATM Program since its inception:

Gross proceeds	$	62,310,967
Common shares issued		1,120,910
Gross average sale price per share	$	55.59
Sales commissions	$	934,665
Offering costs		1,353,015
Net proceeds		60,023,287
Average price per share, net	$	53.55

8. Earnings (Loss) Per Share

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, which excludes any unvested restricted stock units issued pursuant to the 2016 LTIP. Diluted earnings (loss) per share is computed by adjusting basic earnings (loss) per share for the dilutive effect of the assumed vesting of restricted stock units. During periods of net loss, the assumed vesting of restricted stock units is anti-dilutive and is not included in the calculation of earnings (loss) per share.

The effect of the conversion of OP Units held by noncontrolling limited partners is not reflected in the computation of basic and diluted loss per share, as they are exchangeable for common stock on a one-for-one basis. The loss allocable to such units is allocated on this same basis and reflected as net loss attributable to redeemable noncontrolling interests in the OP in the accompanying consolidated statements of operations and comprehensive income (loss). As such, the assumed conversion of these units would have no net impact on the determination of diluted loss per share. See Note 9 for additional information.

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The following table sets forth the computation of basic and diluted loss per share for the periods presented (in thousands, except per share amounts):

		For the Three Months Ended March 31,
		2023			2022
Numerator for loss per share:
Net loss		$	(3,898	)	$	(4,667	)
Net loss attributable to redeemable noncontrolling interests in the Operating Partnership			(15	)		(14	)
Net loss attributable to common stockholders		$	(3,883	)	$	(4,653	)
Denominator for loss per share:
Weighted average common shares outstanding			25,599			25,620
Denominator for basic loss per share			25,599			25,620
Weighted average unvested restricted stock units			476			573
Denominator for diluted earnings per share	(1)		25,599			25,620
Loss per weighted average common share:
Basic		$	(0.15	)	$	(0.18	)
Diluted		$	(0.15	)	$	(0.18	)

(1) If the Company sustains a net loss for the period presented, unvested restricted stock units are not included in the diluted earnings per share calculation.

9. Noncontrolling Interests

Redeemable Noncontrolling Interests in the OP

Interests in the OP held by limited partners are represented by OP Units. Net income (loss) is allocated to holders of OP Units based upon net income (loss) attributable to common stockholders and the weighted average number of OP Units outstanding to total common shares plus OP Units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to OP Units in accordance with the terms of the partnership agreement of the OP. Each time the OP distributes cash to the Company, outside limited partners of the OP receive their pro-rata share of the distribution. Redeemable noncontrolling interests in the OP have a redemption feature and are marked to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests in the OP.

On April 1, 2022, the Company acquired The Adair and Estates on Maryland, from investors in a Delaware Statutory Trust managed by an entity affiliated with the Adviser, for total consideration of $143.4 million (the “Purchase Price”). The Purchase Price consisted of 31,071 OP Units (valued at $2.9 million) that were issued in connection with the acquisition and approximately $70.7 million in cash and debt. The fair value of the OP Units was determined based on the April 1, 2022 share price of NXRT as the OP units are convertible to common stock on a one to one basis.

On June 30, 2017, the Company and the OP entered into a contribution agreement with BH Equities, LLC and its affiliates (collectively, “BH Equity”), whereby the Company purchased 100% of the joint venture interests in the Portfolio owned by BH Equity, representing approximately 8.4% ownership in the Portfolio (the “BH Buyout”), for total consideration of approximately $51.7 million (the “Purchase Amount”). The Purchase Amount consisted of approximately $49.7 million in cash that was paid on June 30, 2017 and 73,233 OP Units (initially valued at $2.0 million) that were issued on August 1, 2017. The number of OP Units issued was calculated by dividing $2.0 million by the midpoint of the range of the Company’s net asset value as publicly disclosed in connection with the Company’s release of its second quarter of 2017 earnings results, which was $27.31 per share.

In connection with the issuance of OP Units to BH Equity on August 1, 2017, the Company and the OP amended the partnership agreement of the OP (the “Amendment”). Pursuant to the Amendment, limited partners holding OP Units have the right to cause the OP to redeem their units at a redemption price equal to and in the form of the Cash Amount (as defined in the partnership agreement of the OP), provided that such OP Units have been outstanding for at least one year. The Company, through the OP GP, as the general partner of the OP may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash Amount or the REIT Share Amount (one share of common stock of the Company for each OP Unit), as defined in the partnership agreement of the OP. Notwithstanding the foregoing, a limited partner will not be entitled to exercise its redemption right to the extent the issuance of the Company’s common stock to the redeeming limited partner would (1) be prohibited, as determined in the Company’s sole

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discretion, under the Company’s charter or (2) cause the acquisition of common stock by such redeeming limited partner to be “integrated” with any other distribution of the Company’s common stock for purposes of complying with the Securities Act. Accordingly, the Company records the OP Units held by noncontrolling limited partners outside of permanent equity and reports the OP Units at the greater of their carrying value or their redemption value using the Company’s stock price at each balance sheet date.

The following table sets forth the redeemable noncontrolling interests in the OP for the three months ended March 31, 2023 (in thousands):

Redeemable noncontrolling interests in the OP, December 31, 2022	$	5,631
Net loss attributable to redeemable noncontrolling interests in the OP		(15	)
Other comprehensive loss attributable to redeemable noncontrolling interests in the OP		(65	)
Distributions to redeemable noncontrolling interests in the OP		(49	)
Issuance of operating partnership units for purchase of noncontrolling interests		415
Adjustment to reflect redemption value of redeemable noncontrolling interests in the OP		141
Redeemable noncontrolling interests in the OP, March 31, 2023	$	6,058

Fees and Reimbursements to BH and its Affiliates

The Company has entered into management agreements with BH Management Services, LLC (“BH”), the Company’s property manager and an independently owned third party, who manages the Company’s properties and supervises the implementation of the Company’s value-add program. BH is an affiliate of BH Equity, who was a noncontrolling interest member of the Company’s joint ventures prior to the BH Buyout on June 30, 2017. Through BH Equity’s noncontrolling interests in such joint ventures, BH Equity was deemed to be a related party. With the completion of the BH Buyout, BH Equity is no longer deemed to be a related party. BH Equity became a noncontrolling limited partner of the OP upon execution of the Amendment. BH and its affiliates do not have common ownership in any joint venture with the Adviser; there is also no common ownership between BH and its affiliates and the Adviser.

The property management fee paid to BH is approximately 3% of the monthly gross income from each property managed. Currently, BH manages all of the Company’s properties. Additionally, the Company may pay BH certain other fees, including: (1) a fee of $15-25 per unit for the one-time setup and inspection of properties, (2) a construction supervision fee of 5-6% of total project costs, which is capitalized, (3) acquisition fees and due diligence costs reimbursements, and (4) other owner approved fees at $55 per hour. BH also acts as a paymaster for the properties and is reimbursed at cost for various operating expenses it pays on behalf of the properties. The following is a summary of fees that the properties incurred to BH and its affiliates, as well as reimbursements paid to BH from the properties for various operating expenses, for the three months ended March 31, 2023 and 2022 (in thousands):

		For the Three Months Ended March 31,
		2023		2022
Fees incurred
Property management fees	(1)	$	2,019	$	1,750
Construction supervision fees	(2)		651		325
Design fees	(2)		11		—
Reimbursements
Payroll and benefits	(3)		5,451		5,164
Other reimbursements	(4)		1,353		1,028

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

(2) Capitalized on the consolidated balance sheets and reflected in buildings and improvements.

(3) Included in property operating expenses on the consolidated statements of operations and comprehensive income (loss).

(4) Includes property operating expenses such as repairs and maintenance costs and certain property general and administrative expenses, which are included on the consolidated statements of operations and comprehensive income (loss).

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10. Related Party Transactions

Advisory and Administrative Fee

In accordance with the Advisory Agreement, the Company pays the Adviser an advisory fee equal to 1.00% of the Average Real Estate Assets (as defined below). The duties performed by the Company’s Adviser under the terms of the Advisory Agreement include, but are not limited to: providing daily management for the Company, selecting and working with third party service providers, managing the Company’s properties or overseeing the third party property manager, formulating an investment strategy for the Company and selecting suitable properties and investments, managing the Company’s outstanding debt and its interest rate exposure through derivative instruments, determining when to sell assets, and managing the value-add program or overseeing a third party vendor that implements the value-add program. “Average Real Estate Assets” means the average of the aggregate book value of Real Estate Assets before reserves for depreciation or other non-cash reserves, computed by taking the average of the book value of real estate assets at the end of each month (1) for which any fee under the Advisory Agreement is calculated or (2) during the year for which any expense reimbursement under the Advisory Agreement is calculated. “Real Estate Assets” is defined broadly in the Advisory Agreement to include, among other things, investments in real estate-related securities and mortgages and reserves for capital expenditures (the value-add program). The advisory fee is payable monthly in arrears in cash, unless the Adviser elects, in its sole discretion, to receive all or a portion of the advisory fee in shares of common stock, subject to certain limitations.

In accordance with the Advisory Agreement, the Company also pays the Adviser an administrative fee equal to 0.20% of the Average Real Estate Assets. The administrative fee is payable monthly in arrears in cash, unless the Adviser elects, in its sole discretion, to receive all or a portion of the administrative fee in shares of common stock, subject to certain limitations.

The advisory and administrative fees paid to the Adviser on the Contributed Assets (as defined in the Advisory Agreement) are subject to an annual cap of approximately $5.4 million (the “Contributed Assets Cap”) (see “Expense Cap” below).

Pursuant to the terms of the Advisory Agreement, the Company will reimburse the Adviser for all documented Operating Expenses and Offering Expenses it incurs on behalf of the Company. “Operating Expenses” include legal, accounting, financial and due diligence services performed by the Adviser that outside professionals or outside consultants would otherwise perform, the Company’s pro rata share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Adviser required for the Company’s operations, and compensation expenses under the 2016 LTIP. Operating Expenses do not include expenses for the advisory and administrative services described in the Advisory Agreement. Certain Operating Expenses, such as the Company’s ratable share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses incurred by the Adviser or its affiliates that relate to the operations of the Company, may be billed monthly to the Company under a shared services agreement. “Offering Expenses” include all expenses (other than underwriters’ discounts) in connection with an offering, including, without limitation, legal, accounting, printing, mailing and filing fees and other documented offering expenses. For the three months ended March 31, 2023 and 2022, the Adviser did not bill any Operating Expenses or Offering Expenses to the Company and any such expenses the Adviser incurred during the periods are considered to be permanently waived.

Expense Cap

Pursuant to the terms of the Advisory Agreement, expenses paid or incurred by the Company for operating expenses and advisory and administrative fees payable to the Adviser and Operating Expenses will not exceed 1.5% of Average Real Estate Assets per calendar year (or part thereof that the Advisory Agreement is in effect (the “Expense Cap”)). The Expense Cap does not limit the reimbursement of expenses related to Offering Expenses. The Expense Cap also does not apply to legal, accounting, financial, due diligence and other service fees incurred in connection with mergers and acquisitions, extraordinary litigation or other events outside the Company’s ordinary course of business or any out-of-pocket acquisitions or due diligence expenses incurred in connection with the acquisition or disposition of real estate assets. Also, advisory and administrative fees are further limited on Contributed Assets to approximately $5.4 million in any calendar year. Contributed Assets refers to all Real Estate Assets contributed to the Company as part of its spin-off. The Contributed Assets Cap is not reduced for dispositions of such assets subsequent to its spin-off. Advisory and administrative fees on New Assets are not subject to the above limitation and are based on an annual rate of 1.2% on Average Real Estate Assets, but are subject to the Expense Cap. New Assets are all Real Estate Assets that are not Contributed Assets.

For the three months ended March 31, 2023 and 2022, the Company incurred advisory and administrative fees of $1.9 million and $1.8 million, respectively.  

For the three months ended March 31, 2023 and 2022, the Adviser elected to voluntarily waive the advisory and administrative fees of approximately $5.3 million and $4.9 million, respectively. The advisory and administrative fees waived by the Adviser are considered to be permanently waived for the periods.  The Adviser is not contractually obligated to waive fees on New Assets in the future and may cease waiving fees on New Assets at its discretion.

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Other Related Party Transactions

The Company has in the past, and may in the future, utilize the services of affiliated parties. For the three months ended March 31, 2023 and 2022, the Company did not pay any fees to NexBank Title, Inc. (“NexBank Title”). NexBank Title is an affiliate of the Adviser through common beneficial ownership. NexBank Title provides title insurance and work related to providing title insurance on properties related to acquisitions, dispositions and refinancing transactions. These amounts are either capitalized as real estate assets or deferred financing costs, expensed as loss on extinguishment of debt and modification costs, or expensed as selling costs when determining gain (loss) on sales of real estate, depending on the appropriate accounting as determined for each specific transaction. The Company holds multiple operating accounts at NexBank Capital, Inc. (“NexBank”), an affiliate of the Adviser through common beneficial ownership.

NexBank is an affiliate of the Adviser through common beneficial ownership.

On July 30, 2021, three of our property-owning subsidiaries entered into agreements with NLMF Holdco, LLC, an entity under common control with our Adviser and in which we own a 10% equity interest. As of March 31, 2023, the Company has funded approximately $0.3 million to NLMF Holdco, LLC which is included in prepaid and other assets on the consolidated balance sheet of the Company. For the three months ended March 31, 2023, the Company incurred expenses of $0.1 million for fiber internet service which is included in property operating expenses on the consolidated statement of operations and comprehensive income (loss).  Additionally, on July 30, 2021, we entered into agreements with NLMF Leaseco, LLC, which is controlled by Matt McGraner, one of our officers. We expect that these actions will provide faster, more reliable and lower cost internet to our residents.

11. Commitments and Contingencies

Commitments

In the normal course of business, the Company enters into various rehabilitation construction related purchase commitments with parties that provide these goods and services. In the event the Company were to terminate rehabilitation construction services prior to the completion of projects, the Company could potentially be committed to satisfy outstanding or uncompleted purchase orders with such parties. As of March 31, 2023, management does not anticipate any material deviations from schedule or budget related to rehabilitation projects currently in process.

The Company’s agreement with NLMF Holdco, LLC may result in additional funding requirements to cover future project costs. The maximum exposure of potential commitments is expected to be no more than $4.0 million. As of March 31, 2023, the Company has funded approximately $0.3 million to NLMF Holdco, LLC which is included in prepaid and other assets on the consolidated balance sheet of the Company.

Contingencies

In the normal course of business, the Company is subject to claims, lawsuits, and legal proceedings. While it is not possible to ascertain the ultimate outcome of all such matters, management believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated balance sheets or consolidated statements of operations and comprehensive income (loss) of the Company. The Company is not involved in any material litigation nor, to management’s knowledge, is any material litigation currently threatened against the Company or its properties or subsidiaries.

Environmental liabilities could have a material adverse effect on the Company’s business, assets, cash flows or results of operations. As of March 31, 2023, the Company was not aware of any environmental liabilities. There can be no assurance that material environmental liabilities do not exist.

Self-Insurance Program

On March 1, 2021, the Adviser entered into a self-insurance policy resulting in an aggregate amount of $2,468,750 (the “2021 Aggregate Amount”) which is allocated across properties managed by the Adviser with approximately $1.6 million being allocated to the Company. As of December 31, 2021, all of the $1.6 million of the 2021 Aggregate Amount allocated to the Company has been prepaid. For the period from March 1, 2021 to February 28, 2022, the Company incurred claims related to its entire allocated 2021 Aggregate Amount at Old Farm and Silverbrook.

On March 1, 2022, the Adviser entered into a new policy resulting in a new aggregate amount of $2,497,500 (the “2022 Aggregate Amount”) which is allocated across properties managed by the Adviser with approximately $1.8 million being allocated to the Company. From March 1, 2022 to March 31, 2023, the Company incurred claims at Six Forks Station, Parc500, Hollister Place, Versailles, Timber Creek, Venue at 8651, The Preserve at Terrell Mill, High House at Cary and Arbors of Brentwood. As of March 31, 2023, all of the 2022 Aggregate Amount allocated to the Company has been funded (see Note 4 to our consolidated financial statements).

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12. Subsequent Events

Dividends Declared

On April 24, 2023, the Company’s Board declared a quarterly dividend of $0.42 per share, payable on June 30, 2023 to stockholders of record on June 15, 2023.

2023 Insurance Renewal

On April 1, 2023, the Company renewed its property, casualty, and environmental insurance. The property insurance has an aggregate of $5,500,000 (the “2023 Aggregate Amount”) which is allocated across properties covered by the policy.

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

The following is a discussion and analysis of our financial condition and our historical results of operations. The following should be read in conjunction with our financial statements and accompanying notes included herein and with our annual report on Form 10-K for the year ended December 31, 2022 (our “Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2023. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected, forecasted, or expected in these forward-looking statements as a result of various factors, including, but not limited to, those discussed below and elsewhere in this quarterly report. See “Cautionary Statement Regarding Forward-Looking Statements” in this report, and “Risk Factors” in Part I, Item 1A, “Risk Factors” of our Annual Report.

Overview

As of March 31, 2023, our Portfolio consisted of 40 multifamily properties primarily located in the Southeastern and Southwestern United States encompassing 15,127 units of apartment space that was approximately 94.0% leased with a weighted average monthly effective rent per occupied apartment unit of $1,487. Substantially all of our business is conducted through the OP. We own the Portfolio through the OP and our TRS. The OP owns approximately 99.9% of the Portfolio; our TRS owns approximately 0.1% of the Portfolio. The OP GP is the sole general partner of the OP. As of March 31, 2023, there were 26,055,458 OP Units outstanding, of which 25,951,154, or 99.6%, were owned by us and 104,304, or 0.4%, were owned by an unaffiliated limited partner (see Note 8 to our consolidated financial statements).

We are primarily focused on directly or indirectly acquiring, owning, and operating well-located multifamily properties with a value-add component in large cities and suburban submarkets of large cities, primarily in the Southeastern and Southwestern United States. We generate revenue primarily by leasing our multifamily properties. We intend to employ targeted management and a value-add program at a majority of our properties in an attempt to improve rental rates and the net operating income (“NOI”) at our properties and achieve long-term capital appreciation for our stockholders. We are externally managed by the Adviser through the Advisory Agreement, by and among the OP, the Adviser and us. The Advisory Agreement was renewed on February 14, 2023 for a one-year term. The Adviser is wholly owned by NexPoint Advisors, L.P.

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, and expect to continue to qualify as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the three months ended March 31, 2023 and 2022.

On October 16, 2019, Highland, a former affiliate of our Sponsor, filed for Chapter 11 bankruptcy protection with the United States Bankruptcy Court for the District of Delaware (the “Highland Bankruptcy”), On October 15, 2021, Marc S. Kirschner, as litigation trustee of a litigation subtrust formed pursuant to Highland’s plan of reorganization and disclosure statement which became effective on August 11, 2021, filed a lawsuit (the “Bankruptcy Trust Lawsuit”) against various persons and entities, including our Sponsor and James Dondero. In addition, on February 8, 2023, UBS Securities LLC and its affiliate (collectively, “UBS”) filed a lawsuit in the Supreme Court of the State of New York, County of New York against Mr. Dondero and a number of other persons and entities seeking to collect on $1.3 billion in judgments UBS obtained against entities that were managed indirectly by Highland (the “UBS Lawsuit”). Neither the Bankruptcy Trust Lawsuit nor the UBS Lawsuit include claims related to our business or our assets. Our Sponsor and Mr. Dondero have informed us they believe the Bankruptcy Trust Lawsuit has no merit, and Mr. Dondero has informed us he believes the UBS Lawsuit has no merit; we have been advised that the defendants named in each of the lawsuits intend to vigorously defend against the claims. We do not expect the Bankruptcy Trust Lawsuit or the UBS Lawsuit will have a material effect on our business, results of operations or financial condition.

Components of Our Revenues and Expenses

Revenues

Rental income. Our earnings are primarily attributable to the rental revenue from our multifamily properties. We anticipate that the leases we enter into for our multifamily properties will typically be for one year or less on average. Also included are utility reimbursements, late fees, pet fees, and other rental fees charged to tenants.

Other income. Other income includes ancillary income earned from tenants such as non-refundable fees, application fees, laundry fees, cable TV income, and other miscellaneous fees charged to tenants.

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Expenses

Property operating expenses. Property operating expenses include property maintenance costs, salary and employee benefit costs, utilities, casualty-related expenses and recoveries and other property operating costs.

Real estate taxes and insurance. Real estate taxes include the property taxes assessed by local and state authorities depending on the location of each property. Insurance includes the cost of commercial, general liability, and other needed insurance for each property.

Property management fees. Property management fees include fees paid to BH, our property manager, or other third party management companies for managing each property (see Note 9 to our consolidated financial statements).

Advisory and administrative fees. Advisory and administrative fees include the fees paid to our Adviser pursuant to the Advisory Agreement (see Note 10 to our consolidated financial statements).

Corporate general and administrative expenses. Corporate general and administrative expenses include, but are not limited to, audit fees, legal fees, listing fees, board of director fees, equity-based compensation expense, investor relations costs and payments of reimbursements to our Adviser for operating expenses. Corporate general and administrative expenses and the advisory and administrative fees paid to our Adviser (including advisory and administrative fees on properties defined in the Advisory Agreement as New Assets) will not exceed 1.5% of Average Real Estate Assets per calendar year (or part thereof that the Advisory Agreement is in effect), calculated in accordance with the Advisory Agreement, or the Expense Cap. The Expense Cap does not limit the reimbursement by us of expenses related to securities offerings paid by our Adviser. The Expense Cap also does not apply to legal, accounting, financial, due diligence, and other service fees incurred in connection with mergers and acquisitions, extraordinary litigation, or other events outside our ordinary course of business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of real estate assets.  Additionally, in the sole discretion of the Adviser, the Adviser may elect to waive certain advisory and administrative fees otherwise due.  If advisory and administrative fees are waived in a period, the waived fees for that period are considered to be waived permanently and the Adviser may not be reimbursed in the future.

Property general and administrative expenses. Property general and administrative expenses include the costs of marketing, professional fees, general office supplies, and other administrative related costs of each property.

Depreciation and amortization. Depreciation and amortization costs primarily include depreciation of our multifamily properties and amortization of acquired in-place leases.

Other Income and Expense

Interest expense. Interest expense primarily includes the cost of interest expense on debt, the amortization of deferred financing costs and the related impact of interest rate derivatives used to manage our interest rate risk.

Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs includes prepayment penalties and defeasance costs, the write-off of unamortized deferred financing costs and fair market value adjustments of assumed debt related to the early repayment of debt, costs incurred in a debt modification that are not capitalized as deferred financing costs and other costs incurred in a debt extinguishment.

Casualty losses. Casualty losses include expenses resulting from damages from an unexpected and unusual event such as a natural disaster. Expenses can include additional payments on insurance premiums, impairment recognized on a property, and other abnormal expenses arising from the related event.  

Miscellaneous income. Miscellaneous income includes proceeds received from insurance for business interruption involving the loss of rental income at a property that has temporarily suspended operations due to an unexpected and unusual event.

Gain on sales of real estate. Gain on sales of real estate includes the gain recognized upon sales of properties. Gain on sales of real estate is calculated by deducting the carrying value of the real estate and costs incurred to sell the properties from the sales prices of the properties.

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Results of Operations for the Three Months Ended March 31, 2023 and 2022

The following table sets forth a summary of our operating results for the three months ended March 31, 2023 and 2022 (in thousands):

	For the Three Months Ended March 31,
	2023			2022			$ Change
Total revenues	$	69,227		$	60,786		$	8,441
Total expenses		(56,105	)		(55,126	)		(979	)
Operating income		13,122			5,660			7,462
Interest expense		(16,739	)		(10,636	)		(6,103	)
Gain (loss) on extinguishment of debt and modification costs		122			—			122
Casualty gain (loss)		(814	)		128			(942	)
Miscellaneous income		411			181			230
Net loss		(3,898	)		(4,667	)		769
Net loss attributable to redeemable noncontrolling interests in the Operating Partnership		(15	)		(14	)		(1	)
Net loss attributable to common stockholders	$	(3,883	)	$	(4,653	)	$	770

The change in our net loss for the three months ended March 31, 2023 as compared to the net loss for the three months ended March 31, 2022 primarily relates to an increase in total revenues and was partially offset by an increase in interest expense.

Revenues

Rental income. Rental income was $67.5 million for the three months ended March 31, 2023 compared to $59.3 million for the three months ended March 31, 2022, which was an increase of approximately $8.2 million. The increase between the periods was primarily due to a 13.5% increase in the weighted average monthly effective rent per occupied apartment unit in our Portfolio to $1,487 as of March 31, 2023 from $1,310 as of March 31, 2022.  The increase in effective rent was primarily driven by the value-add program that we have implemented and organic growth in rents in the markets where our properties are located.

Other income. Other income was $1.7 million for the three months ended March 31, 2023 compared to $1.5 million for the three months ended March 31, 2022.

Expenses

Property operating expenses. Property operating expenses were $13.3 million for the three months ended March 31, 2023 compared to $13.6 million for the three months ended March 31, 2022, which was a decrease of approximately $0.3 million. The decrease between the periods was primarily due to a $0.7 million decrease in casualty loss partially offset by increases of $0.1 million and $0.1 million in contract painting and water and sewer, respectively.

Real estate taxes and insurance. Real estate taxes and insurance costs were $10.0 million for the three months ended March 31, 2023 compared to $8.7 million for the three months ended March 31, 2022. Property taxes incurred in the first year of ownership may be significantly less than subsequent years since the purchase price of the property may trigger a significant increase in assessed value by the taxing authority in subsequent years, increasing the cost of real estate taxes.

Property management fees. Property management fees were $2.0 million for the three months ended March 31, 2023 compared to $1.8 million for the three months ended March 31, 2022, which was an increase of approximately $0.2 million. The increase between the periods was primarily due to an increase in total revenues, which the fee is primarily based on.

Advisory and administrative fees. Advisory and administrative fees were $1.9 million for the three months ended March 31, 2023 and $1.8 million for the three months ended March 31, 2022, which was an increase of approximately $0.1 million. For the three months ended March 31, 2023 and 2022, our Adviser elected to voluntarily waive the advisory and administrative fees of approximately $5.3 million and $4.9 million and are considered to be permanently waived. Our Adviser is not contractually obligated to waive fees on New Assets in the future and may cease waiving fees on New Assets at its discretion. Advisory and administrative fees may increase in future periods as we acquire additional properties, which will be classified as New Assets.

Corporate general and administrative expenses. Corporate general and administrative expenses were $3.4 million for the three months ended March 31, 2023 compared to $3.5 million for the three months ended March 31, 2022, which was a decrease of approximately $0.1 million. The decrease between the periods was primarily due to a decrease in professional fees of approximately $0.1 million.

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Property general and administrative expenses. Property general and administrative expenses were $2.3 million for the three months ended March 31, 2023 compared to $2.0 million for the three months ended March 31, 2022, which was an increase of approximately $0.3 million. The increase between the periods was primarily due to an increase in centralized services of approximately $0.3 million.

Depreciation and amortization. Depreciation and amortization costs were $23.3 million for the three months ended March 31, 2023 compared to $23.7 million for the three months ended March 31, 2022, which was a decrease of approximately $0.4 million. The decrease between the periods was due to the amortization of intangible lease assets of $0.0 million related to no properties for the three months ended March 31, 2023 compared to $1.1 million related to two property for the three months ended March 31, 2022, which was a decrease of approximately $1.1 million partially offset by an increase of $0.6 million in depreciation expense, primarily due to our acquisition activity in 2022 (acquisitions of The Adair and Estates on Maryland in the second quarter of 2022) and the timing of the transactions, as described above. The amortization of intangible lease assets over a six-month period from the date of acquisition is expected to increase the amortization expense during the year of acquisition for each property.

Other Income and Expense

Interest expense. Interest expense was $16.7 million for the three months ended March 31, 2023 compared to $10.6 million for the three months ended March 31, 2022. There was an increase in interest on debt of approximately $17.5 million and interest rate caps market-to-market gain of $2.2 million partially offset by interest rate swaps of $13.7 million. The following table details the various costs included in interest expense for the three months ended March 31, 2023 and 2022 (in thousands):

	For the Three Months Ended March 31,
	2023			2022			$ Change
Interest on debt	$	25,147		$	7,689		$	17,458
Amortization of deferred financing costs		767			565			202
Interest rate swaps		(10,145	)		3,562			(13,707	)
Interest rate caps mark-to-market loss (gain)		970			(1,180	)		2,150
Total	$	16,739		$	10,636		$	6,103

Non-GAAP Measurements

Net Operating Income and Same Store 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 other comparable properties, to determine trends in earnings and to compute the fair value of our properties as NOI is calculated by adjusting net income (loss) to add back (1) interest expense (2) advisory and administrative fees, (3) 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 (loss) computed in accordance with GAAP, (4) corporate general and administrative expenses, (5) other gains and losses that are specific to us including loss on extinguishment of debt and modification costs, (6) casualty-related expenses/(recoveries) and casualty gains (losses), (7) loss on extinguishment of debt and modification costs that are not reflective of continuing operations of the properties, and (8) property general and administrative expenses that are not reflective of the continuing operations of the properties or are incurred on behalf of the Company at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees.

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. Corporate general and administrative expenses 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. Casualty-related expenses and recoveries are excluded because they do not reflect continuing operating costs of the property owner. Entity level general and administrative expenses incurred at the properties are eliminated as they are specific to the way in which we have chosen to hold our properties and are the result of our ownership structuring. Also, expenses that are incurred upon acquisition of a property do not reflect continuing operating costs of the property owner. 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 items from net income (loss) is useful because the resulting measure captures the actual ongoing revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs.

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However, the usefulness of NOI is limited because it excludes corporate general and administrative expenses, interest expense, loss on extinguishment of debt and modification costs, certain fees to affiliates such as advisory and administrative fees, depreciation and amortization expense and gains or losses from the sale of properties, and other gains and losses as determined under 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.

We define “Same Store NOI” as NOI for our properties that are comparable between periods. We view Same Store NOI as an important measure of the operating performance of our properties because it allows us to compare operating results of properties owned for the entirety of the current and comparable periods and therefore eliminates variations caused by acquisitions or dispositions during the periods.

NOI and Same Store NOI for the Three Months Ended March 31, 2023 and 2022

The following table, which has not been adjusted for the effects of noncontrolling interests, reconciles our NOI and our Same Store NOI for the three months ended March 31, 2023 and 2022 to net loss, the most directly comparable GAAP financial measure (in thousands):

		For the Three Months Ended March 31,
		2023			2022
Net loss		$	(3,898	)	$	(4,667	)
Adjustments to reconcile net loss to NOI:
Advisory and administrative fees			1,889			1,843
Corporate general and administrative expenses			3,367			3,486
Casualty-related expenses/(recoveries)	(1)		(1,706	)		1,047
Casualty gains			814			(128	)
Property general and administrative expenses	(2)		781			738
Depreciation and amortization			23,266			23,718
Interest expense			16,739			10,636
Gain (loss) on extinguishment of debt and modification costs			(122	)		—
NOI		$	41,130		$	36,673
Less Non-Same Store
Revenues			(6,579	)		(4,403	)
Operating expenses			3,199			2,302
Operating income			—			(52	)
Same Store NOI		$	37,750		$	34,520

(1) Adjustment to net loss to exclude certain property operating expenses that are casualty-related expenses.

(2) Adjustment to net loss to exclude certain property general and administrative expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees.

Net Operating Income for Our Same Store and Non-Same Store Properties for the Three Months Ended March 31, 2023 and 2022

There are 36 properties encompassing 13,534 units of apartment space in our same store pool for the three months ended March 31, 2023 and 2022 (our “Same Store” properties). Our Same Store properties exclude the following four properties in our Portfolio as of March 31, 2023: Old Farm, Stone Creek at Old Farm, The Adair, and Estates at Maryland as well as the 107 units that are currently down (see Note 4).

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The following table reflects the revenues, property operating expenses and NOI for the three months ended March 31, 2023 and 2022 for our Same Store and Non-Same Store properties (dollars in thousands):

	For the Three Months Ended March 31,
	2023		2022		$ Change			% Change
Revenues
Same Store
Rental income	$	61,149	$	54,963	$	6,186			11.3	%
Other income		1,499		1,420		79			5.6	%
Same Store revenues		62,648		56,383		6,265			11.1	%
Non-Same Store
Rental income		6,388		4,334		2,054			47.4	%
Other income		191		69		122			176.8	%
Non-Same Store revenues		6,579		4,403		2,176			49.4	%
Total revenues		69,227		60,786		8,441			13.9	%
Operating expenses
Same Store
Property operating expenses (1)		13,376		11,587		1,789			15.4	%
Real estate taxes and insurance		8,781		7,632		1,149			15.1	%
Property management fees (2)		1,827		1,627		200			12.3	%
Property general and administrative expenses (3)		1,325		1,146		179			15.6	%
Same Store operating expenses		25,309		21,992		3,317			15.1	%
Non-Same Store
Property operating expenses (4)		1,596		962		634			65.9	%
Real estate taxes and insurance		1,239		1,088		151			13.9	%
Property management fees (2)		200		130		70			53.8	%
Property general and administrative expenses (5)		164		122		42			34.4	%
Non-Same Store operating expenses		3,199		2,302		897			39.0	%
Total operating expenses		28,508		24,294		4,214			17.3	%
Operating income
Same Store
Miscellaneous income		411		129		282			218.6	%
Non-Same Store
Miscellaneous income		—		52		(52	)	N/M
Total operating income		411		181		230		N/M
NOI
Same Store		37,750		34,520		3,230			9.4	%
Non-Same Store		3,380		2,153		1,227			57.0	%
Total NOI	$	41,130	$	36,673	$	4,457			12.2	%

(1) For the three months ended March 31, 2023 and 2022, excludes approximately $1,712,000 and $1,562,000, respectively, of casualty-related recoveries.

(2) Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the OP.

(3) For the three months ended March 31, 2023 and 2022, excludes approximately $695,000 and $694,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees.

(4) For the three months ended March 31, 2023 and 2022, excludes approximately $6,000 and $2,609,000, respectively, of casualty-related expenses.  

(5) For the three months ended March 31, 2023 and 2022, excludes approximately $86,000 and $44,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees.

See reconciliation of net loss to NOI above under “NOI and Same Store NOI for the Three Months Ended March 31, 2023 and 2022.”

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Same Store Results of Operations for the Three Months Ended March 31, 2023 and 2022

As of March 31, 2023, our Same Store properties were approximately 94.0% leased with a weighted average monthly effective rent per occupied apartment unit of $1,494. As of March 31, 2022, our Same Store properties were approximately 94.3% leased with a weighted average monthly effective rent per occupied apartment unit of $1,319. For our Same Store properties, we recorded the following operating results for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022:

Revenues

Rental income. Rental income was $61.1 million for the three months ended March 31, 2023 compared to $55.0 million for the three months ended March 31, 2022, which was an increase of approximately $6.2 million, or 11.3%. The majority of the increase is related to a 13.3% increase in the weighted average monthly effective rent per occupied apartment unit to $1,494 as of March 31, 2023 from $1,319 as of March 31, 2022, partially offset by a 0.3% decrease in occupancy.

Other income. Other income was $1.5 million for the three months ended March 31, 2023 compared to $1.4 million for the three months ended March 31, 2022.

Expenses

Property operating expenses. Property operating expenses were $13.4 million for the three months ended March 31, 2023 compared to $11.6 million for the three months ended March 31, 2022, which was an increase of approximately $1.8 million, or 15.4%. The majority of the increase is related to a $1.0 million, or 22.4%, increase in repair and maintenance costs and an increase in payroll of $0.7 million, or 15.3%.

Real estate taxes and insurance. Real estate taxes and insurance costs were $8.8 million for the three months ended March 31, 2023 compared to $7.6 million for the three months ended March 31, 2022, which was an increase of approximately $1.2 million, or 15.1%. The majority of the increase is related to an increase in real estate taxes of approximately $1.0 million. The increase between the periods was primarily due to our acquisition activity in 2022 and the timing of the transactions. Property taxes incurred in the first year of ownership may be significantly less than subsequent years since the purchase price of the property may trigger a significant increase in assessed value by the taxing authority in subsequent years, increasing the costs of real estate taxes.

Property management fees. Property management fees were $1.8 million for the three months ended March 31, 2023 compared to $1.6 million for the three months ended March 31, 2022, which was an increase of approximately $0.2 million, or 12.3%. The majority of the increase is related to a $6.1 million, or 11.3%, increase in rental income, which the fee is primarily based on.

Property general and administrative expenses. Property general and administrative expenses were $1.3 million for the three months ended March 31, 2023 compared to $1.1 million for the three months ended March 31, 2022, which was an increase of approximately $0.2 million, or 15.6%. The majority of the increase is related to an increase in property operations expense of $0.2 million.

FFO, Core FFO and AFFO

We believe that net income (loss), as defined by GAAP, is the most appropriate earnings measure. We also believe that funds from operations (“FFO”), as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), core funds from operations (“Core FFO”) and adjusted funds from operations (“AFFO”) are important non-GAAP supplemental measures of operating performance for a REIT.

Since the historical cost accounting convention used for real estate assets requires depreciation except on land, such accounting presentation implies that the value of real estate assets diminishes predictably over time. However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income (loss), as defined by GAAP. FFO is defined by NAREIT as net income (loss) computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization. We compute FFO attributable to common stockholders in accordance with NAREIT’s definition. Our presentation differs slightly in that we begin with net income (loss) before adjusting for amounts attributable to redeemable noncontrolling interests in the OP and we show the combined amounts attributable to such noncontrolling interests as an adjustment to arrive at FFO attributable to common stockholders.

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Core FFO makes certain adjustments to FFO, which are either not likely to occur on a regular basis or are otherwise not representative of the ongoing operating performance of our Portfolio. Core FFO adjusts FFO to remove items such casualty-related expenses and recoveries and gains or losses, gain on extinguishment of debt and modification costs that are not reflective of continuing operations of the properties, the amortization of deferred financing costs incurred in connection with obtaining short-term debt financing, and the noncontrolling interests (as described above) related to these items. We believe Core FFO is useful to investors as a supplemental gauge of our operating performance and is useful in comparing our operating performance with other REITs that are not as involved in the aforementioned activities.

AFFO makes certain adjustments to Core FFO in order to arrive at a more refined measure of the operating performance of our Portfolio. There is no industry standard definition of AFFO and practice is divergent across the industry. AFFO adjusts Core FFO to remove items such as equity-based compensation expense and the amortization of deferred financing costs incurred in connection with obtaining long-term debt financing, and the noncontrolling interests (as described above) related to these items. We believe AFFO is useful to investors as a supplemental gauge of our operating performance and is useful in comparing our operating performance with other REITs that are not as involved in the aforementioned activities.

The effect of the conversion of OP Units held by noncontrolling limited partners is not reflected in the computation of basic and diluted FFO, Core FFO and AFFO per share, as they are exchangeable for common stock on a one-for-one basis. The FFO, Core FFO and AFFO allocable to such units is allocated on this same basis and reflected in the adjustments for noncontrolling interests in the table below. As such, the assumed conversion of these units would have no net impact on the determination of diluted FFO, Core FFO and AFFO per share. See Note 8 to our consolidated financial statements for additional information.

We believe that the use of FFO, Core FFO and AFFO, combined with the required GAAP presentations, improves the understanding of operating results of REITs among investors and makes comparisons of operating results among such companies more meaningful. While FFO, Core FFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent cash flows from operations or net income (loss) as defined by GAAP and should not be considered as an alternative or substitute to those measures in evaluating our liquidity or operating performance. FFO, Core FFO and AFFO do not purport to be indicative of cash available to fund our future cash requirements. Further, our computation of FFO, Core FFO and AFFO may not be comparable to FFO, Core FFO and AFFO reported by other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition or define Core FFO or AFFO differently than we do.

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The following table reconciles our calculations of FFO, Core FFO and AFFO to net loss, the most directly comparable GAAP financial measure, for the three months ended March 31, 2023 and 2022 (in thousands, except per share amounts):

		For the Three Months Ended March 31,
		2023			2022			% Change
Net loss		$	(3,898	)	$	(4,667	)		16.5	%
Depreciation and amortization			23,266			23,718			-1.9	%
Adjustment for noncontrolling interests			(73	)		(57	)		28.1	%
FFO attributable to common stockholders			19,295			18,994			1.6	%
FFO per share - basic		$	0.75		$	0.74			1.7	%
FFO per share - diluted		$	0.74		$	0.73			2.0	%
(Gain) loss on extinguishment of debt and modification costs			(122	)		—			0.0	%
Casualty-related expenses/(recoveries)			(1,706	)		1,047		N/M
Casualty loss (gain)			814			(128	)	N/M
Amortization of deferred financing costs - acquisition term notes			330			182		N/M
Adjustment for noncontrolling interests			2			(4	)	N/M
Core FFO attributable to common stockholders			18,613			20,091			7.9	%
Core FFO per share - basic		$	0.73		$	0.78			-7.3	%
Core FFO per share - diluted		$	0.71		$	0.77			-6.9	%
Amortization of deferred financing costs - long term debt			437			386			13.2	%
Equity-based compensation expense			1,966			1,876			4.8	%
Adjustment for noncontrolling interests			(9	)		(7	)		28.6	%
AFFO attributable to common stockholders			21,007			22,346			-6.0	%
AFFO per share - basic		$	0.82		$	0.87			-5.9	%
AFFO per share - diluted		$	0.81		$	0.85			-5.6	%
Weighted average common shares outstanding - basic			25,599			25,620			-0.1	%
Weighted average common shares outstanding - diluted	(1)		26,075			26,193			-0.5	%
Dividends declared per common share		$	0.420		$	0.380			10.5	%
Net loss Coverage - diluted	(2)	-0.36x			-0.47x				-24.6	%
FFO Coverage - diluted	(2)	1.76x			1.91x				-7.7	%
Core FFO Coverage - diluted	(2)	1.70x			2.02x				-15.8	%
AFFO Coverage - diluted	(2)	1.92x			2.25x				-14.6	%

(1) The Company uses actual diluted weighted average common shares outstanding when in a dilutive position for FFO, Core FFO and AFFO.

(2) Indicates coverage ratio of Net loss/FFO/Core FFO/AFFO per common share (diluted) over dividends declared per common share during the period.

The three months ended March 31, 2023 as compared to the three months ended March 31, 2022

FFO was $19.3 million for the three months ended March 31, 2023 compared to $19.0 million for the three months ended March 31, 2022, which was an increase of approximately $0.3 million. The change in our FFO between the periods primarily relates to an increase in total revenues of $8.4 million, partially offset by an increase in interest expense of $6.1 million, total property operating expenses of $0.3 million, corporate general and administrative expenses of $0.1 million, and adjustments for amounts attributable to noncontrolling interests.

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Core FFO was $18.6 million for the three months ended March 31, 2023 compared to $20.1 million for the three months ended March 31, 2022, which was a decrease of approximately $1.5 million. The change in our Core FFO between the periods primarily relates to an increase in FFO and an increase in casualty-related recoveries of approximately $2.8 million, partially offset by an increase in casualty gain of $0.9 million.

AFFO was $21.0 million for the three months ended March 31, 2023 compared to $22.3 million for the three months ended March 31, 2022, which was a decrease of approximately $1.3 million. The change in our AFFO between the periods primarily relates to decreases in Core FFO and partially offset by an increase in equity-based compensation expense of $0.1 million.

Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds necessary to pay for debt maturities, operating expenses and other expenditures directly associated with our multifamily properties, including:

• capital expenditures to continue our value-add program and to improve the quality and performance of our multifamily properties;

• interest expense and scheduled principal payments on outstanding indebtedness (see “—Obligations and Commitments” below);

• recurring maintenance necessary to maintain our multifamily properties;

• distributions necessary to qualify for taxation as a REIT;

• acquisition of additional properties;

• advisory and administrative fees payable to our Adviser;

• general and administrative expenses;

• reimbursements to our Adviser; and

• property management fees payable to BH.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations and existing cash balances and any unused capacity on the Corporate Credit Facility. As of March 31, 2023, we had approximately $7.0 million of renovation value-add reserves for our planned capital expenditures to implement our value-add program. Renovation value-add reserves are not required to be held in escrow by a third party. We may reallocate these funds, at our discretion, to pursue other investment opportunities or meet our short-term liquidity requirements.

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional multifamily properties, renovations and other capital expenditures to improve our multifamily properties and scheduled debt payments and distributions. We expect to meet our long-term liquidity requirements through various sources of capital, which may include a revolving credit facility and future debt or equity issuances, existing working capital, net cash provided by operations, long-term mortgage indebtedness and other secured and unsecured borrowings, and property dispositions. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the state of overall equity and credit markets, our degree of leverage, our unencumbered asset base and borrowing restrictions imposed by lenders (including as a result of any failure to comply with financial covenants in our existing and future indebtedness), general market conditions for REITs, our operating performance and liquidity, market perceptions about us and restrictions on sales of properties under the Code. The Company continues to monitor the impact on COVID-19 and its impact on future rent collections, valuation of real estate investments, impact on cash flow and ability to refinance or repay debt. The success of our business strategy will depend, in part, on our ability to access these various capital sources.

In addition to our value-add program, our multifamily properties will require periodic capital expenditures and renovation to remain competitive. Also, acquisitions, redevelopments, or expansions of our multifamily properties will require significant capital outlays. Long-term, we may not be able to fund such capital improvements solely from net cash provided by operations because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gains, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gains. As a result, our ability to fund capital expenditures, acquisitions, or redevelopment through retained earnings long-term is limited. Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes. If we are unable to obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations, and prospects could be materially and adversely affected.

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On March 4, 2020, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of the ATM Sales Agents, pursuant to which the Company may issue and sell from time to time when an effective registration statement is available shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $225,000,000 (the “2020 ATM Program”). The 2020 ATM Program may be terminated by the Company at any time and expires automatically once aggregate sales under the 2020 ATM Program reach $225,000,000 (see Note 7 to our consolidated financial statements).

We believe that our available cash, expected operating cash flows, and potential debt or equity financings will provide sufficient funds for our operations, anticipated scheduled debt service payments and dividend requirements for the twelve-month period following March 31, 2023.

Cash Flows

The following table presents selected data from our consolidated statements of cash flows for the three months ended March 31, 2023 and 2022 (in thousands):

	For the Three Months Ended March 31,
	2023			2022
Net cash provided by operating activities	$	27,923		$	8,682
Net cash used in investing activities		(16,505	)		(10,462	)
Net cash provided by (used in) financing activities		(16,142	)		45,208
Net increase (decrease) in cash, cash equivalents and restricted cash		(4,724	)		43,428
Cash, cash equivalents and restricted cash, beginning of period		51,799			88,696
Cash, cash equivalents and restricted cash, end of period	$	47,075		$	132,124

Cash flows from operating activities. During the three months ended March 31, 2023, net cash provided by operating activities was $27.9 million compared to net cash provided by operating activities of $8.7 million for the three months ended March 31, 2022. The change in cash flows from operating activities was mainly due to the timing of the transactions, as described above. Additionally, the change between periods was attributable to a decrease and increase in our operating assets and liabilities of $5.4 million and $10.6 million, respectively.

Cash flows from investing activities. During the three months ended March 31, 2023, net cash used in investing activities was $16.5 million compared to net cash used in investing activities of $10.5 million for the three months ended March 31, 2022. The change in cash flows from investing activities was mainly due to an increase in furniture, fixtures, and equipment and our acquisition and disposition activity in 2021 and the timing of the transactions, as described above.

Cash flows from financing activities. During the three months ended March 31, 2023, net cash used in financing activities was $16.1 million compared to net cash provided by financing activities of $45.2 million for the three months ended March 31, 2022. The change in cash flows from financing activities was mainly due to a net decrease in mortgage debt of approximately $15 million, a decrease in credit facility proceeds received of $55 million, and an increase in credit facility payments of $17.5 million.

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Real Estate Investments Statistics

As of March 31, 2023, the Company was invested in a total of 40 multifamily properties, as listed below:

							Average Effective Monthly Rent Per Unit (1) as of				% Occupied (2) as of
Property Name		Rentable Square Footage (in thousands)		Number of Units (3)		Date Acquired	March 31, 2023		December 31, 2022		March 31, 2023			December 31, 2022
Arbors on Forest Ridge			155		210	1/31/2014	$	1,182	$	1,180		97.1	%		92.4	%
Cutter's Point			198		196	1/31/2014		1,433		1,497		92.9	%		93.9	%
Silverbrook			526		642	1/31/2014		1,208		1,214		87.7	%		90.3	%
The Summit at Sabal Park			205		252	8/20/2014		1,476		1,503		94.8	%		94.0	%
Courtney Cove			225		324	8/20/2014		1,395		1,490		96.0	%		94.4	%
Radbourne Lake			247		225	9/30/2014		1,408		1,385		93.3	%		93.3	%
Timber Creek			248		352	9/30/2014		1,257		1,244		90.6	%		92.3	%
Sabal Palm at Lake Buena Vista			371		400	11/5/2014		1,706		1,786		98.0	%		95.5	%
Cornerstone			318		430	1/15/2015		1,450		1,453		94.2	%		90.0	%
The Preserve at Terrell Mill			692		752	2/6/2015		1,322		1,321		90.2	%		91.9	%
Versailles			301		388	2/26/2015		1,294		1,261		92.7	%		93.0	%
Seasons 704 Apartments			217		222	4/15/2015		1,802		1,837		94.6	%		94.1	%
Madera Point			193		256	8/5/2015		1,331		1,345		94.1	%		95.7	%
Venue at 8651			289		333	10/30/2015		1,116		1,182		94.0	%		91.6	%
Parc500			266		217	7/27/2016		1,879		1,927		96.3	%		95.9	%
The Venue on Camelback			256		415	10/11/2016		1,087		1,080		95.4	%		91.8	%
Old Farm	(4)		697		734	12/29/2016		1,297		1,326		94.0	%		95.2	%
Stone Creek at Old Farm	(4)		186		190	12/29/2016		1,338		1,343		95.3	%		93.2	%
Rockledge Apartments			802		708	6/30/2017		1,591		1,550		94.3	%		92.7	%
Atera Apartments			334		380	10/25/2017		1,495		1,524		96.8	%		96.1	%
Crestmont Reserve			199		242	9/26/2018		1,221		1,252		94.9	%		95.0	%
Brandywine I & II			414		632	9/26/2018		1,247		1,252		93.5	%		94.5	%
Bella Vista			243		248	1/28/2019		1,755		1,791		95.2	%		98.0	%
The Enclave			194		204	1/28/2019		1,802		1,851		95.1	%		96.6	%
The Heritage			199		204	1/28/2019		1,668		1,653		96.6	%		95.1	%
Summers Landing			139		196	6/7/2019		1,227		1,203		96.4	%		93.9	%
Residences at Glenview Reserve			344		360	7/17/2019		1,321		1,233		94.7	%		95.8	%
Residences at West Place			345		342	7/17/2019		1,584		1,586		92.1	%		93.0	%
Avant at Pembroke Pines			1,442		1,520	8/30/2019		2,063		2,106		95.4	%		95.1	%
Arbors of Brentwood			325		346	9/10/2019		1,494		1,423		94.8	%		89.0	%
Torreyana Apartments			309		316	11/22/2019		1,600		1,557		94.0	%		93.7	%
Bloom			498		528	11/22/2019		1,333		1,315		92.6	%		89.8	%
Bella Solara			271		320	11/22/2019		1,421		1,371		94.6	%		88.8	%
Fairways at San Marcos			340		352	11/2/2020		1,656		1,576		94.3	%		93.5	%
The Verandas at Lake Norman			241		264	6/30/2021		1,336		1,316		92.8	%		94.3	%
Creekside at Matthews			263		240	6/30/2021		1,452		1,397		92.1	%		94.6	%
Six Forks Station			360		323	9/10/2021		1,344		1,416		93.9	%		92.6	%
High House at Cary			293		302	12/7/2021		1,495		1,636		96.0	%		95.4	%
The Adair			328		232	4/1/2022		1,895		1,807		94.0	%		94.4	%
Estates on Maryland			324		330	4/1/2022		1,429		1,459		96.7	%		92.7	%
			13,797		15,127

(1) Average effective monthly rent per unit is equal to the average of the contractual rent for commenced leases as of March 31, 2023 and December 31, 2022, respectively, minus any tenant concessions over the term of the lease, divided by the number of units under commenced leases as of March 31, 2023 and December 31, 2022, respectively.

(2) Percent occupied is calculated as the number of units occupied as of March 31, 2023 and December 31, 2022, divided by the total number of units, expressed as a percentage.

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(3) Includes 107 down units due to casualty events as of March 31, 2023 (see Note 3).

(4) Properties classified as held for sale as of March 31, 2023.

Debt, Derivatives and Hedging Activity

Mortgage Debt

As of March 31, 2023, our subsidiaries had aggregate mortgage debt outstanding to third parties of approximately $1.6 billion at a weighted average interest rate of 6.24% and an adjusted weighted average interest rate of 3.51%. For purposes of calculating the adjusted weighted average interest rate of our mortgage debt outstanding, we have included the weighted average fixed rate of 1.0682% for one-month LIBOR on our combined $1.2 billion notional amount of interest rate swap agreements, which effectively fixes the interest rate on $1.2 billion of our floating rate debt. See Notes 5 and 6 to our consolidated financial statements for additional information.

We have entered into and expect to continue to enter into interest rate swap and cap agreements with various third parties to fix or cap the floating interest rates on a majority of our floating rate mortgage debt outstanding. The interest rate swap agreements generally have a term of four to five years and effectively establish a fixed interest rate on debt on the underlying notional amounts. The interest rate swap agreements involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of March 31, 2023, interest rate swap agreements effectively covered 71% of our $1.6 billion of floating rate debt outstanding.

The interest rate cap agreements generally have a term of three to four years, cover the outstanding principal amount of the underlying debt and are generally required by our lenders. Under the interest rate cap agreements, we pay a fixed fee in exchange for the counterparty to pay any interest above a maximum rate. As of March 31, 2023, interest rate cap agreements covered $1.4 billion of our $1.6 billion of floating rate mortgage debt outstanding. These interest rate cap agreements effectively cap one-month LIBOR on $1.4 billion of our floating rate mortgage debt at a weighted average rate of 5.82%.

We intend to invest in additional multifamily properties as suitable opportunities arise and adequate sources of equity and debt financing are available. We expect that future investments in properties, including any improvements or renovations of current or newly acquired properties, will depend on and will be financed by, in whole or in part, our existing cash, future borrowings and the proceeds from additional issuances of common stock or other securities or property dispositions.

Although we expect to be subject to restrictions on our ability to incur indebtedness, we expect that we will be able to refinance existing indebtedness or incur additional indebtedness for acquisitions or other purposes, if needed. However, there can be no assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing common stock or other debt or equity securities, on terms that are acceptable to us or at all.

Furthermore, following the completion of our value-add and capital expenditures programs and depending on the interest rate environment at the applicable time, we may seek to refinance our floating rate debt into longer-term fixed rate debt at lower leverage levels.

Corporate Credit Facility

On March 25, 2022, the Company entered into a loan modification agreement by and among the Company, the OP, Truist Bank and the Lenders party thereto, which modified the Company’s existing credit agreement, dated as of June 30, 2021 (as amended and supplemented, the “Corporate Credit Facility”). As of March 31, 2022, there was $350.0 million available for borrowing under the Corporate Credit Facility. Subject to conditions provided in the Corporate Credit Facility, the commitments under Corporate Credit Facility may be increased up to an additional $150.0 million if the lenders agree to increase their commitments or if the lenders agree for the increase to be funded by any additional lender proposed by the Company, through the OP. The Corporate Credit Facility will mature on June 30, 2025 with respect to the revolving commitments, unless the Company exercises its option to voluntarily and permanently reduce all of the revolving commitments before the maturity date or elects to exercise its right and option to extend the facility with respect to the revolving commitments for a single one-year term. As of March 31, 2023, there was $57.0 million in aggregate principal outstanding under the Corporate Credit Facility.

The Corporate Credit Facility is a non-recourse obligation and contains customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the document evidencing the loan, defaults in payments under any other security instrument, and bankruptcy or other insolvency events. As of March 31, 2023, the Company believes it is compliant with all provisions. For additional information regarding our Corporate Credit Facility, see Note 5.

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Interest Rate Swap Agreements

In order to fix a portion of, and mitigate the risk associated with, our floating rate indebtedness (without incurring substantial prepayment penalties or defeasance costs typically associated with fixed rate indebtedness when repaid early or refinanced), we, through the OP, have entered into 11 interest rate swap transactions with KeyBank and two with SunTrust Bank (collectively the “Counterparties”) with a combined notional amount of $1.2 billion. As of March 31, 2023, the interest rate swaps we have entered into effectively replace the floating interest rate (one-month LIBOR) with respect to $1.2 billion of our floating rate debt outstanding with a weighted average fixed rate of 1.0682%. During the term of these interest rate swap agreements, we are required to make monthly fixed rate payments of 1.0682%, on a weighted average basis, on the notional amounts, while the Counterparties are obligated to make monthly floating rate payments based on one-month LIBOR to us referencing the same notional amounts. For purposes of hedge accounting under FASB ASC 815, Derivatives and Hedging, we have designated these interest rate swaps as cash flow hedges of interest rate risk. See Notes 5 and 6 to our consolidated financial statements for additional information.

The following table contains summary information regarding our outstanding interest rate swaps (dollars in thousands):

Effective Date	Termination Date	Counterparty	Notional Amount		Fixed Rate (1)
June 1, 2019	June 1, 2024	KeyBank	$	50,000		2.0020	%
June 1, 2019	June 1, 2024	Truist		50,000		2.0020	%
September 1, 2019	September 1, 2026	KeyBank		100,000		1.4620	%
September 1, 2019	September 1, 2026	KeyBank		125,000		1.3020	%
January 3, 2020	September 1, 2026	KeyBank		92,500		1.6090	%
March 4, 2020	June 1, 2026	Truist		100,000		0.8200	%
June 1, 2021	September 1, 2026	KeyBank		200,000		0.8450	%
June 1, 2021	September 1, 2026	KeyBank		200,000		0.9530	%
March 1, 2022	March 1, 2025	Truist		145,000		0.5730	%
March 1, 2022	March 1, 2025	Truist		105,000		0.6140	%
			$	1,167,500		1.0682	%	(2)

(1) The floating rate option for the interest rate swaps is one-month LIBOR. As of March 31, 2023, one-month LIBOR was 4.858%.

(2) Represents the weighted average fixed rate of the interest rate swaps.

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Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of March 31, 2023 for the next five calendar years subsequent to March 31, 2023. We used one-month LIBOR as of March 31, 2023 to calculate interest expense due by period on our floating rate debt and net interest expense due by period on our interest rate swaps.

		Payments Due by Period (in thousands)
		Total		2023		2024		2025		2026		2027		Thereafter
Operating Properties Mortgage Debt
Principal payments		$	1,553,474	$	226	$	391	$	177,373	$	290,324	$	-	$	1,085,160
Interest expense	(1)		555,156		40,814		55,125		62,132		58,451		68,593		270,041
Total		$	2,108,630	$	41,040	$	55,516	$	239,505	$	348,775	$	68,593	$	1,355,201
Held For Sale Property Mortgage Debt
Principal payments		$	68,160	$	—	$	68,160	$	—	$	—	$	—	$	—
Interest expense			5,657		3,404		2,253		—		—		—		—
Total		$	73,817	$	3,404	$	70,413	$	—	$	—	$	—	$	—
Credit Facility
Principal payments		$	57,000	$	—	$	—	$	57,000	$	—	$	—	$	—
Interest expense			9,255		3,100		4,126		2,029		—		—		—
Total		$	66,255	$	3,100	$	4,126	$	59,029	$	—	$	—	$	—
Total contractual obligations and commitments		$	2,248,702	$	47,544	$	130,055	$	298,534	$	348,775	$	68,593	$	1,355,201

(1) Interest expense obligations includes the impact of expected settlements on interest rate swaps which have been entered into in order to fix the interest rate on the hedged portion of our floating rate debt obligations. As of March 31, 2023, we had entered into ten interest rate swap transactions with a combined notional amount of $1.2 billion. We have allocated the total impact of expected settlements on the $1.2 billion notional amount of interest rate swaps to ‘Operating Properties Mortgage Debt.’ We used one-month LIBOR as of March 31, 2023 to determine our expected settlements through the terms of the interest rate swaps.

Corporate Credit Facility

The Corporate Credit Facility will mature on June 30, 2025 with respect to the revolving commitments, unless the Company exercises its option to voluntarily and permanently reduce all of the revolving commitments before the maturity date or elects to exercise its right and option to extend the facility with respect to the revolving commitments for a single one-year term.

Advisory Agreement

Our Advisory Agreement requires that we pay our Adviser an annual advisory and administrative fee of 1.2%. The advisory and administrative fees paid to the Adviser on the Contributed Assets (as defined in the Advisory Agreement) are subject to an annual cap of approximately $5.4 million. For the three months ended March 31, 2023 and 2022, the Company incurred advisory and administrative fees of $1.9 million and $1.8 million, respectively.

NLMF Holdco, LLC

The Company’s agreement with NLMF Holdco, LLC may result in additional funding requirements to cover future project costs. The maximum exposure of potential commitments is expected to be no more than $4.0 million. We expect that these actions will provide faster, more reliable and lower cost internet to our residents. We expect to roll out this service to our other properties in the future. As of March 31, 2023, the Company has funded approximately $0.3 million to NLMF Holdco, LLC which is included in prepaid and other assets on the consolidated balance sheet of the Company. For the three months ended March 31, 2023, the Company incurred expenses of $0.1 million for fiber internet service which is included in property operating expenses on the consolidated statement of operations and comprehensive income (loss).

Capital Expenditures and Value-Add Program

We anticipate incurring average annual repairs and maintenance expense of $575 to $725 per apartment unit in connection with the ongoing operations of our business. These expenditures are expensed as incurred. In addition, we reserve, on average,

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approximately $250 to $350 per apartment unit for non-recurring capital expenditures and/or lender required replacement reserves. When incurred, these expenditures are either capitalized or expensed, in accordance with GAAP, depending on the type of the expenditure. Although we will continuously monitor the adequacy of this average, we believe these figures to be sufficient to maintain the properties at a high level in the markets in which we operate. A majority of the properties in our Portfolio were underwritten and acquired with the premise that we would invest $4,000 to $10,000 per unit in the first 36 months of ownership, in an effort to add value to the asset’s exterior and interiors. In many cases, we reserve cash at the closing of each acquisition to fund these planned capital expenditures and value-add improvements. As of March 31, 2023, we had approximately $7.0 million of renovation value-add reserves for our planned capital expenditures and other expenses to implement our value-add program, which will complete approximately 924 planned interior rehabs. The following table sets forth a summary of our capital expenditures related to our value-add program for the  (in thousands):

		For the Three Months Ended March 31,
Rehab Expenditures		2023		2022
Interior	(1)	$	7,309	$	4,714
Exterior and common area			4,007		917
Total rehab expenditures		$	11,316	$	5,631

(1) Includes total capital expenditures during the period on completed and in-progress interior rehabs. For the three months ended March 31, 2023 and 2022, we completed full and partial interior rehabs on 494 and 531 units, respectively.  

Income Taxes

We anticipate that we will continue to qualify to be taxed as a REIT for U.S. federal income tax purposes, and we intend to continue to be organized and to operate in a manner that will permit us to qualify as a REIT. 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 stockholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the three months ended March 31, 2023 and 2022.

If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax on our taxable income at regular corporate income tax rates, and dividends paid to our stockholders would not be deductible by us in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to stockholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify to be taxed as a REIT.

We evaluate the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing our 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. Our 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. We have no examinations in progress and none are expected at this time.

We recognize our tax positions and evaluate them using a two-step process. First, we determine 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. Second, we will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.

We had no material unrecognized tax benefit or expense, accrued interest or penalties as of March 31, 2023. We and our subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2022, 2021 and 2020 tax years remain open to examination by tax jurisdictions to which our subsidiaries and we are subject. When applicable, we recognize interest and/or penalties related to uncertain tax positions on our consolidated statements of operations and comprehensive income (loss).

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Dividends

We intend to make regular quarterly dividend payments to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We intend to make regular quarterly dividend payments of all or substantially all of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our Board. Before we make any dividend payments, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets, borrow funds or raise additional capital to make cash dividends or we may make a portion of the required dividend in the form of a taxable distribution of stock or debt securities.

We will make dividend payments based on our estimate of taxable earnings per share of common stock, but not earnings calculated pursuant to GAAP. Our dividends and taxable income and GAAP earnings will typically differ due to items such as depreciation and amortization, fair value adjustments, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses. Our quarterly dividends per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share. Our Board declared our first quarterly dividend of 2023 of $0.42 per share on February 17, 2023, which was paid on March 31, 2023 and funded out of cash flows from operations.

Off-Balance Sheet Arrangements

As of March 31, 2023 and December 31, 2022, 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.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these judgments, assumptions and estimates for changes that would affect the reported amounts. These estimates are based on management’s historical industry experience and on various other judgments and assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these judgments, assumptions and estimates. Below is a discussion of the accounting policies that we consider critical to understanding our financial condition or results of operations where there is uncertainty or where significant judgment is required. A discussion of recent accounting pronouncements and our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in this quarterly report.

Purchase Price Allocation

Upon acquisition of a property considered to be an asset acquisition, the purchase price and related acquisition costs (“total consideration”) are allocated to land, buildings, improvements, furniture, fixtures, and equipment, and intangible lease assets based on relative fair value in accordance with FASB ASC 805, Business Combinations. Acquisition costs are capitalized in accordance with FASB ASC 805.

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 (see Note 6 to our consolidated financial statements), is based on management’s estimate of the property’s “as-if” vacant fair value and 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. 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 debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.

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Impairment

Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The key inputs into our impairment analysis include, but are not limited to, the holding period, net operating income, and capitalization rates. In such cases, we will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, 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’s impairment analysis identifies and evaluates events or changes in circumstances that indicate the carrying amount of a real estate investment may not be recoverable, including determining the period the Company will hold the rental property, net operating income, and the estimated capitalization rate for each respective real estate investment.

Inflation

The real estate market has not been directly affected by inflation in the past several years due to increases in rents nationwide. The majority of our lease terms are for a period of one year or less and reset to market if renewed. The majority of our leases also contain protection provisions applicable to reimbursement billings for utilities. Due to the short-term nature of our leases, we do not believe our results will be materially affected.

Inflation may also affect the overall cost of debt, as the implied cost of capital increases. The Federal Reserve has raised interest rates in response to or in anticipation of continued inflation concerns. We intend to mitigate these risks through long-term fixed interest rate loans and interest rate hedges, which to date have included interest rate cap and interest rate swap agreements.

REIT Tax Election

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code and expect to continue to qualify as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our “REIT taxable income,” as defined by the Code, to our stockholders. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the three months ended March 31, 2023 and 2022. We believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the adverse effect on the value of assets and liabilities that results from a change in market conditions. Our primary market risk exposure is interest rate risk with respect to our indebtedness and counterparty credit risk with respect to our interest rate derivatives. In order to minimize counterparty credit risk, we enter into and expect to enter into hedging arrangements only with major financial institutions that have high credit ratings. As of March 31, 2023, we had total indebtedness of $1.7 billion at a weighted average interest rate of 6.26%, of which $1.6 billion was debt with a floating interest rate. As of March 31, 2023, interest rate swap agreements effectively covered 71% of our $1.6 billion of floating rate debt outstanding. For purposes of calculating the adjusted weighted average interest rate of the total indebtedness, we have included the weighted average fixed rate of 1.0682% for one-month LIBOR on the $1.2 billion notional amount of interest rate swap agreements that we have entered into as of March 31, 2023.

An increase in interest rates could make the financing of any acquisition by us more costly. Rising interest rates could also limit our ability to refinance our debt when it matures or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. We may manage, or hedge, interest rate risks related to our borrowings by means of interest rate cap and interest rate swap agreements. As of March 31, 2023, the interest rate cap agreements we have entered into effectively cap one-month LIBOR on $1.4 billion of our floating rate mortgage debt at a weighted average rate of 5.82% for the term of the agreements, which is generally three to four years. We also expect to manage our exposure to interest rate risk by maintaining a mix of fixed and floating rates for our indebtedness.

In order to fix a portion of, and mitigate the risk associated with, our floating rate indebtedness (without incurring substantial prepayment penalties or defeasance costs typically associated with fixed rate indebtedness when repaid early or refinanced), we, through the OP, have entered into ten interest rate swap transactions with the Counterparties with a combined notional amount of $1.2 billion. The interest rate swaps we have entered into effectively replace the floating interest rate (one-month LIBOR) with respect to that amount with a weighted average fixed rate of 1.0682%. During the term of these interest rate swap agreements, we are required to make monthly fixed rate payments of 1.0682%, on a weighted average basis, on the notional amounts, while the Counterparties are obligated to make monthly floating rate payments based on one-month LIBOR to us referencing the same notional amounts. We have designated these interest rate swaps as cash flow hedges of interest rate risk.

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Until our interest rates reach the caps provided by our interest rate cap agreements, each quarter point change in LIBOR would result in an approximate increase to annual interest expense costs on our floating rate indebtedness, reduced by any payments due from the Counterparties under the terms of the interest rate swap agreements we had entered into as of March 31, 2023, of the amounts illustrated in the table below for our indebtedness as of March 31, 2023 (dollars in thousands):

Change in Interest Rates	Annual Increase to Interest Expense
0.25%	$	1,051
0.50%		2,102
0.75%		3,153
1.00%		4,204

There is no assurance that we would realize such expense as such changes in interest rates could alter our liability positions or strategies in response to such changes.

We may also be exposed to credit risk in the derivative financial instruments we use. Credit risk is the failure of the Counterparties to perform under the terms of the derivative financial instruments. If the fair value of a derivative financial instrument is positive, the Counterparties will owe us, which creates credit risk for us. If the fair value of a derivative financial instrument is negative, we will owe the Counterparties and, therefore, do not have credit risk. We seek to minimize the credit risk in derivative financial instruments by entering into transactions with major financial institutions that have high credit ratings.

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. We have material contracts that are indexed to USD-LIBOR and are monitoring this activity and evaluating the related risks.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our President and Chief Financial Officer, evaluated, as of March 31, 2023, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2023, to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

There has been no change in internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

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

There have been no material changes to the risk factors previously disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report, filed with the SEC on February 24, 2023:

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchase of Shares

On June 15, 2016, we announced that our Board authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $30.0 million during a two-year period that was set to expire on June 15, 2018 (the “Share Repurchase Program”).  On April 30, 2018, our Board increased the Share Repurchase Program from $30.0 million to up to $40.0 million and extended it by an additional two years to June 15, 2020. On March 13, 2020, the Board increased the Share Repurchase Program from $40.0 million to up to $100.0 million and extended it to March 12, 2023. On October 25, 2022, we announced that our Board authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $100.0 million during a two-year period that will expire on October 24, 2024. This authorization replaced the Board’s prior authorization of the Share Repurchase Program. During the three months ended March 31, 2023, the Company repurchased no shares of its common stock. Since the inception of the Share Repurchase Program through March 31, 2023, the Company had repurchased 2,550,628 shares of its common stock, par value $0.01 per share, at a total cost of approximately $72.3 million, or $28.36 per share as shown in the table below:

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that may yet be Purchased under the Plans or Programs (in millions)
Beginning Total		2,550,628	$	28.36		2,550,628	$	100.0
January 1 – January 31		—		—		—		100.0
February 1 – February 28		—		—		—		100.0
March 1 – March 31		—		—		—		100.0
Total as of March 31, 2023		2,550,628	$	28.36		2,550,628	$	100.0

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

EXHIBIT INDEX

Exhibit Number	Description
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1+	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
101.INS*	Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document)
101.SCH*	Inline XBRL Taxonomy Extension Schema
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase
101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase
104*	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

+ Furnished herewith.

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SIGNATURES

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

NEXPOINT RESIDENTIAL TRUST, INC.

Signature	Title	Date
/s/ Jim Dondero	President and Director	April 27, 2023
Jim Dondero	(Principal Executive Officer)
/s/ Brian Mitts	Chief Financial Officer and Director	April 27, 2023
Brian Mitts	(Principal Financial Officer and Principal Accounting Officer)

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