ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINAN CIAL CONDITION AND RESULTS OF OPERATIONS (unaudited)
The following discussion and analysis should be read in conjunction with the accompanying financial statements of Resource REIT, Inc. and the notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I, as well as the notes to our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations for Resource Real Estate Opportunity REIT I, Inc. included in the Amended Current Report on Form 8-K/A filed by Resource REIT, Inc. on April 8, 2021.
Overview
We are a self-managed REIT formed as a Maryland corporation on September 28, 2012. We own a diversified portfolio of U.S. commercial real estate. We conduct our operations through RRE Opportunity OP II, LP, (“REIT II OP” or “OP II”), our operating partnership. We have sub-contracted with Greystar, a third-party property management company to provide property management services at our properties. Our portfolio consists of multifamily rental properties to which we have added value with a capital infusion (referred to as “value add properties”). The primary portion of our initial public offering commenced in February 2014 and closed in February 2016.
On January 28, 2021, we acquired REIT I and Resource Apartment REIT III, Inc. (“REIT III”) and their respective subsidiaries in stock-for-stock transactions (collectively, the “Resource REIT Mergers”). As a result of our acquisition of REIT I and its subsidiaries, including the entities that provide our advisory, asset and property management services, we became self-managed and as of December 31, 2021, have 44 e mployees. Prior to January 28, 2021, we were externally advised by Resource Real Estate Opportunity Advisor II, LLC (our “Advisor”) pursuant to an advisory agreement initially entered into in February 2014. As of December 31, 2021, we owned 45 properties in 13 states, comprising a total of 13,707 multifamily units.
In connection with the Resource REIT Mergers, REIT II was the legal acquirer of both REIT I and REIT III, however, REIT I was the accounting acquirer for financial reporting purposes. Thus, the financial information set forth herein subsequent to the Resource REIT Mergers reflects results of the combined entity, and the financial information set forth herein prior to the Resource REIT Mergers reflects REIT I’s results. For this reason, period to period comparisons may not be meaningful.
In addition, unless the context requires otherwise, all references to the “Company,” “we,” “our,” and “us” herein mean REIT I, and one or more of REIT I’s subsidiaries for periods prior to the Resource REIT Mergers, and REIT II and one or more of REIT II’s subsidiaries for periods following the Resource REIT Mergers. Certain historical information of REIT II is included for background purposes.
Self-Management Transaction
On September 8, 2020, REIT I engaged in a series of transactions which we refer to as the “Self-Management Transaction,” pursuant to which REIT I acquired the advisors and property managers for REIT I, REIT II and REIT III from C-III Capital Partners, LLC (“C-III”) and its affiliates in exchange for 6,158,759 REIT I OP Common Units (“OP Common units”), 319,965 REIT I OP Series A Preferred Units (“OP I Preferred Units”) with a face value of $67.5 million, and the right to receive certain deferred payments having the aggregate value of $27.0 million. Prior to this transaction, our Advisor was an indirect wholly-owned subsidiary of Resource America, Inc. (“RAI”), our initial sponsor and an indirect wholly-owned subsidiary of C-III.
As a result of the Self-Management Transaction, REIT I was self-managed for the period from September 8, 2020 through the effectiveness of the Resource REIT Mergers and succeeded to the advisory, asset management and property management arrangements formerly in place with REIT II and REIT III until the Resource REIT Mergers. At the time of the Resource REIT Mergers, the OP I Common Units converted into 7,539,738 OP Common Units and Op I Preferred Units have participation rights of 391,711 OP Preferred Units.
On September 14, 2021, in accordance with a letter agreement entered with C-III and RRE Legacy Co LLC (“Legacy Co”), we redeemed all of the 319,965 outstanding Series A Preferred Units collectively held by C-III and Legacy Co for $67.5 million and exchanged all of the 7,539,737.53 common units collectively held by C-III and Legacy Co for an equivalent number of shares of our common stock.
Blackstone Merger
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On January 23, 2022, we entered into an Agreement and Plan of Merger (the “Blackstone Merger Agreement”). The Blackstone Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, we will merge with and into an affiliate of Blackstone Real Estate Income Trust, Inc. (“BREIT”), which is an affiliate of Blackstone, Inc. Upon completion of the transaction (the “Blackstone Merger”), our separate existence will cease. The transactions contemplated by the Blackstone Merger Agreement were unanimously approved by our board of directors.
COVID-19 Pandemic and Portfolio Outlook
As of December 31, 2021, the novel coronavirus, or COVID-19, pandemic is ongoing. During the year ended December 31, 2020, the COVID-19 pandemic created disruption in the U.S. and global economies, adversely impacting many industries, including the real estate industry, directly or indirectly. During the year ended December 31, 2021, the global economy has, with certain setbacks, begun reopening and wider distribution of vaccines will likely encourage greater economic activity. Nonetheless, the recovery could remain uneven, particularly given uncertainty with respect to the distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus.
The outbreak of COVID-19 and its impact on the current financial, economic, capital markets and real estate market environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition, results of operations, liquidity, and ability to pay distributions. Although a recovery is partially underway, it continues to be gradual, uneven and characterized by meaningful dispersion across sectors and regions, and could be hindered by persistent or resurgent infection rates. The most recent round of U.S. fiscal stimulus could provide meaningful support, along with continued accommodative monetary policy and wider distribution of vaccines. Issues with respect to the distribution and acceptance of vaccines or the spread of new variants of the virus could adversely impact the recovery. Overall, there remains significant uncertainty regarding the timing and duration of the economic recovery, which precludes any prediction as to the ultimate adverse impact COVID-19 may have on our business.
Many of our tenants have suffered difficulties with their personal financial situations as a result of job loss or reduced income and, depending upon the duration of the measures put in place to mitigate or contain the spread of the virus and the corresponding economic slowdown, some of our tenants have or will seek rent deferrals or become unable to pay their rent. For the three months ended December 31, 2021, our 30-day collection rate was approximately 95.6% , of the billed rental income. Collections and rent relief requests to-date may not be indicative of collections or requests in any future period. In particular, many of our tenants may be the recipients of unemployment benefits or other economic stimulus under the CARES Act and the 2021 American Rescue Plan which will have aided in the payment of rent due. The extent to which these benefits will be available going forward is uncertain. To the extent our tenants do not have access to additional federal or state relief to mitigate the impact of the COVID-19 pandemic on their personal finances our ability to collect rent and our operations would be adversely affected. In addition, we expect the economic caused by the COVID-19 pandemic will cause elevated credit and may our ability to increase rental rates. If required by applicable law, we may continue to waive fees, , and offer a payment deferral plan to residents who have been financially impacted by COVID-19 where applicable federal, state or local restrictions are in effect. To help mitigate the impact on our operating results of the COVID-19 pandemic, in 2020, we initiated various operational cost saving initiatives across our portfolio. In addition, we have taken measures to preserve cash, which will help to offset any impact to our liquidity that may occur as a result of the COVID-19 pandemic.
The extent to which the COVID-19 pandemic or any other pandemic, epidemic or disease impacts our operations and those of our tenants remain uncertain and cannot be predicted with confidence and will depend on the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. However, notwithstanding the challenging economic circumstances created by the COVID-19 pandemic, we believe our focus on multifamily assets makes us better positioned relative to other classes of real estate to withstand many of the adverse impacts of the COVID-19 pandemic as housing is a basic need, rather than a discretionary expense. In addition, we have taken several steps to offset any disruptions in rent that may occur as a result of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic (or a future pandemic, epidemic or disease) presents material uncertainty and risk with respect to our business, financial condition, results of operations and cash flows.
Results of Operations
As of December 31, 2021, we owned interests in a total of 45 multifamily properties. The three combined REITs have acquired interests in 78 multifamily properties, and as of December 31, 2021, have sold interests in 33 of these properties.
Through December 31, 2021, the COVID-19 pandemic has not significantly impacted our operating results; however, we have experienced some reductions in revenue during the year as a result of increased bad debt expense, waiving late fees and the suspension of evictions at our properties. We expect, however, that as the impact of COVID-19 continues to be felt, the COVID-19 outbreak will adversely affect our business, financial condition, results of operations and cash flows going forward,
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including but not limited to, rental revenues and leasing activity, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous factors, many of which are outside of our control, as discussed above.
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
The following table reflects the revenues, property operating expenses and net operating income, or NOI, (as defined below) for the years ended December 31, 2021 and 2020 for our Same Store and Non-Same Store properties (as defined below) (dollars in thousands, except per unit):
As Of or For the Year Ended
December 31, 2021 (2)
December 31, 2020
Increase / (Decrease)
% Change (1)
Number of properties:
Same Store
Non-Same Store
Total
Number of Units
Same Store
Non-Same Store
Total
Average Occupancy
Same Store
Non-Same Store
Total
Net effective rent, per occupied unit
Same Store
Non-Same Store
All properties
Revenues:
Same Store revenues
Non-Same Store revenues
Total Rental income
Expenses:
Same Store
Property operating expenses, including real estate taxes
Property management fees - third party
Property management fees - related party
General and administrative - property
Same Store operating expenses
Non-Same Store
Property operating expenses, including real estate taxes
Property management fees - third party
Property management fees - related party
General and administrative - property
Non-Same Store operating expenses
Total operating expenses
Net Operating Income "NOI"
Same Store
Non-Same Store
Total NOI
(1) N/M- result not meaningful.
(2) We have combined two properties; Adair off Addison and Adair off Addison II.
See reconciliation of Net income (loss) attributable to common stockholders to NOI table below:
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For the Year Ended
December 31, 2021
December 31, 2020
Increase / (Decrease)
% Change
Net income (loss) attributable to common stockholders
Allocation of income to preferred unit holders attributable to noncontrolling interests
Net loss attributable to noncontrolling interests
Net income (loss) after preferred unit distributions
Preferred return to preferred OP unit holders
Redemption of preferred OP units
Net income (loss)
Adjustments to reconcile net income (loss) to NOI:
Casualty loss
Acquisition fees
Transaction expenses
Property management fees - third party
Asset Management fees - related party
General and administrative - corporate
Loss on disposal of assets
Depreciation and amortization expense
Interest expense
Interest income
Gain on sale of land easement
Gain on sale of rental property
Management fee and other income
Insurance proceeds in excess of cost basis
Provision for income taxes
NOI
Net Operating Income or “NOI” is a non-GAAP financial measure, which we define as total rental property revenues less property operating expenses, including real estate taxes. We believe that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that is unaffected by depreciation and amortization, interest expense, related party management fees, casualty losses and gains, losses on disposal of assets and corporate general and administrative expenses. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance.
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. The 22 properties formerly held by REIT II and REIT III which were acquired in the Resource REIT Mergers are included in Non-Same Store results and statistics for the year ended December 31, 2021.
Net effective rent, per occupied unit is equal to the average of gross potential rent net of gain/loss to lease, less vacancy, non-revenue units and concessions, divided by the average occupancy (in units) for the periods presented.
Average occupancy represents the daily average occupied units for the reporting period divided by the total number of units, expressed as a percentage.
Rental and other property revenue. Same store property revenue of the former REIT I portfolio, increased by approximately $5.7 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase was principally due to an approximately $5.2 million increase in rental income resulting from a 1.4% i ncrease in average occupancy and an approximately $54 per unit increase in net effective monthly rent. This increase was offset by an increase in bad debt expense, net of recoveries, of approximately $420,000 for the year ended December 31, 2021 as compared to the year ended December 31, 2020. In addition, utility income and ancillary tenant fees increased by approximatel y $861,000 d ue to increased utility charges and late fees charged to tenants. Non-same store results include the former REIT II and REIT III properties for the period from January 28, 2021 through December 31, 2021 due to the Resource REIT Mergers as well as four former REIT I properties sold during 2021.
Property operating expenses. Same store property operating expenses increased by approximately $560,000 p rimarily due to an approximately $383,000 increase in real estate taxes and an approximately $195,000 increase in utilities. There was an approximately $1.3 million net decrease in property management fees for same store for the year ended December 31, 2021 as compared the year ended December 31, 2020. Prior to September 8, 2020, our former Advisor subcontracted certain services to
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an unaffiliated third-party, Greystar, and paid for those services from its property management fee; after September 8, 2020, we paid those fees directly to Greystar.
Management Fees . Asset management fees- related party decreased by approximately $8.5 million f or the year ended December 31, 2021 as compared to the year ended December 31, 2020 as a result of the Self-Management Transaction on September 8, 2020. In addition, we paid Greystar approximately $887,000 for the period September 8, 2020 to December 31, 2020 to manage the former REIT II and III properties. These costs are included in non-same store operating expenses in 2021.
Casualty Loss . We are self-insured for property related casualties up to $1.1 million and as of December 31, 2021, we had incurred approximately $944,000 of expense related to these losses. In addition, we have deductibles of $25,000 for general liability losses and $100,000 for property related losses.
Transaction expenses . We incurred approximately $465,000 of transaction costs related to the Blackstone Merger in the three months ended December 31, 2021. Transaction costs of approximately $2.3 million were expensed in connection with the Self-Management Transaction during the year ended December 31, 2020.
General and Administrative. Corporate general and administrative expenses increased by approximately $16.8 million for the year ended December 31, 2021 as compared the year ended December 31, 2020 including an increase in payroll and benefit costs of approximatel y $12.3 million in cluding approximately $4.6 million o f compensation expense for restricted stock awards, professional fees of approximately $980,000 , transfer agent fees of approximately $628,000 and insurance expense of approximately $777,000. The year ended December 31, 2020 primarily included allocations from our former Advisor to reimburse for costs incurred to manage assets of REIT I. As of December 31, 2021, we employed 44 e mployees to manage the assets of the merged REITs.
Depreciation and Amortization . Depreciation and amortization expense is comprised of the depreciation on our rental properties and amortization of intangible assets primarily related to in-place apartment unit leases from the Resource REIT Mergers. The increase in depreciation and amortization expense during the year ended December 31, 2021, as compared to the year ended December 31, 2020, was comprised as follows (in thousands):
Same Store
Non-Same Store
Corporate
Total
Depreciation
Amortization of intangibles
Interest Expense . Interest expense increased by approximatel y $21.7 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 and the increase was comprised as follows (in thousands):
Same Store
Non-Same Store
Revolving Credit Facility
Total
Interest payable to banks
Deferred finance cost amortization
Fair value amortization
Interest rate cap adjustments
Prepayment penalties
Deferred finance extinguishment
Gain on sale of rental properties . We sold five properties (Evergreen at Coursey, Brookwood, Pines of York, Retreat at Rocky Ridge, and Tech Center) during the year ended December 31, 2021 totaling approximately $202.2 million in gross proceeds and realizing approximately $93.7 million in gain on sales.
Other Revenue. We recorded approximately $1.2 million of asset and property management fee revenue from REIT II and REIT III for the period from January 1, 2021 through January 27, 2021 prior to the Resource REIT Mergers in 2021. We recorded asset and property management fee revenue and debt financing fees from REIT II and REIT III for the period September 9, 2020 through December 31, 2020 of approximately $5.2 million following the Self-Management Transaction in 2020. Upon effectiveness of the Resource REIT Mergers, these fees were no longer earned.
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Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
The following table reflects the revenues, property operating expenses and net operating income, or NOI, (as defined below) for the years ended December 31, 2020 and 2019 for our Same Store and Non-Same Store properties (as defined below) (dollars in thousands, except per unit):
For the Year Ended
December 31, 2020
December 31, 2019
Increase / (Decrease)
% Change (1)
Number of properties:
Same Store
Non-Same Store
Total
Number of Units
Same Store
Non-Same Store
Total
Average Occupancy
Same Store
Non-Same Store
Total
Net effective rent, per occupied unit
Same Store
Non-Same Store
All properties
Revenues:
Same Store revenues
Non-Same Store revenues
Total Rental income
Expenses:
Same Store
Property operating expenses, including real estate taxes
Property management fees - third party
Property management fees - related party
General and administrative - property
Same Store operating expenses
Non-Same Store
Property operating expenses, including real estate taxes
Property management fees - third party
Property management fees - related party
General and administrative - property
Non-Same Store operating expenses
Total operating expenses
Net Operating Income "NOI"
Same Store
Non-Same Store
Total NOI
(1) N/M- result not meaningful.
See reconciliation of net loss attributable to common stockholders to NOI in the table below:
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For the Year Ended
December 31, 2020
December 31, 2019
Increase / (Decrease)
% Change
Net loss attributable to common stockholders
Allocation of income to preferred unit holders attributable to noncontrolling interests
Net loss attributable to noncontrolling interests
Net loss after preferred unit distributions
Preferred return to preferred OP unit holders
Net loss
Adjustments to reconcile net loss to NOI:
Casualty loss
Acquisition fees
Transaction expenses
Property management fees - third party
Asset Management fees - related party
General and administrative - corporate
Loss on disposal of assets
Depreciation and amortization expense
Interest expense
Interest income
Gain on sale of land easement
Gain on sale of rental property
Management fee and other income
Insurance proceeds in excess of cost basis
NOI
Net Operating Income or “NOI” is a non-GAAP financial measure, which we define as total rental property revenues less property operating expenses, including real estate taxes. We believe that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that is unaffected by depreciation and amortization, interest expense, related party management fees, casualty losses and gains, losses on disposal of assets and corporate general and administrative expenses. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance.
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. Same Store and Non-Same Store for the years ended December 31, 2020 and 2019 are comprised of REIT I properties only.
Net effective rent, per occupied unit is equal to the average of gross potential rent net of gain/loss to lease, less vacancy, non-revenue units and concessions, divided by the average occupancy (in units) for the periods presented.
Average occupancy represents the daily average occupied units for the reporting period divided by the total number of units, expressed as a percentage.
Rental and other property revenue. Same store property revenue of the former REIT I portfolio, increased by approximately $1.3 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019. The increase was principally resulting from an increase of approximately $23 per unit net effective monthly rent. This increase was offset by an increase in bad debt expense, net of recoveries, of approximately $834,000 fo r the year ended December 31, 2020 as compared to the year ended December 31, 2019. In addition, utility income increased by approximately $110,000 due to increased utility charges to tenants.
Property operating expenses. Same store property operating expenses increased by approximately $2.5 million primarily due to an approximate $486,000 increase in real estate taxes, $436,000 increase in turnover costs, $494,000 increase in utilities and an $608,000 increase in insurance. There was an approximate $643,000 net decrease in property management fees for same store for the year ended December 31, 2020 as compared the year ended December 31, 2019. Prior to September 8, 2020, our former Advisor subcontracted certain services to an unaffiliated third-party, Greystar, and paid for those services from its property management fee; after September 8, 2020, we paid those fees directly to Greystar.
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Transaction expenses . Transaction costs of approximately $2.3 million were expensed in connection with the Self-Management Transaction during the twelve months ended December 31, 2020.
Management Fees . Asset management fees- related party decreased by approximately $4.0 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019 as a result of these fees no longer being paid as of September 8, 2020.
General and Administrative. Corporate g eneral and administrative expenses, primarily payroll and benefit costs, increased by approximately $2.1 million for the year ended December 31, 2020 as compared the year ended December 31, 2019 connected to the Self-Management Transaction in 2020.
Depreciation and Amortization . Depreciation and amortization expense is comprised of the depreciation on our rental properties and amortization of intangible assets related to in-place apartment unit leases from the Resource REIT Mergers and in-place antennae leases. The decrease in depreciation and amortization expense during the year ended December 31, 2020, as compared to the year ended December 31, 2019, was comprised as follows (in thousands):
Same Store
Non-Same Store
Corporate
Total
Depreciation
Amortization of intangibles
Interest Expense . Interest expense decreased by approximately $12.2 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019 and the decrease was comprised as follows (in thousands):
Same Store
Non-Same Store
Total
Interest payable to banks
Deferred finance cost amortization
Fair value amortization
Interest rate cap adjustments
Deferred finance extinguishment
Gain on sale of rental properties . We sold Williamsburg on March 8, 2019 for $70.0 million realizing an approximate $34.6 million gain on sale. We sold Pinehurst on December 20, 2019 for $12.3 million realizing an approximate $4.2 million gain on sale.
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Liquidity and Capital Resources
We have derived the capital required to purchase real estate investments and conduct our operations from the proceeds of our public offerings, secured financings from banks or other lenders, proceeds from the sale of assets, and cash flow generated from our operations.
Our ability to derive the capital needed to conduct our operations may be adversely affected by the impact of the COVID-19 pandemic as discussed above.
We allocate funds as necessary to support the future maintenance and viability of properties we acquire in order to preserve value for our investors. If such allocations and any other available income become insufficient to cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties, debt investments or other assets we may hold. We cannot assure you that we will be able to access additional funds when we need them or upon acceptable terms.
During the year ended December 31, 2021, we obtained REIT-level financing through a line of credit from Bank of America. Some of our assets serve as collateral for this debt. In addition to debt financing at the REIT-level, we have financed, and may continue to finance, the acquisition costs of individual real estate investments, as well as the acquisition costs of all or a group of real estate investments acquired by us, by causing our subsidiaries to borrow directly from third-party financial institutions or other commercial lenders. Under these circumstances, we anticipate that certain properties will serve as collateral for the debt we incur to acquire those particular properties and that we will seek to obtain nonrecourse financing for the acquisition of the properties. However, there is no guarantee that we will be successful in obtaining financing arrangements on a property-by-property basis and that the loans would be nonrecourse to us. We have and may again also obtain mortgage financing which contains cross-collateralization or cross-default provisions whereby a default on a single property could affect multiple properties. Finally, we may also obtain seller financing with respect to specific assets that we acquire.
Material Cash Requirements
Our expected material cash requirements for the twelve months ended December 31, 2022 and thereafter are comprised of (i) contractually obligated expenditures; (ii) other required expenditures; and (iii) capital expenditures.
Contractually Obligated Expenditures
The following table summarizes our debt payments (excluding extension options), interest payment obligations (excluding debt premiums and discounts, unused fees and deferred financing costs) and obligations under non-cancelable operating leases (excluding renewal options) as of December 31, 2021 (dollars in millions):
Twelve Months Ended
December 31, 2022
Thereafter
Debt repayments
Interest payments (1)
Operating leases
(1) Scheduled interest payments included in these amounts for variable rate loans are presented using rates as of December 31, 2021.
Other Required Expenditures
We incur certain other required expenditures in the ordinary course of business, such as utilities, insurance, real estate taxes, third-party management fees, certain capital expenditures related to the maintenance of our properties, and corporate level expenses. Additionally, we carry comprehensive insurance to protect our properties against various losses. The amount of insurance expense that we incur depends on the assessed value of our properties, prevailing market rates, changes in risk. Furthermore, we incur real estate taxes in the various jurisdictions in which we operate. The amount of real estate taxes that we incur depends on changes in the assessed value of our properties, changes in tax rates assessed by certain jurisdictions.
In order to continue to qualify as a REIT for federal income tax purposes, we must meet several organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We intend to continue to satisfy this requirement and maintain our REIT status. Our Board of Directors will evaluate the dividend on a quarterly basis,
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taking into account a variety of relevant factors, including REIT taxable income. Pursuant to the terms of the Blackstone Merger Agreement, we may continue to pay regular quarterly distributions of no more than $0.07 per share of our common stock for the first two quarters of 2022. Thereafter, we may not pay distribution except as necessary to preserve our tax status as a REIT, and any such distributions would result in an offsetting decrease to the merger consideration to be paid to our common stockholders.
Capital Expenditures
We deployed approximatel y $28.4 million du ring the year ended December 31, 2021 for capital expenditures. The properties in which we deployed the most capital during the year ended December 31, 2021 are listed separately and the capital expenditures made on all other properties are aggregated in "All other properties" below (in thousands):
Capital deployed
during the year ended
2022 capital
December 31, 2021
budgeted
Skyview
Calloway at Las Colinas
Maxwell Townhomes
The Westside Apartment Homes
Meridian Pointe
Providence in the Park
The Palmer at Las Colinas
Crosstown at Chapel Hill
Verona Apartment Homes
The Adairs
All other properties
Distributions Paid to Common Stockholders
For the year ended December 31, 2021, we paid aggregate distributions as follows (dollars in thousands, except per share data):
Record Date
Per Common Share
Distribution Date
Net Cash Distributions
Distributions reinvested in shares of Common Stock
Total Aggregate Distributions
March 30, 2021
March 31, 2021
June 29, 2021
June 30, 2021
September 29, 2021
September 30, 2021
December 28, 2021
December 29, 2021
Gross Offering Proceeds
As of December 31, 2021, we had an aggregate of 165.8 million shares of our $0.01 par value common stock outstanding including 1.1 million unvested restricted shares. The following table presents our shares issued (dollars in thousands):
Shares
Issued
Gross
Proceeds
Shares issued through private offering
Shares issued through primary public offering
Shares issued through stock distributions
Shares issued through distribution reinvestment plan
Restricted shares issued to employees
Shares issued through conversion of common OP units
Shares issued in conjunction with the Resource REIT Mergers
Total
Shares redeemed and retired
Total shares issued and outstanding as of December 31, 2021
LIBOR
Central banks and regulators in a number of major jurisdictions (including both the U.S. and the U.K.) have convened working groups to find, and implement the transition to, suitable replacements for Interbank Offered Rates (IBORs), including LIBOR. The FCA, which regulates LIBOR, has announced that it will not compel panel banks to contribute to LIBOR after 2021.
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On March 5, 2021, the FCA announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative (i) immediately after December 31, 2021, in the case of the 1-week and 2-month US dollar settings; and (ii) immediately after June 30, 2023, in the case of the remaining US dollar settings. The tenors that were extended to June 30, 2023 are more widely used and are the tenors used in our LIBOR-based debt.
We have exposure to IBORs through floating rate mortgage debt with maturity dates beyond 2021 for which the interest rates are tied to LIBOR. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. Any changes in benchmark interest rates could increase our cost of capital, which could impact our results of operations, cash flows, and the market value of our real estate investments.
Share Redemption Program
On February 3, 2021, our board of directors adopted the Fifth Amended and Restated Share Redemption Program (the “Amended SRP”) pursuant to which, subject to significant conditions and limitations of the program, our stockholders can have their shares repurchased by us. The Amended SRP provides that redemptions will continue to be made quarterly but in an amount not to exceed proceeds from the sale of shares in the DRP in the immediately preceding calendar quarter; provided that, for any quarter in which no DRP proceeds are available, the funding limitation for the quarter will be set by the board of directors upon ten business days’ notice to stockholders. Additional changes to the share redemption program in the Amended SRP clarify the timing of redemption procedures. The share redemption program remains suspended except with respect to redemptions sought up on a stockholder’s death, disability, or confinement to a long-term care facility (each as defined in the Amended SRP). Further, on January 23, 2022, in connection with the entry into the Blackstone Merger Agreement, our board of directors suspended the share redemption program.
Funds from Operations (FFO) and Core Funds from Operations (Core FFO)
Funds from operations, or FFO, is a non-GAAP financial measurement that is widely recognized as a measure of operating performance for a REIT. We calculate FFO as defined by the National Association of Real Estate Investment Trusts, or NAREIT, to be net income or loss, computed in accordance with GAAP, excluding:
depreciation and amortization related to real estate;
gains and losses from the sale of certain real estate assets; and
impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.
These reconciling items include adjustments related to noncontrolling interests.
We believe that FFO is helpful to our investors as a measure of operating performance because it reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, we believe that the use of FFO, together with the required GAAP presentations, is helpful to our investors in understanding our performance. Factors that impact FFO include start-up costs, fixed costs, delays in buying assets, yields on cash held in accounts, interest rates on acquisition financing, and operating expenses. In addition, FFO will be affected by the types of investments in our portfolio.
Core FFO includes certain adjustments to FFO for non-routine items or items not considered core to business operations. Core FFO adjusts FFO to exclude equity compensation expense, losses on extinguishment of debt and modification costs, transaction (including Self-Management) costs, amortization of deferred financing costs, amortization of intangible lease assets, debt premium or discount amortization, realized losses on fair value adjustments related to interest rate caps, and casualty gains and losses. By further adjusting for items that are not considered part of core business operations, we believe that Core FFO provides investors with additional information to compare core operating and financial performance between periods.
FFO and Core FFO should not be considered as alternatives to net income or loss or any other GAAP measurement of performance, but rather should be considered as additional, supplemental measures. FFO and Core FFO do not represent cash generated from operating activities in accordance with GAAP, nor indicate funds available to fund all cash needs, including the ability to service indebtedness or make distributions to shareholders. In addition, Core FFO is a non-GAAP and non-standardized financial measure that may be calculated differently by other REITs and that should not be considered a substitute for operating results determined in accordance with GAAP.
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The following table reconciles net income (loss) attributable to common shareholders to FFO and Core FFO for the years ended December 31, 2021, 2020 and 2019 (in thousands, except per share amounts). Amounts reported in the tables below include adjustments attributable to noncontrolling interests for the years ended December 31,2021 and 2020. There were no noncontrolling interests in the year ended December 31, 2019.
Years Ended December 31,
Net income (loss) attributable to common stockholders – GAAP
Depreciation expense (1)
Net gains on disposition of properties (2)
FFO attributable to common stockholders
Stock compensation expense (3)
Redemption of preferred units (4)
Debt prepayment costs (5)
Acquisition fees
Amortization of intangible lease assets (6)
Realized loss on change in fair value of interest rate cap (7)
Debt premium (discount) amortization (8)
Deferred financing costs amortization (9)
Casualty losses, net of casualty gains (10)
Transaction expenses (11)
Core FFO attributable to common stockholders
Basic and diluted net income (loss) per common share - GAAP
FFO per diluted share (12)
Core FFO per diluted share (12)
Weighted average shares outstanding - basic
Weighted average shares outstanding - diluted (13)
(1) Includes allocation for noncontrolling interests of approximately $3.0 million and $1.4 million, respectively, for the years ended December 31, 2021 and 2020.
(2) Includes allocation for noncontrolling interests of approximately $860,000 for the year ended December 31, 2021. There was no allocation for the year ended December 31, 2020.
(3) Includes allocation for noncontrolling interests of approximately $192,000 and $1,000, respectively, for the years ended December 31, 2021 and 2020.
(4) Includes allocation for noncontrolling interests of approximately $13,000 for the year ended December 31, 2021. There was no allocation for the year ended December 31, 2020.
(5) Includes allocation for noncontrolling interests of approximately $129,000 for the year ended December 31, 2021. There was no allocation for the year ended December 31, 2020.
(6) Includes allocation for noncontrolling interests of approximately $396,000 for the year ended December 31, 2021. There was no allocation for the year ended December 31, 2020.
(7) Includes allocation for noncontrolling interests of approximately $5,000 and $2,000, respectively, for the years ended December 31, 2021 and 2020.
(8) Includes allocation for noncontrolling interests of approximately $15,000, and $7,000, respectively, for the years ended December 31, 2021 and 2020.
(9) Includes allocation for noncontrolling interests of approximately $168,000 and $42,000, respectively, for the years ended December 31, 2021 and 2020.
(10) Includes allocation for noncontrolling interests of approximately $51,000 and $1,000, respectively, for the years ended December 31, 2021 and 2020.
(11) Includes allocation for noncontrolling interests of approximately $79,000 for the year ended December 31, 2020. There was no allocation for the year ended December 31, 2021.
(12) Calculated using weighted average shares outstanding – diluted.
(13) None of the shares of convertible stock or 467,461 unvested performance awards that vest only upon a liquidation event are included in the diluted earnings per share calculations because the necessary conditions for conversion have not been satisfied as of either December 31, 2021, 2020 and 2019. Income (loss) attributable to outstanding OP Common and Preferred units issued in the Self-Management Transaction prior to their redemption and or conversion were included in net (income) loss attributable to noncontrolling interest, and therefore, excluded from the calculation of earnings (loss) per common share, basic and diluted, for all periods presented.
Critical Accounting E s timates
We consider these policies critical because they involve significant management judgments and assumptions, they require estimates about matters that are inherently uncertain, and they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of our assets and liabilities and our disclosure of contingent assets and liabilities on the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.
Real Estate Assets
Real Estate Purchase Price Allocation
Acquisitions that do not meet the definition of a business under the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"), Business Combinations, ("ASC 805") are accounted for as asset acquisitions. In most cases, we believe acquisitions of real estate will no longer be considered business combinations, as in most cases
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substantially all of the fair value is concentrated in a single identifiable asset or group of tangible assets that are physically attached to each other (land and building). However, if we determine that substantially all of the fair value of the gross assets acquired is not concentrated in either a single identifiable asset or in a group of similar identifiable assets, we will then perform an assessment to determine whether the asset is a business by using the framework outlined in the guidance. If we determine that the acquired asset is not a business, we will allocate the cost of the acquisition, including transaction costs, to the assets acquired or liabilities assumed based on their relative fair value.
Upon the acquisition of real properties, we allocate the purchase price of properties to acquired tangible assets consisting of land, buildings, fixtures and improvements, identified intangible lease assets, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases, the value of tenant relationships, and liabilities, based in each case on their fair values.
We record above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. We amortize any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases.
We measure the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if it were vacant. Management’s estimates of value are determined by independent appraisers. Factors to be considered in the analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
In estimating the fair value of both the tangible and intangible acquired assets, we also consider information obtained about each property as a result of its pre-acquisition due diligence. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods. Management also estimates costs to execute similar leases including leasing commissions and legal and other related expenses to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.
The total amount of other intangible assets acquired is further allocated to customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of the our existing relationships with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
We amortize the value of in-place leases to expense over the average remaining term of the underlying leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event will the amortization periods for the intangible assets exceed the remaining depreciable life of the building.
The determination of the fair value of assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of our reported net income.
Valuation of Real Estate Assets
We periodically evaluate our long-lived assets, primarily investments in rental properties, for impairment indicators. The review considers factors such as past and expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. When circumstances indicate the carrying value of a property may not be recoverable, we review the asset for permanent impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. An impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss would be the adjustment to fair value less the estimated cost to dispose of the asset.
In conjunction with the Resource REIT Mergers and for our annual estimated value per share calculation in 2020 and 2019, we engaged with a third-party to provide the estimated fair value of its rental properties as of January 28, 2021, December 31, 2020 and 2019, respectively. We compared these values to the carrying values and concluded that there was no indication that the carrying value of our investments in real estate were not recoverable as of December 31, 2021, 2020 and 2019. There were no impairment losses recorded on long lived assets during the years ended December 31, 2021, 2020 and 2019.
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Adoption of New Accounting Standards
In March 2020, FASB issued Accounting Standards Update ("ASU") No. 2020-04, “Reference Rate Reform (Topic 848).” ASU No. 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in ASU No. 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. During the year ended December 31, 2021, we have elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Off-Balance Sheet Arrangements
As of both December 31, 2021 and 2020, we did not have any off-balance sheet arrangements or obligations.
Subsequent Events
On January 20, 2022, we sold The Bryant at Yorba Linda in Yorba Linda, California for $205.5 million. We expect to recognize a gain on the sale during the quarter ending March 31, 2022.
On January 20, 2022, we sold Maxwell Townhomes in San Antonio, Texas for $48.0 million. We expect to recognize a gain on the sale during the quarter ending March 31, 2022.
On January 23, 2022, we entered into the Blackstone Merger Agreement. In addition, our board of directors suspended our share redemption program and our distribution reinvestment plan offering.
On January 28, 2022, we repaid in the full the loans secured by Skyview, Courtney Meadows, Indigo Creek, and Meridian Pointe.
On March 22, 2022, we sold Sunset Ridge in San Antonio, Texas fo r $60.8 million. We expect to recognize a gain on the sale during the quarter ending March 31, 2022.
We have evaluated subsequent events and determined that no events have occurred, other than those disclosed above, which would require an adjustment to or additional disclosure in the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from our financial instruments primarily from changes in market interest rates. We do not have exposure to any other significant market risks. We monitor interest rate risk as an integral part of our overall risk management, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on our results of operations. Our operating results are affected by changes in interest rates, primarily changes in LIBOR, as a result of borrowings under our outstanding mortgage loans.
We enter into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we entered into a total o f 18 interest rate caps that were designated as cash flow hedges. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
As of December 31, 2021 and 2020, we had approximately $613.0 million and $680.9 million, res pectively, in variable rate debt outstanding. If interest rates on the variable rate debt had been 100 basis points higher during the years ended December 31, 2021 and 2020, our annual interest expense would have increased by approximate ly $7.0 million and $ 6.7 million, respectively.
In addition, changes in interest rates affect the fair value of our fixed rate mortgage notes payable. As of December 31, 2021 and 2020, the face value of fixed rate outstanding borrowings was approximately $802.3 million and $150.1 million, res pectively. As of December 31, 2021 and 2020, this fixed rate debt had fair values o f approximately $782.5 million and $151.0 million, re spectively. Fair values are computed using rates available to us for debt with similar terms and remaining maturities.
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If interest rates had been 100 basis points higher as of December 31, 2021 and 2020, the fair value of this fixed rate debt would have decreased by approximately $43.7 million and $4.4 million, respectively.
ITEM 8. FINANCIAL STATEMEN TS AND SUPPLEMENTARY DATA
See the Index to Financial Statements at page F-1 of this Annual Report on Form 10-K.
