Item 7. Management’s Discussion and Analysis o f 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. 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 Annual Report. See “Cautionary Statement Regarding Forward-Looking Statements” in this report, and “Risk Factors” in this Annual Report. Our management believes the assumptions underlying the Company’s financial statements and accompanying notes are reasonable. However, the Company’s financial statements and accompanying notes may not be an indication of our financial condition and results of operations in the future.
This section of this Annual Report generally discusses the years ended December 31, 2025 and 2024. A discussion of the year ended December 31, 2023 is available at Part II, “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2024 which was filed with the SEC on February 26, 2025.
Overview
As of December 31, 2025, our Portfolio consisted of 36 multifamily properties primarily located in the Southeastern and Southwestern United States encompassing 13,305 units of apartment space that was approximately 92.7% leased with a weighted average monthly effective rent per occupied apartment unit of $1,492. 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 December 31, 2025, there were 26,053,988 OP Units outstanding, of which 25,951,154, or 99.6%, were owned by us and 102,834, or 0.4%, were owned by unaffiliated limited partners (see Note 9 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 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 23, 2026 for a one-year term. The Adviser is wholly owned by NexPoint Advisors, L.P. 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 the ATM Program (as defined below). On March 20, 2025, the equity distribution agreements with each of KeyBanc and SunTrust were terminated (each as defined below). See Note 7 to our consolidated financial statements.
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 U.S. 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 years ended December 31, 2025, 2024 and 2023.
The macroeconomic environment remains challenging. The high interest rate environment, and ongoing economic uncertainty, has limited credit availability to commercial real estate. Less available and more expensive debt capital has had pronounced effects on the capital markets, making property acquisitions and other investments harder to finance. Similar factors also impact the timing of and proceeds generated from asset sales and our ability to obtain debt capital.
For information regarding the Bankruptcy Trust Lawsuit and the UBS Lawsuit, see “Item 1A. Risk Factors— The Chapter 11 bankruptcy filing by Highland Capital Management, L.P. (“Highland”) may have materially adverse consequences on our business, financial condition and results of operations ” and “Item 1A. Risk Factors— Litigation against James Dondero and others may have materially adverse consequences on our business, financial condition and results of operations .” 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.
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, 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 Adviser Operating Expenses. Under the Advisory Agreement, reimbursement of Adviser Operating Expenses and the 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 Fees otherwise due. If 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 loss . Casualty loss includes 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.
Results of Operations for the Years Ended December 31, 2025 and 2024
The year ended December 31, 2025 as compared to the year ended December 31, 2024
The following table sets forth a summary of our operating results for the years ended December 31, 2025 and 2024 (in thousands):
For the Year Ended December 31,
$ Change
Total revenues
Total expenses
Operating income before gain on sales of real estate
Gain on sales of real estate
Operating income
Interest expense
Loss on extinguishment of debt and modification costs
Casualty loss
Equity in earnings of affiliate
Miscellaneous income
Net income (loss)
Net income (loss) attributable to redeemable noncontrolling interests in the OP
Net income (loss) attributable to common stockholders
The change in our net income (loss) between the periods primarily relates to decreases in gain on sales of real estate and rental income of $54.2 million and $8.2 million, respectively, partially offset by a decrease in loss on extinguishment of debt and modification costs of $24.0 million.
Revenues
Rental income . Rental income was $243.7 million for the year ended December 31, 2025 compared to $251.9 million for the year ended December 31, 2024, which was a decrease of approximately $8.2 million. The decrease between the periods was primarily due to our three dispositions in 2024. During the year ended December 31, 2024, the Company sold one property in each of the first, second, and fourth quarters of 2024.
Other income. Other income was $7.5 million for the year ended December 31, 2025 compared to $7.8 million for the year ended December 31, 2024, which was a decrease of approximately $0.3 million. The decrease between the periods was primarily due to a $0.6 million decrease in internet/tech income, offset by a $0.2 million increase in non-refundable fees.
Expenses
Property operating expenses. Property operating expenses were $53.9 million for the year ended December 31, 2025 compared to $56.6 million for the year ended December 31, 2024, which was a decrease of approximately $2.7 million. The decrease between the periods was primarily due to our disposition activity in 2024.
Real estate taxes and insurance. Real estate taxes and insurance costs were $32.4 million for the year ended December 31, 2025 compared to $33.1 million for the year ended December 31, 2024, which was a decrease of approximately $0.7 million. The decrease between the periods was primarily due to a decrease of $0.7 million in property/liability insurance costs.
Property management fees. Property management fees were $7.2 million for the year ended December 31, 2025 compared to $7.5 million for the year ended December 31, 2024, which was a decrease of approximately $0.3 million. The decrease between the periods was primarily due to a decrease in total revenues, which the fee is primarily based on.
Advisory and administrative fees. Advisory and administrative fees were $6.9 million for the year ended December 31, 2025 compared to $6.9 million for the year ended December 31, 2024, which was flat. For the years ended December 31, 2025 and 2024, our Adviser elected to voluntarily waive advisory and administrative fees of approximately $21.0 million and $21.3 million and are considered 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 $17.9 million for the year ended December 31, 2025 compared to $19.4 million for the year ended December 31, 2024, which was a decrease of approximately $1.5 million. The decrease was primarily due to decreases in stock compensation expense of $0.7 million, other insurance expense of $0.5 million and professional fees of $0.3 million.
Property general and administrative expenses. Property general and administrative expenses were $9.2 million for the year ended December 31, 2025 compared to $9.2 million for the year ended December 31, 2024, which was flat.
Depreciation and amortization. Depreciation and amortization costs were $95.8 million for the year ended December 31, 2025 compared to $97.8 million for the year ended December 31, 2024, which was a decrease of approximately $2.0 million. The decrease between the periods was due to the dispositions in the prior year.
Other Income and Expense
Interest expense. Interest expense was $60.7 million for the year ended December 31, 2025 compared to $58.5 million for the year ended December 31, 2024, which was an increase of approximately $2.2 million. The increase between the periods was primarily due to an increase in amortization of deferred financing costs of $3.2 million, respectively, for the years ended December 31, 2025 and 2024 (in thousands):
For the Year Ended December 31,
$ Change
Interest on debt
Amortization of deferred financing costs
Interest rate swaps
Interest rate caps
Interest rate caps mark-to-market loss (gain)
Total
Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs was $0.0 million for the year ended December 31, 2025 compared to $24.0 million for the year ended December 31, 2024, which was a decrease of approximately $24.0 million. The decrease between periods is primarily driven by decreases in prepayment penalties and defeasance costs and write-off of deferred financing costs of $15.5 million and $8.5 million, respectively, due to our refinance activity in 2024 as compared to 2025. During the year ended December 31, 2024, the Company completed a portfolio refinance on 34 of its property mortgages. The following table details the various costs included in loss on extinguishment of debt and modification costs for the years ended December 31, 2025 and 2024 (in thousands):
For the Year Ended December 31,
$ Change
Prepayment penalties and defeasance costs
Write-off of deferred financing costs
Debt modification and other extinguishment costs
Total
Casualty loss. Casualty loss was $0.2 million for the year ended December 31, 2025 compared to $0.6 million for the year ended December 31, 2024. The decrease in casualty loss is attributable to the Company's casualty events and the timing of such events (see Note 4 to our consolidated financial statements).
Miscellaneous income. Miscellaneous income was $0.6 million for the year ended December 31, 2025 compared to $0.5 million for the year ended December 31, 2024, which was an increase of approximately $0.1 million. The increase between the periods was primarily due to more business interruption proceeds received from casualty events (see Note 4).
Gain on sales of real estate. Gain on sales of real estate was $0.0 million for the year ended December 31, 2025 compared to $54.2 million for the year ended December 31, 2024, which was a decrease of approximately $54.2 million. During the year ended December 31, 2025, we did not sell any properties compared to the year ended December 31, 2024, in which we sold three properties for a combined gain of $54.2 million.
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) depreciation and amortization expenses, (4) gains or losses from the sale of operating real estate assets that are included in net income (loss) computed in accordance with GAAP, (5) corporate income and corporate general and administrative expenses that are not reflective of operations of the properties, (6) other gains and losses that are specific to us including gain (loss) on extinguishment of debt and modification costs, (7) casualty-related expenses/(recoveries) and casualty loss, (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 and (9) equity in earnings of affiliates.
These items 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 is useful for investors and management 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.
However, the usefulness of NOI is limited because it excludes the items listed above, 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 2024-2025 Same Store NOI for the Years Ended December 31, 2025 and 2024
The following table, which has not been adjusted for the effects of noncontrolling interests, reconciles our NOI and our 2024-2025 Same Store NOI for the years ended December 31, 2025 and 2024 to net income (loss), the most directly comparable GAAP financial measure (in thousands):
For the Year Ended December 31,
Net income (loss)
Adjustments to reconcile net income (loss) to NOI:
Advisory and administrative fees
Corporate general and administrative expenses
Corporate income
Casualty-related expenses
Casualty loss
Property general and administrative expenses
Depreciation and amortization
Interest expense
Equity in earnings of affiliate
Loss on extinguishment of debt and modification costs
Gain on sales of real estate
NOI
Less Non-Same Store
Revenues
Operating expenses
Operating income
Same Store NOI
Adjustment to net income (loss) to exclude certain property operating expenses that are casualty-related expenses/(recoveries).
Adjustment to net income (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.
$31.5 million with a related party for the year ended December 31, 2024.
Net Operating Income for Our 2024-2025 Same Store and Non-Same Store Properties for the Years Ended December 31, 2025 and 2024
There are 35 properties encompassing 12,963 units of apartment space in our 2024-2025 Same Store properties. Our 2024-2025 Same Store properties exclude the 21 units that are currently down (see Note 4 to our consolidated financial statements). We consider a property to be a same store property if we held the property during the entirety of both periods.
The properties in our same store pool for the years ended December 31, 2025, 2024 and 2023 are the same as the 2024-2025 same store properties and, accordingly, 2023-2025 Same Store NOI results were the same as 2024-2025 Same Store NOI results.
The following table reflects the revenues, property operating expenses and NOI for the years ended December 31, 2025 and 2024 for our 2024-2025 Same Store and Non-Same Store properties (dollars in thousands):
For the Year Ended December 31,
$ Change
% Change
Revenues
Same Store
Rental income
Other income
Same Store revenues
Non-Same Store
Rental income
Other income
Non-Same Store revenues
Total revenues
Operating expenses
Same Store
Property operating expenses (1)
Real estate taxes and insurance
Property management fees (2)
Property general and administrative expenses (3)
Same Store operating expenses
Non-Same Store
Property operating expenses (4)
Real estate taxes and insurance
Property management fees (2)
Property general and administrative expenses (5)
Non-Same Store operating expenses
Total operating expenses
Operating income
Same Store
Miscellaneous income
Non-Same Store
Miscellaneous income
Total operating income
NOI
Same Store
Non-Same Store
Total NOI
For the years ended December 31, 2025 and 2024, excludes approximately $1,531,000 and $625,000, respectively, of casualty-related recoveries.
Fees incurred to an unaffiliated third party that is an affiliate of a noncontrolling limited partner of the OP.
For the years ended December 31, 2025 and 2024, excludes approximately $3,703,000 and $3,944,000, 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.
For the years ended December 31, 2025 and 2024, excludes approximately $0 and $16,000, respectively, of casualty-related expenses.
For the years ended December 31, 2025 and 2024, excludes approximately $307,000 and $54,000, 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 income (loss) to NOI above under “NOI and 2024-2025 Same Store NOI for the Years Ended December 31, 2025 and 2024.”
2024-2025 Same Store Results of Operations for the Years Ended December 31, 2025 and 2024
As of December 31, 2025, our 2024-2025 Same Store properties were approximately 92.7% leased with a weighted average monthly effective rent per occupied apartment unit of $1,489. As of December 31, 2024, our 2024-2025 Same Store properties were approximately 94.7% leased with a weighted average monthly effective rent per occupied apartment unit of $1,491. For our 2024-2025 Same Store properties, we recorded the following operating results for the year ended December 31, 2025 as compared to the year ended December 31, 2024:
Revenues
Rental income . Rental income was $243.5 million for the year ended December 31, 2025 compared to $246.7 million for the year ended December 31, 2024, which was a decrease of approximately $3.2 million, or 1.3%. The majority of the decrease is related to a decrease in weighted average occupancy during the year ended December 31, 2025 compared to the year ended December 31, 2024.
Other income. Other income was $5.9 million for the year ended December 31, 2025 compared to $5.3 million for the year ended December 31, 2024, which was an increase of $0.6 million. The increase between periods is primarily attributable to a $0.8 million increase in internet income.
Expenses
Property operating expenses. Property operating expenses were $53.6 million for the year ended December 31, 2025 compared to $53.5 million for the year ended December 31, 2024, which was an increase of approximately $0.1 million, or 0.3%. The majority of the increase is related to increases in electricity expenses of $0.1 million.
Real estate taxes and insurance. Real estate taxes and insurance costs were $32.4 million for the year ended December 31, 2025 compared to $32.7 million for the year ended December 31, 2024, which was a decrease of approximately $0.3 million, or 0.9%. The majority of the decrease is related to a $0.2 million decrease in property taxes.
Property management fees. Property management fees were $7.2 million for the year ended December 31, 2025 compared to $7.3 million for the year ended December 31, 2024, which was a decrease of approximately $0.1 million, or 1.4%. The majority of the decrease is related to a decrease in total revenues, which the fee is primarily based on.
Property general and administrative expenses. Property general and administrative expenses were $5.2 million for the year ended December 31, 2025 compared to $5.0 million for the year ended December 31, 2024, which was an increase of approximately $0.2 million, or 2.6%. The majority of the increase is related to a $0.1 million increase in marketing expenses.
FFO, Core FFO and AFFO
We believe that net income, 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, as defined by GAAP. FFO is defined by NAREIT as net income 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.
Core FFO makes certain adjustments to FFO, which are 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, loss (gain) on extinguishment
of debt and modification costs that are not reflective of continuing operations of the properties, the amortization of deferred financing costs, mark-to-market gains or losses related to interest rate cap agreements not designated as hedges for accounting purposes, 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. Starting in the third quarter of 2024, the Company adjusted Core FFO to remove (1) the amortization of all deferred financing costs instead of those solely related to short-term debt financing and (2) mark-to-market gains or losses related to interest rate cap agreements not designated as hedges for accounting purposes. Prior periods have been recast to conform to current presentations.
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 related 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 9 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.
The following table reconciles our calculations of FFO, Core FFO and AFFO to net income (loss), the most directly comparable GAAP financial measure, for the years ended December 31, 2025 and 2024 (in thousands, except per share amounts):
For the Year Ended December 31,
% Change 2025 - 2024
Net income (loss)
Depreciation and amortization
Gain on sales of real estate
Adjustment for noncontrolling interests
FFO attributable to common stockholders
FFO per share - basic
FFO per share - diluted
Loss on extinguishment of debt and modification costs
Casualty-related expenses
Casualty loss
Amortization of deferred financing costs
Mark-to-market adjustments of interest rate caps
Adjustment for noncontrolling interests
Core FFO attributable to common stockholders
Core FFO per share - basic
Core FFO per share - diluted
Equity-based compensation expense
Adjustment for noncontrolling interests
AFFO attributable to common stockholders
AFFO per share - basic
AFFO per share - diluted
Weighted average common shares outstanding - basic
Weighted average common shares outstanding - diluted
Dividends declared per common share
Net income Coverage - diluted
FFO Coverage - diluted
Core FFO Coverage - diluted
AFFO Coverage - diluted
$31.5 million with a related party for the year ended December 31, 2024.
The Company uses actual diluted weighted average common shares outstanding when in a dilutive position for FFO, Core FFO and AFFO.
Indicates coverage ratio of net income (loss)/FFO/Core FFO/AFFO per common share (diluted) over dividends declared per common share during the period.
The year ended December 31, 2025 as compared to the year ended December 31, 2024
FFO was $63.3 million for the year ended December 31, 2025 compared to $44.5 million for the year ended December 31, 2024, which was an increase of approximately $18.8 million. The change in our FFO between the periods primarily relates to a decrease in gain on sales of real estate of $54.2 million offset by a decrease in net income of $33.2 million.
Core FFO was $71.3 million for the year ended December 31, 2025 compared to $73.1 million for the year ended December 31, 2024, which was a decrease of approximately $1.8 million. The change in our Core FFO between the periods primarily relates to a decrease in loss on extinguishment of debt and modification costs of $24.0 million, partially offset by an increase in FFO and amortization of deferred financing costs of $18.8 million and $3.2 million.
AFFO was $81.1 million for the year ended December 31, 2025 compared to $83.6 million for the year ended December 31, 2024, which was a decrease of approximately $2.5 million. The change in our AFFO between the periods primarily relates to a decrease in Core FFO of $1.8 million and a decrease in equity-based compensation expense of $0.7 million.
Liquidity and Capital Resources
Our short-term cash requirements consist primarily of funds necessary to pay for 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 cash requirements generally through net cash provided by operations and existing cash balances and any unused capacity on the Credit Facility (as defined below). As of December 31, 2025, we had approximately $8.3 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 cash 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 cash 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 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.
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 December 31, 2025. We believe that our sources of long-term cash will be sufficient for our needs thereafter.
Cash Flows
The following table presents selected data from our consolidated statements of cash flows for the years ended December 31, 2025 and 2024 (in thousands):
For the Year Ended December 31,
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
The year ended December 31, 2025 as compared to the year ended December 31, 2024
Cash flows from operating activities. During the year ended December 31, 2025, net cash provided by operating activities was $83.6 million compared to net cash provided by operating activities of $73.6 million for the year ended December 31, 2024. The change in cash flows from operating activities was mainly due to a decrease on gain on sales of real estate of $54.2 million, offset by a decreases in amortization/write-off of deferred financing costs of $21.0 million and net cash received on derivative settlements of $22.2 million.
Cash flows from investing activities. During the year ended December 31, 2025, net cash used in investing activities was $115.8 million compared to net cash provided by investing activities of $130.6 million for the year ended December 31, 2024. The change in cash flows from investing activities was mainly due to a decrease in net proceeds from sales of real estate of $165.7 million and partially offset by a decrease in acquisitions of real estate investments of $73.3 million.
Cash flows from financing activities. During the year ended December 31, 2025, net cash provided by financing activities was $23.4 million compared to net cash used in financing activities of $195.6 million for the year ended December 31, 2024. The change in cash flows from financing activities was mainly due to increases in mortgage payments, credit facilities proceeds received, credit facilities payments and prepayment penalties on extinguished debt of $1.5 billion, $90.0 million, $24.0 million and $15.5 million, partially offset by a decrease in mortgage proceeds received of $1.4 billion.
Real Estate Investments Statistics
As of December 31, 2025, the Company was invested in a total of 36 multifamily properties, as listed below:
Average Effective Monthly
Rent Per Unit
as of December 31,*(1)
% Occupied as of December 31,*(2)
Property Name
Rentable Square
Footage
(in thousands)*
Number
Units*(3)
Date
Acquired
Arbors on Forest Ridge
Cutter's Point
The Summit at Sabal Park
Courtney Cove
Sabal Palm at Lake Buena Vista
Cornerstone
The Preserve at Terrell Mill
Versailles
Seasons 704 Apartments
Madera Point
Venue at 8651
Parc500
The Venue on Camelback
Rockledge Apartments
Atera Apartments
Versailles II
Brandywine I & II
Bella Vista
The Enclave
The Heritage
Summers Landing
Residences at Glenview Reserve
Residences at West Place
Avant at Pembroke Pines
Arbors of Brentwood
Torreyana Apartments
Bloom
Bella Solara
Fairways at San Marcos
The Verandas at Lake Norman
Creekside at Matthews
Six Forks Station
High House at Cary
The Adair
Estates on Maryland
Sedona at Lone Mountain
Average effective monthly rent per unit is equal to the contractual rent for commenced leases as of December 31, 2025 and December 31, 2024, respectively, minus any tenant concessions over the term of the lease, divided by the number of units under commenced leases as of December 31, 2025 and December 31, 2024, respectively.
Percent occupied is calculated as the number of units occupied as of December 31, 2025 and 2024, divided by the total number of units, expressed as a percentage.
Includes 22 down units due to casualty events as of December 31, 2025 (see Note 4 to our consolidated financial statements).
Debt, Derivatives and Hedging Activity
Mortgage Debt
Interest rates for mortgage debt is based on a reference rate plus an applicable margin, except for fixed rate mortgage debt. The reference rate used in our Portfolio is the Secured Overnight Financing Rate (“SOFR”). Loans that transitioned from the London Inter-Bank Offered Rate ("LIBOR") to SOFR include a 0.11448% adjustment to SOFR for the all-in rate ("Adjusted SOFR"). As of December 31, 2025, our subsidiaries had aggregate mortgage debt outstanding to third parties of approximately $1.6 billion at a weighted average interest rate of 4.86% and an adjusted weighted average interest rate of 3.28%. For purposes of calculating the adjusted weighted average interest rate of our mortgage debt outstanding, we have included the weighted average fixed rate of 1.36% for Adjusted SOFR on our combined $0.9 billion notional amount of interest rate swap agreements, which effectively fix the interest rate on $0.9 billion of our floating rate mortgage debt. See Notes 5 and 6 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 December 31, 2025, interest rate swap agreements effectively covered 62% of our $1.5 billion of floating rate mortgage 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 December 31, 2025, interest rate cap agreements covered $1.5 billion of our $1.5 billion of floating rate mortgage debt outstanding, which effectively cap SOFR on $1.5 billion of our floating rate mortgage debt at a weighted average rate of 7.98%.
LIBOR ceased publication on June 30, 2023. On July 1, 2023, LIBOR rates were replaced with SOFR as the reference rate for most LIBOR debt and derivative instruments.
On October 1, 2024, the Company entered into an agreement with JPMorgan Chase Bank, N.A., (“JPM”) to refinance $714.4 million of its first mortgage debt relating to 17 properties that had original loan maturities ranging from September 1, 2025 to December 1, 2032. The new loans mature on October 1, 2031, with the entire principal amounts due upon maturity totaling $813.6 million and bears interest at an annual rate of 30-day average SOFR plus 109 basis points.
On November 26, 2024, the Company entered into an agreement with JPM to refinance $714.7 million of its first mortgage debt relating to 17 properties that had original loan maturities on December 1, 2032. The new loans mature on December 1, 2031, with the entire principal amounts due upon maturity totaling $655.9 million and bears interest at an annual rate of 30-day average SOFR plus 109 basis points.
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.
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 credit agreement, dated as of June 30, 2021 (as amended and supplemented, the “Corporate Credit Facility”). On February 28, 2025, the Company agreed to reduce the available borrowing on the Corporate Credit Facility by $250.0 million. The Corporate Credit Facility matured on June 30, 2025 with respect to the revolving commitments. As of December 31, 2025 and 2024, the Company had $0.0 million and $350.0 million, respectively, available for borrowing under the Corporate Credit Facility.
On July 11, 2025, the Company, though the OP, entered into a $200.0 million revolving credit facility with JPM and the lenders thereto from time to time (the "Credit Facility"). The Credit Facility may be increased by up to an additional $200.0 million if the lenders agree to increase their commitments. The Credit Facility will mature on June 30, 2028, unless the Company exercises its option to extend for a one-year term upon satisfaction of certain criteria and payment of an extension fee of 0.15% of the aggregate amount outstanding under the Credit Facility. On December 9, 2025, the Company drew $90.0 million on the Credit Facility. As of December 31, 2025, the Company had $108.0 million available for borrowing under the Credit Facility, $90.0 million drawn under the Credit Facility and a $2.0 million letter of credit outstanding.
The Credit Facility is guaranteed by the Company and the obligations under the Credit Facility are, subject to some exceptions, secured by a security interest in the proceeds of all equity offerings and other capital events by the Company, the OP or their subsidiaries and an equity pledge of each subsidiary of the OP that owns an interest in a mortgaged property.
Advances under the Credit Facility accrue interest at a per annum rate equal to, at the Company’s election, either (i) daily SOFR plus a margin of 1.50% to 2.25%, depending on the Company’s total leverage ratio in the immediately preceding quarter, (ii) term SOFR for the interest period plus a margin of 1.50% to 2.25%, depending on the Company’s total leverage ratio in the immediately preceding quarter, or (iii) a base rate determined according to the highest of (a) the prime rate, (b) the federal funds rate plus 0.5%, or (c) one-month term SOFR plus 1.0%, plus a margin of 0.50% to 1.25%, depending on the Company’s total leverage ratio in the immediately preceding quarter.
A commitment fee at a rate of 0.20% or 0.30%, depending on the average daily revolving commitment utilization percentage for the calendar quarter, applies to unutilized borrowing capacity under the Credit Facility.
The Credit Facility contains representations and warranties, affirmative and negative covenants and events of default that the Company considers customary for an agreement of this type, including covenants setting a maximum total leverage ratio and payout ratio and a minimum fixed charge coverage ratio, minimum tangible net worth, debt yield and cash reserve. If an event of default occurs, the lenders may terminate the commitments under the Credit Facility and require the immediate repayment of all outstanding borrowings and the cash collateralization of all outstanding letters of credit under the Credit Facility. As of December 31, 2025, the Company believes it is compliant with all provisions of the Credit Facility.
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 five interest rate swap transactions with KeyBank, one with JPM and one with Truist Bank (collectively the “Counterparties”) with a combined notional amount of $0.9 billion which are effective as of December 31, 2025. As of December 31, 2025, the interest rate swaps we have entered into effectively replace the floating interest rate (Adjusted SOFR or SOFR) with respect to $0.9 billion of our floating rate debt outstanding with a weighted average fixed rate of 1.36%. During the term of these interest rate swap agreements, we are required to make monthly fixed rate payments of 1.36%, on a weighted average basis, on the notional amounts, while the Counterparties are obligated to make monthly floating rate payments based on Adjusted SOFR, other than the JPM swap which is based on SOFR, 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 for additional information.
The following table contains summary information regarding our outstanding interest rate swaps (dollars in thousands):
Effective Date
Termination Date
Counterparty
Notional
Fixed Rate (1)
September 1, 2019
September 1, 2026
KeyBank
September 1, 2019
September 1, 2026
KeyBank
January 3, 2020
September 1, 2026
KeyBank
March 4, 2020
June 1, 2026
Truist
June 1, 2021
September 1, 2026
KeyBank
June 1, 2021
September 1, 2026
KeyBank
April 3, 2025
April 1, 2030
JPM
The floating rate option for the interest rate swaps is Adjusted SOFR and SOFR. As of December 31, 2025, Adjusted SOFR and SOFR were 3.94% and 3.79%, respectively.
Represents the weighted average fixed rate of the interest rate swaps.
Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of December 31, 2025 for the next five calendar years subsequent to December 31, 2025. We used SOFR as of December 31, 2025 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
Thereafter
Operating Properties Mortgage Debt
Principal payments
Interest expense
Total
Credit Facility
Principal payments
Interest expense
Total
Total contractual obligations and commitments
Interest expense obligations include 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 December 31, 2025, we had entered into seven interest rate swap transactions with a combined notional amount of $0.9 billion and one forward rate swap agreement with a notional amount of approximately $0.1 billion. We have allocated the total impact of expected settlements on the $1.0 billion notional amount of interest rate swaps to ‘Operating Properties Mortgage Debt.’ We used the applicable reference rate as of December 31, 2025 to determine our expected settlements through the terms of the interest rate swaps.
Credit Facility
The Credit Facility will mature on June 30, 2028 with respect to the revolving commitments, unless the Company exercises its option to extend for a one-year term upon satisfaction of certain criteria and payment of an extension fee of 0.15% of the aggregate amount outstanding under the Credit Facility. See Note 5 to our consolidated financial statements.
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 are subject to an annual cap of approximately $5.4 million. For the years ended December 31, 2025 and 2024, the Company incurred advisory and administrative fees of $6.9 million and $6.9 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 development funding is expected to be no more than 10% of the total project costs. We expect that these actions will provide faster, more reliable and lower cost internet to our residents. As of December 31, 2025, the Company has funded approximately $0.9 million to NLMF Holdco, LLC which is included in prepaid and other assets on the consolidated balance sheet of the Company. For the year ended December 31, 2025, the Company incurred expenses of $3.2 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, 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 December 31, 2025, we had approximately $8.3 million of renovation value-add reserves for our planned capital expenditures and other expenses to implement our value-add program, which will complete approximately 12,984 planned interior rehabs. The following table sets forth a summary of our capital expenditures related to our value-add program for the years ended December 31, 2025, 2024 and 2023 (in thousands):
For the Year Ended December 31,
Rehab Expenditures
Interior
Exterior and common area
Total rehab expenditures
Includes total capital expenditures during the period on completed and in-progress interior rehabs. For the years ended December 31, 2025, 2024 and 2023, we completed full and partial interior rehabs on 1,518, 388 and 2,703 units, respectively.
REIT Tax Election and Income Taxes
We elected to be taxed as a REIT for U.S. federal income tax purposes under Sections 856 through 860 of the Code commencing with the taxable year ended December 31, 2015, 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 U.S. 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 TRSs and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRSs for the years ended December 31, 2025, 2024 and 2023.
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 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 December 31, 2025. We and our subsidiaries are subject to U.S. federal income tax as well as income tax of various state and local jurisdictions. The 2024, 2023 and 2022 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).
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 U.S. 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 fourth quarterly dividend of 2025 of $0.53 per share on October 27, 2025, which was paid on December 31, 2025 to stockholders of record on December 15, 2025, and funded out of cash flows from operations.
Off-Balance Sheet Arrangements
As of December 31, 2025, 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” included in this Annual 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 (“ASC 820”) (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. The fair value of land is estimated using valuation techniques appropriate for the specific property type, including the sales comparison approach, which reflects publicly available comparable land sales used to determine the fair value of land. The fair value of building assets is estimated using valuation methods that include a replacement cost new less depreciation approach and a residual value derived from a discounted cash flow analysis. These approaches reflect the estimated cost to replace the asset, adjusted for depreciation, as well as the building’s contribution to the property’s income generating potential. 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. The Company allocates the purchase consideration to land, building, intangible lease assets, and other assets based on their relative fair values as part of the overall purchase price allocation.
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. We intend to mitigate these risks through interest rate hedges, which to date have included interest rate cap and interest rate swap agreements.
Item 7A. Quantitative and Qualitat ive 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 December 31, 2025, we had total indebtedness of $1.6 billion at a weighted average interest rate of 4.90%, of which $1.6 billion was debt with a floating interest rate. The interest rate swap agreements we have entered into effectively fix the interest rate on 62% of our $1.5 billion of floating rate mortgage debt outstanding (see below). As of December 31, 2025, the adjusted weighted average interest rate of our total indebtedness was 3.39%. For purposes of calculating the adjusted weighted average interest rate of the total indebtedness, we have included the weighted average fixed rate of 1.36% for the floating rate on the $0.9 billion notional amount of interest rate swap agreements that we have entered into as of December 31, 2025, which effectively fix the interest rate on $0.9 billion of our floating rate mortgage debt outstanding.
An increase in interest rates could make the financing of any acquisition by us more costly. Rising or high 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 December 31, 2025, the interest rate cap agreements we have entered into effectively cap SOFR on $1.5 billion of our floating rate mortgage debt at a weighted average rate of 7.98% for the term of the agreements, which is generally three to four years.
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 seven interest rate swap transactions with the Counterparties with a combined notional amount of $0.9 billion, and one forward rate swap agreement with a notional amount of approximately $0.1 billion. The interest rate swaps we have entered into effectively replace the floating interest rate (Adjusted SOFR or SOFR) with respect to that amount with a weighted average fixed rate of 1.36%. During the term of these interest rate swap agreements, we are required to make monthly fixed rate payments of 1.36%, on a weighted average basis, on the notional amounts, while the Counterparties are obligated to make monthly floating rate payments based on Adjusted SOFR or SOFR to us referencing the same notional amounts. We have designated these interest rate swaps as cash flow hedges of interest rate risk.
Until our interest rates reach the caps provided by our interest rate cap agreements, each quarter point change in SOFR 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 December 31, 2025, of the amounts illustrated in the table below for our indebtedness as of December 31, 2025 (dollars in thousands):
Change in Interest Rates
Annual Increase to Interest Expense
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.
Item 8. Financial Statemen ts and Supplementary Data
The information required by this Item 8 is included in our consolidated financial statements and the notes thereto beginning on page F-1 in this Annual Report on Form 10-K.
