NexPoint Residential Trust, Inc. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2020


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

For the transition period from to

Commission File Number 001-36663

NexPoint Residential Trust, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

47-1881359

(State or other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

300 Crescent Court, Suite 700, Dallas, Texas

(Address of Principal Executive Offices)

75201

(Zip Code)

(972) 628-4100

(Telephone Number, Including Area Code)

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☒	Accelerated Filer	☐
Non-Accelerated Filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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

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

As of May 8, 2020, the registrant had 24,299,451 shares of its common stock, par value $0.01 per share, outstanding.

NEXPOINT RESIDENTIAL TRUST, INC.

Form 10-Q

Quarter Ended March 31, 2020

INDEX

			Page
Cautionary Statement Regarding Forward-Looking Statements			ii

	PART I—FINANCIAL INFORMATION

Item 1.		Financial Statements
		Consolidated Balance Sheets as of March 31, 2020 (Unaudited) and December 31, 2019	1
		Consolidated Unaudited Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019	2
		Consolidated Unaudited Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019	3
		Consolidated Unaudited Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019	4
		Notes to Consolidated Unaudited Financial Statements	6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.		Controls and Procedures	50

	PART II—OTHER INFORMATION

Item 1.		Legal Proceedings	51
Item 1A.		Risk Factors	51
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.		Defaults Upon Senior Securities	52
Item 4.		Mine Safety Disclosures	52
Item 5.		Other Information	52
Item 6.		Exhibits	53
Signatures			54

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

•

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

•

risks associated with ownership of real estate;

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

failure of acquisitions to yield anticipated results;

•

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

•

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

•

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

•

lack of or insufficient amounts of insurance;

•

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

•

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

•

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

•

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

•

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

•

risks associated with operating through joint ventures and funds;

•

our dependence on information systems;

•

risks associated with breaches of our data security;

•

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

•

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

•

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

•

risks associated with derivatives or hedging activity;

•

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

•

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

•

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

•

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

•

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

•

risks associated with any potential internalization of our management functions;

•

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

•

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

•

failure to maintain our status as a REIT;

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

risks associated with the current pandemic of the coronavirus, or COVID-19, and the future outbreak of other highly infectious or contagious diseases; and

•

any other risks included under Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on February 21, 2020 or under Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q.

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

iii

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	March 31, 2020			December 31, 2019
	(Unaudited)
ASSETS
Operating Real Estate Investments
Land	$	317,886		$	317,886
Buildings and improvements		1,477,664			1,472,319
Intangible lease assets		4,211			12,414
Construction in progress		9,500			4,375
Furniture, fixtures, and equipment		84,947			81,038
Total Gross Operating Real Estate Investments		1,894,208			1,888,032
Accumulated depreciation and amortization		(167,686	)		(152,552	)
Total Net Operating Real Estate Investments		1,726,522			1,735,480
Real estate held for sale, net of accumulated depreciation of $0 and $897, respectively		—			46,330
Total Net Real Estate Investments		1,726,522			1,781,810
Cash and cash equivalents		69,540			25,671
Restricted cash		36,041			45,511
Accounts receivable		3,095			6,285
Prepaid and other assets		3,695			2,336
Fair market value of interest rate swaps		—			4,376
TOTAL ASSETS	$	1,838,893		$	1,865,989

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages payable, net	$	1,145,508		$	1,145,371
Mortgages payable held for sale, net		—			41,176
Credit facility, net		223,850			216,501
Accounts payable and other accrued liabilities		13,137			11,971
Accrued real estate taxes payable		7,119			12,206
Accrued interest payable		3,337			3,691
Security deposit liability		2,893			2,977
Prepaid rents		1,469			1,658
Fair market value of interest rate swaps		47,077			902
Total Liabilities		1,444,390			1,436,453

Redeemable noncontrolling interests in the Operating Partnership		2,332			3,295

Stockholders' Equity:
Preferred stock, $0.01 par value: 100,000,000 shares authorized; 0 shares issued		—			—
Common stock, $0.01 par value: 500,000,000 shares authorized; 25,717,549 and 25,245,740 shares issued and 24,852,868 and 25,245,740 shares outstanding, respectively		256			251
Additional paid-in capital		378,943			359,748
Accumulated earnings less dividends		84,345			63,776
Accumulated other comprehensive income (loss)		(47,922	)		2,466
Common stock held in treasury at cost; 864,681 and 0 shares		(23,451	)		—
Total Stockholders' Equity		392,171			426,241
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,838,893		$	1,865,989

See Notes to Consolidated Financial Statements

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(in thousands, except per share amounts)

(Unaudited)

	For the Three Months Ended March 31,
	2020			2019
Revenues
Rental income	$	51,115		$	40,451
Other income		1,467			1,040
Total revenues		52,582			41,491
Expenses
Property operating expenses		11,721			9,639
Real estate taxes and insurance		8,023			5,758
Property management fees (1)		1,550			1,240
Advisory and administrative fees (2)		1,865			1,850
Corporate general and administrative expenses		2,701			2,233
Property general and administrative expenses		1,832			1,658
Depreciation and amortization		23,338			15,398
Total expenses		51,030			37,776
Operating income before gain on sales of real estate		1,552			3,715
Gain on sales of real estate		38,972			—
Operating income		40,524			3,715
Interest expense		(11,662	)		(8,088	)
Loss on extinguishment of debt and modification costs		(874	)		—
Casualty gains		51			—
Net income (loss)		28,039			(4,373	)

Net income (loss) attributable to redeemable noncontrolling interests in the Operating Partnership		84			(13	)
Net income (loss) attributable to common stockholders	$	27,955		$	(4,360	)
Other comprehensive loss
Unrealized losses on interest rate derivatives		(50,540	)		(5,665	)
Total comprehensive loss		(22,501	)		(10,038	)
Comprehensive loss attributable to redeemable noncontrolling interests in the Operating Partnership		(68	)		(30	)
Comprehensive loss attributable to common stockholders	$	(22,433	)	$	(10,008	)

Weighted average common shares outstanding - basic		25,388			23,550
Weighted average common shares outstanding - diluted		25,851			24,044

Earnings (loss) per share - basic	$	1.10		$	(0.19	)
Earnings (loss) per share - diluted	$	1.08		$	(0.19	)

(1)	Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the Company’s operating partnership, NexPoint Residential Trust Operating Partnership, L.P. (see Note 10).

(2)	Fees incurred to the Adviser (see Note 11).

See Notes to Consolidated Financial Statements

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in thousands)

(Unaudited)

	Preferred Stock				Common Stock						Additional			Accumulated Earnings (Loss)			Accumulated Other			Common Stock Held in
	Number of Shares		Par Value		Number of Shares			Par Value			Paid-in Capital			Less Dividends			Comprehensive Income (Loss)			Treasury at Cost			Total
Balances, December 31, 2019		—	$	—		25,245,740		$	251		$	359,748		$	63,776		$	2,466		$	—		$	426,241
Net income attributable to common stockholders		—		—		—			—			—			27,955			—			—			27,955
Repurchase of common stock		—		—		—			—			—			—			—			(30,999	)		(30,999	)
Retirement of common stock held in treasury		—		—		(225,799	)		(2	)		(7,546	)		—			—			7,548			—
Vesting of stock-based compensation		—		—		137,608			1			(433	)		—			—			—			(432	)
Issuance of common shares through at-the-market offering		—		—		560,000			6			27,174			—			—			—			27,180
Common stock dividends declared ($0.3125 per share)		—		—		—			—			—			(8,206	)		—			—			(8,206	)
Other comprehensive loss		—		—		—			—			—			—			(50,388	)		—			(50,388	)
Adjustment to reflect redemption value of redeemable noncontrolling interests in the Operating Partnership		—		—		—			—			—			820			—			—			820
Balances, March 31, 2020		—	$	—		25,717,549		$	256		$	378,943		$	84,345		$	(47,922	)		(23,451	)	$	392,171

	Preferred Stock				Common Stock				Additional		Accumulated Earnings (Loss)			Accumulated Other			Common Stock Held in
	Number of Shares		Par Value		Number of Shares		Par Value		Paid-in Capital		Less Dividends			Comprehensive Income			Treasury at Cost		Total
Balances, December 31, 2018		—	$	—		23,499,635	$	234	$	285,511	$	(6,764	)	$	17,047		$	—	$	296,028
Net income attributable to common stockholders		—		—		—		—		—		(4,360	)		—			—		(4,360	)
Vesting of stock-based compensation		—		—		143,642		1		1,069		—			—			—		1,070
Other comprehensive loss		—		—		—		—		—		—			(5,648	)		—		(5,648	)
Common stock dividends declared ($0.275 per share)		—		—		—		—		—		(6,641	)		—			—		(6,641	)
Adjustment to reflect redemption value of redeemable noncontrolling interests in the Operating Partnership		—		—		—		—		—		(126	)		—			—		(126	)
Balances, March 31, 2019		—	$	—		23,643,277	$	235	$	286,580	$	(17,891	)	$	11,399		$	—	$	280,323

See Notes to Consolidated Financial Statements

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	For the Three Months Ended March 31,
	2020			2019
Cash flows from operating activities
Net income (loss)	$	28,039		$	(4,373	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Gain on sales of real estate		(38,972	)		—
Depreciation and amortization		23,338			15,398
Amortization/write-off of deferred financing costs		1,207			432
Change in fair value on derivative instruments included in interest expense		(648	)		(1,854	)
Net cash received on derivative settlements		737			1,810
Interest payable on derivative instruments		(62	)		—
Amortization/write-off of fair market value adjustment of assumed debt		(51	)		(24	)
Vesting of stock-based compensation		1,300			1,070
Casualty gain		(51	)		—
Changes in operating assets and liabilities, net of effects of acquisitions:
Operating assets		791			(2,320	)
Operating liabilities		(4,210	)		(6,416	)
Net cash provided by operating activities		11,418			3,723

Cash flows from investing activities
Net proceeds from sales of real estate		85,418			—
Prepaid acquisition costs		(2,025	)		—
Insurance proceeds paid for casualty losses		(549	)		—
Insurance proceeds received for casualty losses		3,049			—
Additions to real estate investments		(13,604	)		(6,897	)
Acquisitions of real estate investments		—			(124,829	)
Net cash provided by (used in) investing activities		72,289			(131,726	)

Cash flows from financing activities
Mortgage proceeds received		—			78,987
Mortgage payments		(41,845	)		(238	)
Credit facilities proceeds received		35,000			52,500
Credit facilities payments		(28,000	)		—
Deferred financing costs paid		—			(1,355	)
Interest rate cap fees paid		—			(20	)
Prepayment penalties on extinguished debt		(416	)		—
Proceeds from the issuance of common shares through at-the-market offering, net of offering costs		27,180			—
Payments for taxes related to net share settlement of stock-based compensation		(1,732	)		—
Repurchase of common stock		(30,999	)		—
Dividends paid to common stockholders		(8,496	)		(6,717	)
Net cash (used in) provided by financing activities		(49,308	)		123,157

Net increase (decrease) in cash, cash equivalents and restricted cash		34,399			(4,846	)
Cash, cash equivalents and restricted cash, beginning of period		71,182			43,129
Cash, cash equivalents and restricted cash, end of period	$	105,581		$	38,283

See Notes to Consolidated Financial Statements

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

Supplemental Disclosure of Cash Flow Information
Interest paid	$	11,981		$	9,176
Prepayment penalties		416			—
Supplemental Disclosure of Noncash Activities

Capitalized construction costs included in accounts payable and other accrued liabilities		4,252			1,542
Change in fair value on derivative instruments designated as hedges		(50,540	)		(5,665	)
Other assets acquired from acquisitions		—			87
Liabilities assumed from acquisitions		—			271
Decrease in dividends payable upon vesting of restricted stock units		(290	)		(76	)
Write-off of fully amortized in-place leases		8,203			3,049
Write-off of deferred financing costs		455			—

See Notes to Consolidated Financial Statements

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

NexPoint Residential Trust, Inc. (the “Company”, “we”, “our”) was incorporated in Maryland on September 19, 2014, and has elected to be taxed as a real estate investment trust (“REIT”). The Company is focused on “value-add” multifamily investments primarily located in the Southeastern and Southwestern United States. Substantially all of the Company’s business is conducted through NexPoint Residential Trust Operating Partnership, L.P. (the “OP”), the Company’s operating partnership. The Company owns its properties (the “Portfolio”) through the OP and its wholly owned taxable REIT subsidiary (“TRS”). The OP owns approximately 99.9% of the Portfolio; the TRS owns approximately 0.1% of the Portfolio. The Company’s wholly owned subsidiary, NexPoint Residential Trust Operating Partnership GP, LLC (the “OP GP”), is the sole general partner of the OP. As of March 31, 2020, there were 23,819,402 common units in the OP (“OP Units”) outstanding, of which 23,746,169, or 99.7%, were owned by the Company and 73,233, or 0.3%, were owned by a noncontrolling limited partner (see Note 10).

The Company is externally managed by NexPoint Real Estate Advisors, L.P. (the “Adviser”), through an agreement dated March 16, 2015, as amended, and renewed on February 17, 2020 for a one-year term (the “Advisory Agreement”), by and among the Company, the OP and the Adviser. The Adviser conducts substantially all of the Company’s operations and provides asset management services for its real estate investments. The Company expects it will only have accounting employees while the Advisory Agreement is in effect. All of the Company’s investment decisions are made by the Adviser, subject to general oversight by the Adviser’s investment committee and the Company’s board of directors (the “Board”). The Adviser is wholly owned by NexPoint Advisors, L.P. (the “Sponsor”). Our Sponsor is affiliated through common control with Highland Capital Management, L.P.

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

2. Summary of Significant Accounting Policies

Basis of Accounting

The accompanying unaudited consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation. There have been no significant changes to the Company’s significant accounting policies during the three months ended March 31, 2020.

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

In the opinion of management, all adjustments and eliminations necessary for the fair presentation of the Company’s financial position as of March 31, 2020 and results of operations for the three months ended March 31, 2020 and 2019 have been included. Such adjustments are normal and recurring in nature. The unaudited information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2019 and notes thereto included in its Annual Report on Form 10-K filed with the SEC on February 21, 2020.

Principles of Consolidation

The Company accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation. The Company first evaluates whether each entity is a variable interest entity (“VIE”). Under the VIE model, the Company consolidates an entity when it has control to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest. The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries, including the OP and its subsidiaries.

Revenue Recognition

The Company’s primary operations consist of rental income earned from its residents under lease agreements typically with terms of one year or less. Rental income is recognized when earned. This policy effectively results in income recognition on the straight-line method over the related terms of the leases. Resident reimbursements and other income consist of charges billed to residents for utilities, carport and garage rental, and pets, administrative, application and other fees and are recognized when earned. The Company implemented the provisions of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) as of January 1, 2019 using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements as a substantial portion of its revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU 2014-09.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which supersedes the current accounting for leases and while retaining two distinct types of leases, finance and operating, (1) requires lessees to record a right of use asset and a related liability for the rights and obligations associated with a lease, regardless of lease classification, and recognize lease expense in a manner similar to current accounting, (2) eliminates most real estate specific lease provisions and (3) aligns many of the underlying lessor model principles with those in the new revenue standard. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. Entities are required to use a modified retrospective approach when transitioning to the ASU for leases that exist as of or are entered into after the beginning of the earliest comparative period presented in the financial statements. As lessors, substantially all of the Company’s agreements have a term of 12 months or less. For lessors, accounting for leases under the new standard is substantially the same as existing guidance for sales-type leases, direct financing leases, and operating leases, but eliminates current real estate specific provisions and changes the treatment of initial direct costs.

In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements (“ASU 2018-11”), which provides entities with relief from the costs of implementing certain aspects of ASU 2016-02. ASU 2018-11 provides a practical expedient that allows lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Company elected the practical expedient to account for lease and non-lease components as a single component in lease contracts where the Company is the lessor. The Company implemented the provisions of ASU 2018-11 and 2016-02, collectively Topic 842 Leases (“ASC 842”), effective January 1, 2019, and elected the transition option that the ASU provides which permits entities to not recast the comparative periods presented when transitioning to the standard. The Company implemented changes to its business processes and controls related to accounting for and the presentation and disclosure of leases in the consolidated statements of operations and began presenting all rentals and reimbursements from tenants as a single line item within rental income on the consolidated statements of operations and comprehensive income. The table below outlines the components of rental income and its other components which were previously classified as other income for the three months ended March 31, 2020 and 2019:

	For the Three Months Ended March 31,
Lease Income Type	2020		2019
Rental income	$	45,468	$	36,322
Utility reimbursements (1)		3,044		2,541
Late fees (1)		484		379
Pet fees (1)		237		180
Other fees (1)		1,882		1,029
Total rental income	$	51,115	$	40,451

(1)	Previously classified as other income prior to December 31, 2019.

The table below quantifies the effects on rental and other income for the three months ended March 31, 2020 and 2019 from the adoption ASC 842:

	For the Three Months Ended March 31,
	2020			2019
Prior to adoption of ASC 842
Rental income	$	45,468		$	36,322
Other income		7,114			5,169
Total revenue	$	52,582		$	41,491

Post adoption of ASC 842
Rental income	$	51,115		$	40,451
Other income		1,467			1,040
Total revenue	$	52,582		$	41,491

Differences resulting in ASC 842 adoption
Rental income difference	$	5,647		$	4,129
Other income difference		(5,647	)		(4,129	)
Total revenue difference	$	—		$	—

Certain revenue streams such as service provider income and damage recoveries did not qualify for the practical expedient and therefore remained in other income and were subjected to ASU 2014-09.

Purchase Price Allocation

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

The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (“ASC 820”) (see Note 7), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. The allocation of the total consideration to intangible lease assets represents the value associated with the in-place leases, which may include lost rent, leasing commissions, legal and other related costs, which the Company, as buyer of the property, did not have to incur to obtain the residents. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.

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

Land		Not depreciated
Buildings		30 years
Improvements		15 years
Furniture, fixtures, and equipment		3 years
Intangible lease assets		6 months

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

Impairment

Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The key inputs into our impairment analysis include, but are not limited to, the holding period, net operating income, and capitalization rates. In such cases, the Company will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value. The Company’s impairment analysis identifies and evaluates events or changes in circumstances that indicate the carrying amount of a real estate investment may not be recoverable, including determining the period the Company will hold the rental property, net operating income, and the estimated capitalization rate for each respective real estate investment. As of March 31, 2020, the Company has not recorded any impairment on its real estate assets. However, we continue to monitor the impact of COVID-19 (see “–Coronavirus (“COVID-19”)” for additional information, below).

Held for Sale

The Company periodically classifies real estate assets as held for sale when certain criteria are met, in accordance with GAAP. At that time, the Company presents the net real estate assets and the net debt associated with the real estate held for sale separately in its consolidated balance sheet, and the Company ceases recording depreciation and amortization expense related to that property. Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell. As of March 31, 2020, there are no properties held for sale.

Income Taxes

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and expects to continue to qualify as a REIT. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute annually at least 90% of its “REIT taxable income,” as defined by the Code, to its stockholders. As a REIT, the Company will be subject to federal income tax on its undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions it pays with respect to any calendar year are less than the sum of (1) 85% of its ordinary income, (2) 95% of its capital gain net income and (3) 100% of its undistributed income from prior years. The Company intends to operate in such a manner so as to qualify as a REIT, but no assurance can be given that the Company will operate in a manner so as to qualify as a REIT. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. The Company had no significant taxes associated with its TRS for the three months ended March 31, 2020 and 2019.

If the Company fails to meet these requirements, it could be subject to federal income tax on all of the Company’s taxable income at regular corporate rates for that year. The Company would not be able to deduct distributions paid to stockholders in any year in which it fails to qualify as a REIT. Additionally, the Company will also be disqualified from electing to be taxed as a REIT for the four taxable years following the year during which qualification was lost unless the Company is entitled to relief under specific statutory provisions. As of March 31, 2020, the Company believes it is in compliance with all applicable REIT requirements.

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

The Company recognizes its tax positions and evaluates them using a two-step process. First, the Company determines whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, the Company will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.

The Company had no material unrecognized tax benefit or expense, accrued interest or penalties as of March 31, 2020. The Company and its subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2019, 2018 and 2017 tax years remain open to examination by tax jurisdictions to which the Company and its subsidiaries are subject. When applicable, the Company recognizes interest and/or penalties related to uncertain tax positions on its consolidated statements of operations and comprehensive income (loss).

Recent Accounting Pronouncements

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which changes certain recognition, measurement, presentation, and disclosure requirements for financial instruments. The ASU requires all equity investments, except those accounted for under the equity method of accounting or resulting in consolidation, to be measured at fair value with changes in fair value recognized in net income. The ASU also simplifies the impairment assessment for equity investments without readily determinable fair values, amends the presentation requirements for changes in the fair value of financial liabilities, requires presentation of financial instruments by measurement category and form of financial asset, and eliminates the requirement to disclose the methods and significant assumptions used in estimating the fair value of financial instruments. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. The Company implemented the provisions of ASU 2016-01 as of January 1, 2019, and it did not have a material impact on the Company’s consolidated financial statements as the Company does not, nor does it expect to, have a material amount of financial assets or financial liabilities that would be subject to the provisions of ASU 2016-01.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230) (“ASU 2016-15) which amends classification of cash payments for debt prepayment or debt extinguishment costs. Amendments to Topic 230 made by ASU 2016-15 require that any debt prepayment or debt extinguishment costs are classified as cash flows from financing activities. Debt extinguishment costs include third-party costs, premiums paid and other fees paid to creditors that are directly related to the debt prepayment or extinguishment. The Company adopted the provisions of ASU 2016-15 as of January 1, 2019 on a retrospective basis.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company has 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. The Company will continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

Reclassifications

Certain reclassifications have been made to conform the prior period consolidated financial statements and notes to the current period presentation.

Coronavirus (“COVID-19”)

Beginning in January 2020, reports came out of Wuhan, China regarding a new virus which was determined to be highly contagious, more aggressive than typical viruses and for which there is no cure or vaccination at this time. As reported cases and deaths of the COVID-19 virus began increasing in February and continuing through the date of this report, there has been a significant impact to the global economy generally. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. On March 13, 2020, President Trump declared a national emergency in the United States. Over the ensuing weeks, the President and the task force that was set up to deal with preparations across the country, announced sweeping and unprecedented actions to help slow the spread of the virus.

The President’s task force recommended all citizens practice “social distancing” and other protocols to limit interaction between individuals for a period of 15 days, which was later expanded for 30 days and set to end April 30, 2020. Also, many cities and states canceled school or went to online classes, colleges were ordered closed and went to online learning protocols, non-essential businesses such as restaurants or bars closed voluntarily or were ordered closed by local governments, other businesses closed their offices with employees working from home, many businesses canceled non-essential travel, families canceled vacations and airlines reduced traffic. Bans were placed on citizens from certain countries from entering the United States and the U.S./Mexican and U.S./Canadian borders were closed to limit the spread of the virus across countries.

Collectively, these actions, while for the benefit of public health, have also essentially grounded the American economy to a halt. As reported on April 18, 2020 by the U.S. Labor Department, 26 million Americans had filed for unemployment in the past 5-weeks, shattering all prior records of unemployment claims during any 5-week period. The U.S. stock market has seen historic declines over an extraordinarily short period of time. Certain industries such as airlines, lodging, entertainment, gaming, cruise ships, plus industries closely associated with these industries have seen unprecedented declines in business.

As of March 31, 2020, 15 residents have been placed on payment plans for the month of March due to the COVID-19 crisis for a total of approximately $6,000 in rent. The durations of the payment plans are determined on a case by case basis, in which time the tenant is expected to make rent payments in full. The Company has not granted any rent concessions to residents in response to the crisis as of March 31, 2020. The Company continues to monitor the impact on this pandemic and its effect on future rent collections, valuation of real estate investments, liquidity and the ability to refinance or repay debt.

3. Investments in Subsidiaries

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

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

As of March 31, 2020, the Company, through the OP and the wholly owned TRS, owned 37 properties through SPEs. The following table represents the Company’s ownership in each property by virtue of its 100% ownership of the SPEs that directly own the title to each property as of March 31, 2020 and December 31, 2019:

				Effective Ownership Percentage at
Property Name		Location	Year Acquired	March 31, 2020			December 31, 2019
Arbors on Forest Ridge		Bedford, Texas	2014		100	%		100	%
Cutter's Point		Richardson, Texas	2014		100	%		100	%
Eagle Crest		Irving, Texas	2014		100	%		100	%
Silverbrook		Grand Prairie, Texas	2014		100	%		100	%
Beechwood Terrace		Antioch, Tennessee	2014		100	%		100	%
Willow Grove	(1)	Nashville, Tennessee	2014		—			100	%
Woodbridge	(1)	Nashville, Tennessee	2014		—			100	%
The Summit at Sabal Park		Tampa, Florida	2014		100	%		100	%
Courtney Cove		Tampa, Florida	2014		100	%		100	%
Radbourne Lake		Charlotte, North Carolina	2014		100	%		100	%
Timber Creek		Charlotte, North Carolina	2014		100	%		100	%
Sabal Palm at Lake Buena Vista		Orlando, Florida	2014		100	%		100	%
Southpoint Reserve at Stoney Creek	(1)	Fredericksburg, Virginia	2014		—			100	%
Cornerstone		Orlando, Florida	2015		100	%		100	%
The Preserve at Terrell Mill		Marietta, Georgia	2015		100	%		100	%
Versailles		Dallas, Texas	2015		100	%		100	%
Seasons 704 Apartments		West Palm Beach, Florida	2015		100	%		100	%
Madera Point		Mesa, Arizona	2015		100	%		100	%
Venue at 8651		Fort Worth, Texas	2015		100	%		100	%
Parc500		West Palm Beach, Florida	2016		100	%		100	%
The Venue on Camelback	(2)	Phoenix, Arizona	2016		100	%		100	%
Old Farm		Houston, Texas	2016		100	%		100	%
Stone Creek at Old Farm		Houston, Texas	2016		100	%		100	%
Hollister Place		Houston, Texas	2017		100	%		100	%
Rockledge Apartments		Marietta, Georgia	2017		100	%		100	%
Atera Apartments		Dallas, Texas	2017		100	%		100	%
Cedar Pointe	(3)	Antioch, Tennessee	2018		100	%		100	%
Crestmont Reserve		Dallas, Texas	2018		100	%		100	%
Brandywine I & II		Nashville, Tennessee	2018		100	%		100	%
Bella Vista	(4)	Phoenix, Arizona	2019		100	%		100	%
The Enclave	(4)	Tempe, Arizona	2019		100	%		100	%
The Heritage	(4)	Phoenix, Arizona	2019		100	%		100	%
Summers Landing		Fort Worth, Texas	2019		100	%		100	%
Residences at Glenview Reserve	(5)	Nashville, Tennessee	2019		100	%		100	%
Residences at West Place	(5)	Orlando, Florida	2019		100	%		100	%
Avant at Pembroke Pines		Pembroke Pines, Florida	2019		100	%		100	%
Arbors of Brentwood		Nashville, Tennessee	2019		100	%		100	%
Torreyana Apartments	(6)	Las Vegas, Nevada	2019		100	%		100	%
Bloom	(6)	Las Vegas, Nevada	2019		100	%		100	%
Bella Solara	(6)	Las Vegas, Nevada	2019		100	%		100	%

(1)	Properties were disposed in 2020.

(2)	Formerly known as The Colonnade.

(3)

The EAT that directly owned Cedar Pointe was consolidated as a VIE at December 31, 2018. The master lease agreement with the EAT that directly owned Cedar Pointe terminated on February 20, 2019, at which time legal title to Cedar Pointe transferred to the Company. Upon the transfer of title, the entity that directly owned Cedar Pointe was no longer considered a VIE.

(4)

The EAT that directly owned Bella Vista, The Enclave and The Heritage was consolidated as a VIE at March 31, 2019. The master lease agreement with the EAT that directly owned these properties terminated on July 27, 2019, at which time legal title transferred to the Company. Upon the transfer of title, the EAT that directly owned these properties was no longer considered a VIE.

(5)

The Company acquired two multifamily properties, the Residences at Glenview Reserve and the Residences at West Place (the “Residences”) on July 17, 2019. The master lease agreement with the EAT that directly owned these properties terminated on September 3, 2019, at which time legal title transferred to the Company. Upon the transfer of title, the EAT that directly owned these properties was no longer considered a VIE.

(6)

The EAT that directly owned Torreyana, Bloom and Bella Solara was consolidated as a VIE at December 31, 2019. The Company completed the reverse 1031 Exchange on March 31, 2020 and at such time legal title transferred to the Company. As such, the EAT that directly owned these properties is no longer considered a VIE.

4. Real Estate Investments Statistics

As of March 31, 2020, the Company was invested in a total of 37 multifamily properties, as listed below:

							Average Effective Monthly Rent Per Unit *(1) as of				% Occupied *(2) as of
Property Name		Rentable Square Footage (in thousands)*		Number of Units*		Date Acquired	March 31, 2020		December 31, 2019		March 31, 2020			December 31, 2019
Arbors on Forest Ridge			155	210		1/31/2014	$	899	$	894		91.9	%		95.7	%
Cutter's Point	(3)		198	0		1/31/2014		-		-		0.0	%		0.0	%
Eagle Crest			396	447		1/31/2014		974		969		94.4	%		96.6	%
Silverbrook			526	642		1/31/2014		889		870		94.9	%		95.5	%
Beechwood Terrace			272	300		7/21/2014		943		937		94.0	%		91.3	%
The Summit at Sabal Park			205	252		8/20/2014		1,011		1,010		95.6	%		97.2	%
Courtney Cove			225	324		8/20/2014		928		927		94.1	%		94.8	%
Radbourne Lake			247	225		9/30/2014		1,125		1,118		93.8	%		90.7	%
Timber Creek			248	352		9/30/2014		918		916		94.0	%		94.9	%
Sabal Palm at Lake Buena Vista			371	400		11/5/2014		1,291		1,270		95.3	%		93.8	%
Cornerstone			318	430		1/15/2015		1,056		1,053		93.7	%		95.6	%
The Preserve at Terrell Mill			692	752		2/6/2015		980		969		94.7	%		94.9	%
Versailles			301	388		2/26/2015		923		923		92.8	%		93.0	%
Seasons 704 Apartments			217	222		4/15/2015		1,175		1,155		98.2	%		94.6	%
Madera Point			193	256		8/5/2015		946		924		97.7	%		96.1	%
Venue at 8651			289	333		10/30/2015		922		924		95.5	%		96.1	%
Parc500			266	217		7/27/2016		1,295		1,304		92.6	%		93.1	%
The Venue on Camelback			256	415		10/11/2016		799		777		94.9	%		94.2	%
Old Farm			697	734		12/29/2016		1,148		1,162		95.2	%		92.8	%
Stone Creek at Old Farm			186	190		12/29/2016		1,185		1,194		96.3	%		95.8	%
Hollister Place			246	260		2/1/2017		1,008		995		96.5	%		93.1	%
Rockledge Apartments			802	708		6/30/2017		1,267		1,260		93.9	%		95.3	%
Atera Apartments			334	380		10/25/2017		1,246		1,256		93.2	%		93.4	%
Cedar Pointe			224	210		8/24/2018		1,069		1,066		92.4	%		91.4	%
Crestmont Reserve			199	242		9/26/2018		899		902		94.2	%		94.2	%
Brandywine I & II			414	632		9/26/2018		977		978		94.0	%		93.7	%
Bella Vista			243	248		1/28/2019		1,272		1,265		97.2	%		97.2	%
The Enclave			194	204		1/28/2019		1,308		1,295		95.6	%		93.6	%
The Heritage			199	204		1/28/2019		1,262		1,265		95.1	%		96.6	%
Summers Landing			139	196		6/7/2019		934		920		93.4	%		91.8	%
Residences at Glenview Reserve			344	360		7/17/2019		979		977		94.7	%		94.4	%
Residences at West Place			345	342		7/17/2019		1,219		1,211		93.3	%		92.7	%
Avant at Pembroke Pines			1,442	1520		8/30/2019		1,497		1,498		95.1	%		93.7	%
Arbors of Brentwood			325	346		9/10/2019		1,192		1,192		95.1	%		96.2	%
Torreyana Apartments			309	315		11/22/2019		1,182		1,171		94.0	%		95.6	%
Bloom			498	528		11/22/2019		1,097		1,105		87.7	%		90.9	%
Bella Solara			271	320		11/22/2019		1,118		1,136		86.9	%		91.9	%
			12,786		14,104

*	Information is unaudited.

(1)

Average effective monthly rent per unit is equal to the average of the contractual rent for commenced leases as of March 31, 2020 and December 31, 2019, respectively, minus any tenant concessions over the term of the lease, divided by the number of units under commenced leases as of March 31, 2020 and December 31, 2019, respectively.

(2)	Percent occupied is calculated as the number of units occupied as of March 31, 2020 and December 31, 2019, divided by the total number of units, expressed as a percentage.

(3)	Cutter’s Point incurred significant tornado damage on October 20, 2019 which resulted in the property ceasing operations in order to start reconstruction (see Note 5).

5. Real Estate Investments

As of March 31, 2020, the major components of the Company’s investments in multifamily properties were as follows (in thousands):

Operating Properties	Land		Buildings and Improvements			Intangible Lease Assets			Construction in Progress		Furniture, Fixtures and Equipment			Totals
Arbors on Forest Ridge	$	2,330	$	11,590		$	—		$	—	$	1,570		$	15,490
Cutter's Point		3,330		2,568			—			4,738		1,878			12,514
Eagle Crest		5,450		23,847			—			3		1,888			31,188
Silverbrook		4,860		27,131			—			1		4,773			36,765
Beechwood Terrace		1,390		22,200			—			32		2,613			26,235
The Summit at Sabal Park		5,770		13,617			—			—		1,643			21,030
Courtney Cove		5,880		13,425			—			2		2,040			21,347
Radbourne Lake		2,440		22,512			—			—		2,049			27,001
Timber Creek		11,260		14,015			—			8		3,036			28,319
Sabal Palm at Lake Buena Vista		7,580		42,375			—			—		2,196			52,151
Cornerstone		1,500		30,672			—			30		3,133			35,335
The Preserve at Terrell Mill		10,170		49,564			—			109		6,414			66,257
Versailles		6,720		21,715			—			—		3,761			32,196
Seasons 704 Apartments		7,480		14,340			—			—		1,568			23,388
Madera Point		4,920		17,635			—			1		2,071			24,627
Venue at 8651		2,350		18,227			—			—		3,387			23,964
Parc500		3,860		20,834			—			—		3,520			28,214
The Venue on Camelback		8,340		38,021			—			—		2,151			48,512
Old Farm		11,078		70,764			—			19		3,133			84,994
Stone Creek at Old Farm		3,493		19,454			—			1		744			23,692
Hollister Place		2,782		21,814			—			23		2,285			26,904
Rockledge Apartments		17,451		96,397			—			11		5,010			118,869
Atera Apartments		22,371		37,461			—			6		2,097			61,935
Cedar Pointe		2,372		24,228			—			—		1,409			28,009
Crestmont Reserve		4,124		20,639			—			127		1,289			26,179
Brandywine I & II		6,237		73,230			—			102		3,414			82,983
Bella Vista		10,942		36,711			—			—		1,632			49,285
The Enclave		11,046		30,261			—			—		1,293			42,600
The Heritage		6,835		34,624			—			25		1,364			42,848
Summers Landing		1,798		17,232			—			277		557			19,864
Residences at Glenview Reserve		3,367		40,465			—			574		924			45,330
Residences at West Place		3,345		51,249			—			252		873			55,719
Avant at Pembroke Pines		48,435		267,802			—			2,325		5,679			324,241
Arbors of Brentwood		6,346		55,092			—			287		844			62,569
Torreyana Apartments		23,824		42,850			1,201			178		785			68,838
Bloom		23,805		80,576			1,851			218		1,200			107,650
Bella Solara		12,605		52,527			1,159			151		724			67,166
		317,886		1,477,664			4,211			9,500		84,947			1,894,208
Accumulated depreciation and amortization		—		(118,888	)		(2,807	)		—		(45,991	)		(167,686	)
Total Operating Properties	$	317,886	$	1,358,776		$	1,404		$	9,500	$	38,956		$	1,726,522

Total	$	317,886	$	1,358,776		$	1,404		$	9,500	$	38,956		$	1,726,522

As of December 31, 2019, the major components of the Company’s investments in multifamily properties were as follows (in thousands):

Operating Properties	Land		Buildings and Improvements			Intangible Lease Assets			Construction in Progress		Furniture, Fixtures and Equipment			Totals
Arbors on Forest Ridge	$	2,330	$	11,585		$	—		$	—	$	1,520		$	15,435
Cutter's Point		3,330		2,563			—			2,648		1,878			10,419
Eagle Crest		5,450		23,830			—			—		1,832			31,112
Silverbrook		4,860		27,091			—			—		4,630			36,581
Beechwood Terrace		1,390		22,000			—			70		2,535			25,995
The Summit at Sabal Park		5,770		13,600			—			—		1,598			20,968
Courtney Cove		5,880		13,413			—			2		1,982			21,277
Radbourne Lake		2,440		22,465			—			—		1,997			26,902
Timber Creek		11,260		13,993			—			—		2,939			28,192
Sabal Palm at Lake Buena Vista		7,580		41,841			—			492		2,108			52,021
Cornerstone		1,500		30,653			—			—		2,977			35,130
The Preserve at Terrell Mill		10,170		49,216			—			8		6,183			65,577
Versailles		6,720		21,688			—			8		3,736			32,152
Seasons 704 Apartments		7,480		14,336			—			—		1,482			23,298
Madera Point		4,920		17,615			—			—		2,042			24,577
Venue at 8651		2,350		18,192			—			21		3,330			23,893
Parc500		3,860		20,821			—			193		3,202			28,076
The Venue on Camelback		8,340		37,992			—			—		2,086			48,418
Old Farm		11,078		70,670			—			40		2,950			84,738
Stone Creek at Old Farm		3,493		19,436			—			1		716			23,646
Hollister Place		2,782		21,788			—			—		2,159			26,729
Rockledge Apartments		17,451		96,108			—			134		4,759			118,452
Atera Apartments		22,371		37,442			—			8		2,044			61,865
Cedar Pointe		2,372		24,193			—			24		1,268			27,857
Crestmont Reserve		4,124		20,613			—			—		1,272			26,009
Brandywine I & II		6,237		73,004			—			58		3,148			82,447
Bella Vista		10,942		36,690			—			—		1,500			49,132
The Enclave		11,046		30,224			—			24		1,176			42,470
The Heritage		6,835		34,580			—			—		1,246			42,661
Summers Landing		1,798		16,958			—			35		528			19,319
Residences at Glenview Reserve		3,367		40,202			—			11		837			44,417
Residences at West Place		3,345		50,884			—			244		810			55,283
Avant at Pembroke Pines		48,436		266,103			6,989			217		5,376			327,121
Arbors of Brentwood		6,346		54,995			1,215			137		779			63,472
Torreyana Apartments		23,823		42,721			1,201			—		655			68,400
Bloom		23,805		80,365			1,851			—		1,095			107,116
Bella Solara		12,605		52,449			1,158			—		663			66,875
		317,886		1,472,319			12,414			4,375		81,038			1,888,032
Accumulated depreciation and amortization		—		(105,335	)		(6,171	)		—		(41,046	)		(152,552	)
Total Operating Properties	$	317,886	$	1,366,984		$	6,243		$	4,375	$	39,992		$	1,735,480

Held For Sale Property
Southpoint Reserve at Stoney Creek		6,120		11,502			—			1		968			18,591
Woodbridge		3,650		13,296			—			—		1,934			18,880
Willow Grove		3,940		10,946			—			—		1,832			16,718
Accumulated depreciation and amortization		—		(5,390	)		—			—		(2,469	)		(7,859	)
Total Held For Sale Property	$	13,710	$	30,354		$	—		$	1	$	2,265		$	46,330

Total	$	331,596	$	1,397,338		$	6,243		$	4,376	$	42,257		$	1,781,810

Depreciation expense was $18.5 million and $13.2 million for the three months ended March 31, 2020 and 2019, respectively.

Amortization expense related to the Company’s intangible lease assets was $4.8 million and $2.2 million for the three months ended March 31, 2020 and 2019, respectively. Amortization expense related to the Company’s intangible lease assets for all acquisitions completed through March 31, 2020 is expected to be $1.4 million for the remainder of the year ended December 31, 2020. Due to the six-month useful life attributable to intangible lease assets, the value of intangible lease assets on any acquisition prior to September 30, 2019 has been fully amortized and the assets and related accumulated amortization have been written off as of March 31, 2020.

Acquisitions

There were no acquisitions of real estate during the three months ended March 31, 2020. The Company acquired three properties during the three months ended March 31, 2019 for $132.1 million. In connection with the acquisitions made during the three months ended March 31, 2019, the Company paid earnest money deposits of $7.7 million prior to December 31, 2018. Management has determined that these deposits should have been presented as a decrease to the cash outflow associated with the acquisition of real estate investments in the accompanying consolidated statement of cash flow. The Company has corrected the overstatement of operating activities and investing activities to $3.7M and ($131.7M), respectively, for the three months ended March 31, 2019. This correction did not change any amounts on the consolidated balance sheet or statement of operations and comprehensive loss. Management believes that the effect of these corrections is not material to the Company’s financial position, results of operations, or liquidity for any period presented.

Dispositions

The Company sold three properties during the three months ended March 31, 2020, as detailed in the table below (dollars in thousands). There were no sales of real estate during the three months ended March 31, 2019.

Property Name	Location	Date of Sale	Sales Price		Net Cash Proceeds (1)		Gain on Sale of Real Estate
Southpoint Reserve at Stoney Creek	Fredericksburg, Virginia	March 20, 2020	$	23,500		23,176	$	5,469
Willow Grove	Nashville, Tennessee	March 26, 2020		31,300		31,005		17,513
Woodbridge	Nashville, Tennessee	March 26, 2020		31,700		31,237		15,990
			$	86,500	$	85,418	$	38,972

(1)	Represents sales price, net of closing costs.

Cutter’s Point Casualty Losses

On October 20, 2019, as a result of a tornado, the Cutter’s Point property suffered significant property damage. The damage incurred rendered the property inoperable; therefore, the Company has ceased operations at the property as it is under reconstruction. In relation to this event, the Company wrote down the carrying value of Cutter’s Point by approximately $7.8 million, and, in accordance with ASC 610 Other Income, the Company recognized approximately $3.5 million in casualty losses on the consolidated statement of operations and comprehensive income during the year ended December 31, 2019. Also, the Company filed a business interruption insurance claim and recognized approximately $0.6 million for the lost rent, which is included in miscellaneous income on the consolidated statement of operations and comprehensive income for the year ended December 31, 2019. Lost rental income is insured and the Company expects any operating losses resulting from the damage to be immaterial while the property undergoes reconstruction. Starting November 1, 2019, the Company began capitalizing insurance expense, real estate taxes, interest expense and debt issuance costs to construction in progress and stopped depreciation due to Cutter’s Point being under development. As of March 31, 2020, approximately $0.3 million of these costs have been capitalized. As of March 31, 2020, Cutter’s Point was excluded from the portfolio’s total unit count and all same store pools due to the property temporarily ceasing operations while it under goes reconstruction which is estimated to be completed in 2021.

6. Debt

Mortgage Debt

The following table contains summary information concerning the mortgage debt of the Company as of March 31, 2020 (dollars in thousands):

Operating Properties		Type	Term (months)		Outstanding Principal (1)				Interest Rate (2)	Maturity Date
Arbors on Forest Ridge	(3)	Floating		84	$	13,130			2.67%	7/1/2024
Cutter's Point	(3)	Floating		84		16,640			2.67%	7/1/2024
Eagle Crest	(3)	Floating		84		29,510			2.67%	7/1/2024
Silverbrook	(3)	Floating		84		30,590			2.67%	7/1/2024
Beechwood Terrace	(3)	Floating		84		23,365			2.43%	9/1/2025
The Summit at Sabal Park	(3)	Floating		84		13,560			2.61%	7/1/2024
Courtney Cove	(3)	Floating		84		13,680			2.61%	7/1/2024
The Preserve at Terrell Mill	(3)	Floating		84		42,480			2.61%	7/1/2024
Versailles	(3)	Floating		84		23,880			2.61%	7/1/2024
Seasons 704 Apartments	(3)	Floating		84		17,460			2.61%	7/1/2024
Madera Point	(3)	Floating		84		15,150			2.61%	7/1/2024
Venue at 8651	(3)	Floating		84		13,734			2.77%	7/1/2024
The Venue on Camelback	(3)	Floating		84		28,093			2.67%	7/1/2024
Old Farm	(3)	Floating		84		52,886			2.67%	7/1/2024
Stone Creek at Old Farm	(3)	Floating		84		15,274			2.67%	7/1/2024
Timber Creek	(3)	Floating		84		24,100			2.25%	10/1/2025
Radbourne Lake	(3)	Floating		84		20,000			2.28%	10/1/2025
Sabal Palm at Lake Buena Vista	(3)	Floating		84		42,100			2.29%	9/1/2025
Cornerstone	(4)	Fixed		120		21,654			4.24%	3/1/2023
Parc500	(5)	Fixed		120		15,154			4.49%	8/1/2025
Hollister Place	(3)	Floating		84		14,811			2.33%	10/1/2025
Rockledge Apartments	(3)	Floating		84		68,100			2.56%	7/1/2024
Atera Apartments	(3)	Floating		84		29,500			2.47%	11/1/2024
Cedar Pointe	(6)	Floating		84		17,300			2.34%	9/1/2025
Crestmont Reserve	(3)	Floating		84		12,061			2.17%	10/1/2025
Brandywine I & II	(3)	Floating		84		43,835			2.17%	10/1/2025
Bella Vista	(6)	Floating		84		29,040			2.31%	2/1/2026
The Enclave	(6)	Floating		84		25,322			2.31%	2/1/2026
The Heritage	(6)	Floating		84		24,625			2.31%	2/1/2026
Summers Landing	(7)	Floating		84		10,109			2.17%	10/1/2025
Residences at Glenview Reserve	(8)	Floating		84		26,560			2.43%	10/1/2025
Residences at West Place	(8)	Fixed		120		33,817			4.24%	10/1/2028
Avant at Pembroke Pines	(3)	Floating		84		177,100			2.42%	9/1/2026
Arbors of Brentwood	(3)	Floating		84		34,237			2.42%	10/1/2026
Torreyana Apartments	(6)	Floating		84		37,400			2.69%	12/1/2026
Bloom	(6)	Floating		84		58,850			2.69%	12/1/2026
Bella Solara	(6)	Floating		84		36,576			2.69%	12/1/2026
					$	1,151,683
Fair market value adjustment						1,413		(9)
Deferred financing costs, net of accumulated amortization of $2,867						(7,588	)
					$	1,145,508

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

(2)	Interest rate is based on one-month LIBOR plus an applicable margin, except for fixed rate mortgage debt. One-month LIBOR as of March 31, 2020 was 0.9929%.

(3)

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

(4)

Debt in the amount of $18.0 million was assumed upon acquisition of this property and recorded at approximated fair value. The assumed debt carries a 4.09% fixed rate, was originally issued in March 2013, and had a term of 120 months with an initial 24 months of interest only. At the time of acquisition, the principal balance of the first mortgage remained unchanged and had a remaining term of 98 months with 2 months of interest only. The first mortgage is pre-payable and subject to yield maintenance from the 13^th month through August 31, 2022 and is pre-payable at par September 1, 2022 until maturity. Concurrently with the acquisition of the property, the Company placed a supplemental second mortgage on the property with a principal amount of approximately $5.8 million, a fixed rate of 4.70%, and with a maturity date that is the same time as the first mortgage. The supplemental second mortgage is pre-payable and subject to yield maintenance from the date of issuance through August 31, 2022 and is pre-payable at par September 1, 2022 until maturity. As of March 31, 2020, the total indebtedness secured by the property had a blended interest rate of 4.24%.

(5)	Debt was assumed upon acquisition of this property and recorded at approximated fair value. The loan is open to pre-payment in the last four months of the term.

(6)

(7)

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

(8)

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

(9)

The Company reflected a valuation adjustment on its fixed rate debt for Parc500 and Residences at West Place to adjust it to fair market value on their respective dates of acquisition for the difference between the fair value and the assumed principal amount of debt. The difference is amortized into interest expense over the remaining terms of the mortgages.

During the three months ended March 31, 2020, the Company sold three properties and repaid the related mortgage loans that encumbered the properties, as detailed in the table below (in thousands); there were no sales of real estate during the three months ended March 31, 2019.

Property Name	Date of Sale	Type	Outstanding Principal (1)
Southpoint Reserve	March 20, 2020	Floating		13,101
Willow Grove	March 26, 2020	Floating		14,818
Woodbridge	March 26, 2020	Floating		13,677
			$	41,596

(1)	Represents the outstanding principal balance when the loan was repaid.

The weighted average interest rate of the Company’s mortgage indebtedness was 2.61% as of March 31, 2020 and 3.34% as of December 31, 2019. The decrease between the periods is primarily related to a decrease in one-month LIBOR of approximately 77 basis points to 0.9929% as of March 31, 2020 from 1.7625% as of December 31, 2019. As of March 31, 2020, the adjusted weighted average interest rate of the Company’s mortgage indebtedness was 3.00%. For purposes of calculating the adjusted weighted average interest rate of the outstanding mortgage indebtedness, the Company has included the weighted average fixed rate of 1.3792% for one-month LIBOR on its combined $1.2 billion notional amount of interest rate swap agreements, which effectively fix the interest rate on $1.2 billion of the Company’s floating rate indebtedness (see Note 7).

Each of the Company’s mortgages is a non-recourse obligation subject to customary provisions. The loan agreements contain customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan, defaults in payments under any other security instrument covering any part of the property, whether junior or senior to the loan, and bankruptcy or other insolvency events. As of March 31, 2020, the Company believes it is in compliance with all provisions.

Freddie Mac Multifamily Green Advantage. In order to obtain more favorable pricing on the Company’s mortgage debt financing with Freddie Mac, the Company has decided to participate in Freddie Mac’s new Multifamily Green Advantage program (the “Green Program”). In the second quarter of 2017, the Company escrowed approximately $4.2 million to finance smarter, greener property improvements at 18 of its properties. In connection with the three acquisitions and seven refinancings the Company completed in 2018, the Company escrowed approximately $1.2 million related to the Green Program. Since the start of the Green Program, we have spent approximately $6.2 million of green improvements and completed 34 Green Programs. As of March 31, 2020, the Company had completed its Green Program improvements on all but one property. We will complete the green improvements on this property during 2020. We expect to reduce water/sewer costs at each property where the Green Program is implemented by at least 15% through the replacement of showerheads, plumbing fixtures and toilets with modern energy efficient upgrades. Due to changes in Freddie Mac’s requirements to participate in the Green Program, the Company is not implementing this on acquisitions going forward.

Credit Facility

The following table contains summary information concerning the Company’s credit facility as of March 31, 2020 (dollars in thousands):

	Type	Term (months)		Outstanding Principal			Interest Rate (1)	Maturity Date
Corporate Credit Facility	Floating		24	$	41,700		3.24%	1/28/2021
Corporate Credit Facility	Floating		24		19,000		3.27%	1/28/2021
Corporate Credit Facility	Floating		24		18,300		3.05%	1/28/2021
Corporate Credit Facility	Floating		24		111,000		3.17%	1/28/2021
Corporate Credit Facility	Floating		24		35,000		3.05%	1/28/2021
Deferred financing costs, net of accumulated amortization of $902					(1,150	)
				$	223,850

(1)	Interest rate is based on one-month LIBOR plus an applicable margin. One-month LIBOR as of March 31, 2020 was 0.9929%.

Corporate Credit Facility. On January 28, 2019, the Company, through the OP, entered into a $75.0 million credit facility (the “Corporate Credit Facility”) with SunTrust Bank, as administrative agent and the lenders party thereto, and immediately drew $52.5 million to fund a portion of the purchase price of Bella Vista, The Enclave, and The Heritage. The Corporate Credit Facility is a full-term, interest-only facility with an initial 24-month term, that can be extended 12-months at the option of the Company for a minimal fee provided that the Company is not in default. The Company meets the conditions and expects to meet them going forward. The Company has the right to request an increase in the facility amount up to $150 million (the “Accordion Feature”). The facility bears interest at a rate of one-month LIBOR plus a range from 2.00% to 2.50%, depending on the Company’s leverage level as determined under the Corporate Credit Facility agreement, and is guaranteed by the Company. On June 29, 2019, the Company, through the OP, exercised its option under the Accordion Feature of the Corporate Credit Facility and increased the amount of the facility from $75 million to $125 million. In conjunction with the increase in the facility, the Company incurred costs of $0.5 million in obtaining the additional financing through the Accordion Feature (see “Deferred Financing Costs” below). On August 28, 2019, the Company, through the OP, increased the amount of the Corporate Credit Facility by $25 million, resulting in incurred costs of $0.2 million of deferred financing costs. On November 20, 2019, the Company, through the OP, increased the amount of the Corporate Credit Facility by $75 million, resulting in aggregate commitments of $225 million as of December 31, 2019. In conjunction with the increase in the facility, the Company incurred costs of $0.8 million of deferred financing costs. As of March 31, 2020, there was $225 million in aggregate principal outstanding on the Corporate Credit Facility.

The Corporate Credit Facility is a non-recourse obligation and contains customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the document evidencing the loan, defaults in payments under any other security instrument, and bankruptcy or other insolvency events. As of March 31, 2020, the Company believes it is in compliance with all provisions.

Deferred Financing Costs

The Company defers costs incurred in obtaining financing and amortizes the costs over the terms of the related loans using the straight-line method, which approximates the effective interest method. Deferred financing costs, net of amortization, are recorded as a reduction from the related debt on the Company’s consolidated balance sheets. Upon repayment of or in conjunction with a material change in the terms of the underlying debt agreement, any unamortized costs are charged to loss on extinguishment of debt and modification costs (see “Loss on Extinguishment of Debt and Modification Costs” below). For the three months ended March 31, 2020 and 2019, the Company wrote-off deferred financing costs of approximately $0.5 million and $0.0 million, respectively, which is included in loss on extinguishment of debt and modification costs on the consolidated statements of operations and comprehensive loss. For the three months ended March 31, 2020 and 2019, amortization of deferred financing costs of approximately $0.7 million and $0.4 million, respectively, is included in interest expense on the consolidated statements of operations and comprehensive loss.

Loss on Extinguishment of Debt and Modification Costs

Loss on extinguishment of debt and modification costs includes prepayment penalties and defeasance costs incurred on the early repayment of debt, costs incurred in a debt modification that are not capitalized as deferred financing costs and other costs incurred in a debt extinguishment.

Schedule of Debt Maturities

The aggregate scheduled maturities, including amortizing principal payments, of total debt for the next five calendar years subsequent to March 31, 2020 are as follows (in thousands):

	Operating Properties		Credit Facility		Total
2020	$	559	$	—	$	559
2021		894		225,000		225,894
2022		1,492		—		1,492
2023		21,271		—		21,271
2024		424,663		—		424,663
Thereafter		702,804		—		702,804
Total	$	1,151,683	$	225,000	$	1,376,683

7. Fair Value of Derivatives and Financial Instruments

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

•

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

•

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

•

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

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

Derivative Financial Instruments and Hedging Activities

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

The Company utilizes an independent third party to perform the market valuations on its derivative financial instruments. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair values of interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both the Company’s own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of the Company’s derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the Company’s derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. The Company has determined that the significance of the impact of the credit valuation adjustments made to its derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of the Company’s derivatives held as of March 31, 2020 and December 31, 2019 were classified as Level 2 of the fair value hierarchy.

The Company’s main objective in using interest rate derivatives is to add stability to interest expense related to floating rate debt. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The interest rate swaps have terms ranging from four to five years. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. The interest rate caps have terms ranging from three to four years. During the three months ended March 31, 2020 and 2019, interest rate cap derivatives were used to hedge the variable cash flows associated with a portion of the Company’s floating rate debt. The interest rate cap agreements the Company has entered into effectively cap one-month LIBOR on $346.5 million of the Company’s floating rate mortgage indebtedness at a weighted average rate of 5.74% as of March 31, 2020.

In accordance with ASU 2017-12, during the three months ended March 31, 2020, the Company recorded no gain or loss related to the ineffective portion of changes in the fair value of its derivatives designated as cash flow hedges. During the three months ended March 31, 2020 and 2019, the Company recorded no gain/(loss) related to the ineffective portion of changes in the fair value of its derivatives designated as cash flow hedges, which is recorded as a decrease/(increase) to interest expense on the accompanying consolidated statements of operations and comprehensive loss.

In order to fix a portion of, and mitigate the risk associated with, the Company’s floating rate indebtedness (without incurring substantial prepayment penalties or defeasance costs typically associated with fixed rate indebtedness when repaid early or refinanced), the Company, through the OP, has entered into 11 interest rate swap transactions with KeyBank National Association (“KeyBank”) and two with SunTrust Bank with a combined notional amount of $1.2 billion. The interest rate swaps the Company has entered into effectively replace the floating interest rate (one-month LIBOR) with respect to that amount with a weighted average fixed rate of 1.3792%. The Company has designated these interest rate swaps as cash flow hedges of interest rate risk.

As of March 31, 2020, the Company had the following outstanding interest rate swaps that were designated as cash flow hedges of interest rate risk (dollars in thousands):

Effective Date	Termination Date	Counterparty	Notional		Fixed Rate (1)
July 1, 2016	June 1, 2021	KeyBank	$	100,000		1.1055	%
July 1, 2016	June 1, 2021	KeyBank		100,000		1.0210	%
July 1, 2016	June 1, 2021	KeyBank		100,000		0.9000	%
September 1, 2016	June 1, 2021	KeyBank		100,000		0.9560	%
April 1, 2017	April 1, 2022	KeyBank		100,000		1.9570	%
May 1, 2017	April 1, 2022	KeyBank		50,000		1.9610	%
July 1, 2017	July 1, 2022	KeyBank		100,000		1.7820	%
June 1, 2019	June 1, 2024	KeyBank		50,000		2.0020	%
June 1, 2019	June 1, 2024	SunTrust		50,000		2.0020	%
September 1, 2019	September 1, 2026	KeyBank		100,000		1.4620	%
September 1, 2019	September 1, 2026	KeyBank		125,000		1.3020	%
January 3, 2020	September 1, 2026	KeyBank		92,500		1.6090	%
March 4, 2020	June 1, 2026	SunTrust		100,000		0.8200	%
			$	1,167,500		1.3792	%	(2)

(1)	The floating rate option for the interest rate swaps is one-month LIBOR. As of March 31, 2020, one-month LIBOR was 0.9929%.

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

As of March 31, 2020, the Company had the following outstanding interest rate swaps that were designated as cash flow hedges of interest rate risk with future effective dates (dollars in thousands):

Effective Date	Termination Date	Counterparty	Notional		Fixed Rate (1)
June 1, 2021	September 1, 2026	KeyBank	$	200,000		0.8450	%
June 1, 2021	September 1, 2026	KeyBank		200,000		0.9530	%
September 1, 2026	January 1, 2027	KeyBank		92,500		1.7980	%
			$	492,500		1.0678	%	(2)

(1)	The floating rate option for the interest rate swaps is one-month LIBOR. As of March 31, 2020, one-month LIBOR was 0.9929%.

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

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

As of March 31, 2020 and 2019, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands):

As of March 31,

Number of

Interest Rate Caps

Notional Amount of Interest Rate Caps

2020

346,542

2019

310,028

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of March 31, 2020 and December 31, 2019 (in thousands):

		Asset Derivatives				Liability Derivatives
	Balance Sheet Location	March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019
Derivatives designated as hedging instruments:
Interest rate swaps	Fair market value of interest rate swaps	$	—	$	7,298	$	47,077	$	3,824

Derivatives not designated as hedging instruments:
Interest rate caps	Prepaid and other assets		41		—		—		—
Total		$	41	$	7,298	$	47,077	$	3,824

The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of operations and comprehensive loss for the three months ended March 31, 2020 and 2019 (in thousands):

	Amount of gain (loss) recognized in OCI							Location of gain (loss) reclassified from accumulated	Amount of gain (loss) reclassified from OCI into income					Location of gain (loss) recognized	Amount of gain (loss) recognized in income
	2020			2019				OCI into income	2020		2019			in income	2020		2019
Derivatives designated as hedging instruments:
For the three months ended March 31,
Interest rate products	$	(49,931	)	$	(3,785	)	(1)	Interest expense	$	609	$	1,880	(2)	Interest expense	$	—	$	—

(1)	Represents the effective portion of changes in fair value.

(2)	Represents the effective portion of changes in fair reclassified out of OCI.

	Location of gain (loss)	Amount of gain (loss) recognized in income
	recognized in income	2020		2019
Derivatives not designated as hedging instruments:
For the three months ended March 31,
Interest rate products	Interest expense	$	41	$	(26	)

Other Financial Instruments Carried at Fair Value

Redeemable noncontrolling interests in the OP have a redemption feature and are marked to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests in the OP (see Note 10). The redemption value is based on the fair value of the Company’s common stock at the redemption date, and therefore, is calculated based on the fair value of the Company’s common stock at the balance sheet date. Since the valuation is based on observable inputs such as quoted prices for similar instruments in active markets, redeemable noncontrolling interests in the OP are classified as Level 2 if they are adjusted to their redemption value.

Financial Instruments Not Carried at Fair Value

At March 31, 2020 and December 31, 2019, the fair values of cash and cash equivalents, restricted cash, accounts receivable, prepaid and other assets, accounts payable and other accrued liabilities, accrued real estate taxes payable, accrued interest payable, security deposits and prepaid rent approximated their carrying values because of the short term nature of these instruments. The estimated fair values of other financial instruments were determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.

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

Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such cases, the Company will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value. There can be no assurance that the estimates discussed herein, using Level 3 inputs, are indicative of the amounts the Company could realize on disposition of the real estate asset. For the year ended December 31, 2019, the Company noted there was no impairment, but incurred a casualty loss that resulted in a net write down of approximately $7.8 million on Cutter’s Point (see Note 5). For the three months ended March 31, 2020 and 2019, the Company did not record any impairment charges related to real estate assets.

8. Stockholders’ Equity

Common Stock

During the three months ended March 31, 2020, the Company issued 137,608 shares of common stock pursuant to its long-term incentive plan (see “Long Term Incentive Plan” below) and 560,000 pursuant to its at-the-market offering (see “At-the-Market Offering” below).

As of March 31, 2020, the Company had 25,717,549 and 24,852,868 shares of common stock, par value $0.01 per share, issued and outstanding, respectively.

Share Repurchase Program

On June 15, 2016, the Board authorized the Company to repurchase up to $30.0 million of its common stock, par value $0.01 per share, during a two-year period that was set to expire on June 15, 2018 (the “Share Repurchase Program”). On April 30, 2018, the Board increased the Share Repurchase Program from $30.0 million to up to $40.0 million and extended it by an additional two years to June 15, 2020. On March 13, 2020, the Board further increased the Share Repurchase Program from $40.0 million to up to $100.0 million and extended it to March 12, 2023. The Company may utilize various methods to affect the repurchases, and the timing and extent of the repurchases will depend upon several factors, including market and business conditions, regulatory requirements and other corporate considerations, including whether the Company’s common stock is trading at a significant discount to net asset value per share. Repurchases under this program may be discontinued at any time. During the three months ended March 31, 2020, the Company repurchased 1,090,480 shares of its common stock. Since the inception of the Share Repurchase Program through March 31, 2020, the Company had repurchased 1,827,938 shares of its common stock, par value $0.01 per share, at a total cost of approximately $47,693,000, or $26.09 per share.

Treasury Shares

From time to time, in accordance with the Company’s Share Repurchase Program, the Company may repurchase shares of its common stock in the open market. Until any such shares are retired, the cost of the shares is included in common stock held in treasury at cost on the consolidated balance sheet. The number of shares of common stock classified as treasury shares reduces the number of shares of the Company’s common stock outstanding and, accordingly, are considered in the weighted average number of shares outstanding during the period. During the three months ended March 31, 2020, the Company retired 225,799 shares of its common stock held in treasury. As of March 31, 2020, the Company had 864,681 shares of common stock held in treasury.

Long Term Incentive Plan

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

Restricted Stock Units.

Under the 2016 LTIP, restricted stock units may be granted to the Company’s directors, officers and other key employees (and those of the Adviser and the Company’s subsidiaries) and typically vest over a three to five-year period for officers, employees and certain key employees of the Adviser and annually for directors. Beginning on the date of grant, restricted stock units earn dividends that are payable in cash on the vesting date. On August 11, 2016, pursuant to the 2016 LTIP, the Company granted 209,797 restricted stock units to its directors and officers. On March 16, 2017, pursuant to the 2016 LTIP, the Company granted 219,802 restricted stock units to its directors and officers. On February 15, 2018, pursuant to the 2016 LTIP, the Company granted 275,795 restricted stock units to its directors, officers, employees and certain key employees of the Adviser. On February 21, 2019, pursuant to the 2016 LTIP, the Company granted 186,662 restricted stock units to its directors, officers, employees and certain key employees of the Adviser. On February 20, 2020, pursuant to the 2016 LTIP, the Company granted 168,183 restricted stock units to its directors, officers, employees and certain key employees of the Adviser. The following table includes the number of restricted stock units granted, vested, forfeited and outstanding as of March 31, 2020:

	2020
	Number of Units				Weighted Average Grant Date Fair Value
Outstanding January 1,		447,039			$	29.13
Granted		168,183				50.54
Vested		(178,143	)	(1)		23.05
Forfeited		—				—
Outstanding March 31,		437,079		(2)	$	38.39

(1)	Certain key employees of the Adviser elected to net the taxes owed upon vesting against the shares issued resulting in 137,608 shares being issued as shown on the Consolidated Statement of Stockholders’ Equity.

(2)	139,842 restricted stock units vest in February 2021, 131,546 vest in February 2022, 66,860 vest in February 2023, 66,860 vest in February 2024 and 31,971 vest in February 2025.

As of March 31, 2020, the Company had issued 559,157 shares of common stock under the 2016 LTIP. For the three months ended March 31, 2020 and 2019, the Company recognized approximately $1.3 million and $1.2 million, respectively, of equity-based compensation expense related to grants of restricted stock units. As of March 31, 2020, the Company had recognized a liability of approximately $0.6 million related to dividends earned on restricted stock units that are payable in cash upon vesting.

At-the-Market Offering

On February 20, 2019, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of Jefferies LLC (“Jefferies”), Raymond James & Associates, Inc. (“Raymond James”) and SunTrust Robinson Humphrey, Inc. (“SunTrust”, and together with Raymond James and Jefferies, the “2019 ATM Sales Agents”), pursuant to which the Company may issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $100,000,000 (the “2019 ATM Program”). Sales of shares of common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange, to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices. In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies and Raymond James, or their respective affiliates, through the 2019 ATM Program. During the year ended December 31, 2019, the Company issued 1,565,322 shares of common stock at an average price of $45.98 per share for gross proceeds of approximately $72.0 million. The Company paid approximately $1.1 million in fees to the 2019 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $1.0 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. During the three months ended March 31, 2020, the Company issued 560,000 shares of common stock at an average price of $50.00 per share for gross proceeds of $28.0 million. The Company paid approximately $0.4 million in fees to the 2019 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $0.4 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. On February 27, 2020, the 2019 ATM Program reached aggregate sales of $100,000,000 and has therefore expired. The following table contains summary information of the 2019 ATM Program:

Gross proceeds	$	28,000,000
Common shares issued		560,000
Gross average sale price per share	$	50.00

Sales commissions	$	420,000
Offering costs		406,143
Net proceeds		27,173,857
Average price per share, net	$	48.52

On March 4, 2020, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of Jefferies, Raymond James, KeyBanc Capital Markets Inc. (“KeyBanc”) and SunTrust, pursuant to which the Company may issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $225,000,000 (the “2020 ATM Program”). Sales of shares of common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act, including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange, to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices. In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies, KeyBanc and Raymond James, or their respective affiliates, through the 2020 ATM Program. During the three months ended March 31, 2020, no shares were issued under the 2020 ATM Program.

9. Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of the Company’s common stock outstanding, which excludes any unvested restricted stock units issued pursuant to the 2016 LTIP. Diluted earnings (loss) per share is computed by adjusting basic earnings (loss) per share for the dilutive effect of the assumed vesting of restricted stock units. During periods of net loss, the assumed vesting of restricted stock units is anti-dilutive and is not included in the calculation of earnings (loss) per share.

The effect of the conversion of OP Units held by noncontrolling limited partners is not reflected in the computation of basic and diluted earnings (loss) per share, as they are exchangeable for common stock on a one-for-one basis. The income (loss) allocable to such units is allocated on this same basis and reflected as net income (loss) attributable to redeemable noncontrolling interests in the OP in the accompanying consolidated statements of operations and comprehensive loss. As such, the assumed conversion of these units would have no net impact on the determination of diluted earnings (loss) per share. See Note 10 for additional information.

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

	For the Three Months Ended March 31,
	2020		2019
Numerator for earnings (loss) per share:
Net income (loss)	$	28,039	$	(4,373	)
Net income (loss) attributable to redeemable noncontrolling interests in the Operating Partnership		84		(13	)
Net income (loss) attributable to common stockholders	$	27,955	$	(4,360	)

Denominator for earnings (loss) per share:
Weighted average common shares outstanding		25,388		23,550
Denominator for basic earnings (loss) per share		25,388		23,550
Weighted average unvested restricted stock units		463		494
Denominator for diluted earnings per share		25,851		24,044

Earnings (loss) per weighted average common share:
Basic	$	1.10	$	(0.19	)
Diluted	$	1.08	$	(0.19	)

10. Noncontrolling Interests

Redeemable Noncontrolling Interests in the OP

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

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

In connection with the issuance of OP Units to BH Equity on August 1, 2017, the Company and the OP amended the partnership agreement of the OP (the “Amendment”). Pursuant to the Amendment, limited partners holding OP Units have the right to cause the OP to redeem their units at a redemption price equal to and in the form of the Cash Amount (as defined in the partnership agreement of the OP), provided that such OP Units have been outstanding for at least one year. The Company, through the OP GP, as the general partner of the OP may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash Amount or the REIT Share Amount (one share of common stock of the Company for each OP Unit), as defined in the partnership agreement of the OP. Notwithstanding the foregoing, a limited partner will not be entitled to exercise its redemption right to the extent the issuance of the Company’s common stock to the redeeming limited partner would (1) be prohibited, as determined in the Company’s sole discretion, under the Company’s charter or (2) cause the acquisition of common stock by such redeeming limited partner to be “integrated” with any other distribution of the Company’s common stock for purposes of complying with the Securities Act. Accordingly, the Company records the OP Units held by noncontrolling limited partners outside of permanent equity and reports the OP Units at the greater of their carrying value or their redemption value using the Company’s stock price at each balance sheet date.

The following table sets forth the redeemable noncontrolling interests in the OP for the three months ended March 31, 2020 (in thousands):

Redeemable noncontrolling interests in the OP, December 31, 2019	$	3,295
Net income attributable to redeemable noncontrolling interests in the OP		84
Other comprehensive loss attributable to redeemable noncontrolling interests in the OP		(152	)
Contributions from redeemable noncontrolling interests in the OP		84
Distributions to redeemable noncontrolling interests in the OP		(159	)
Adjustment to reflect redemption value of redeemable noncontrolling interests in the OP		(820	)
Redeemable noncontrolling interests in the OP, March 31, 2020	$	2,332

Fees and Reimbursements to BH and its Affiliates

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

The property management fee paid to BH is approximately 3% of the monthly gross income from each property managed. Currently, BH manages all of the Company’s properties. Additionally, the Company may pay BH certain other fees, including: (1) a fee of $15-25 per unit for the one-time setup and inspection of properties, (2) a construction supervision fee of 5-6% of total project costs, which is capitalized, (3) acquisition fees and due diligence costs reimbursements, and (4) other owner approved fees at $55 per hour. BH also acts as a paymaster for the properties and is reimbursed at cost for various operating expenses it pays on behalf of the properties. The following is a summary of fees that the properties incurred to BH and its affiliates, as well as reimbursements paid to BH from the properties for various operating expenses, for the three months ended March 31, 2020 and 2019 (in thousands):

		For the Three Months Ended March 31,
		2020		2019
Fees incurred
Property management fees	(1)	$	1,544	$	1,240
Construction supervision fees	(2)		634		224
Design fees	(2)		296		—
Acquisition fees	(3)		—		308

Reimbursements
Payroll and benefits	(4)		4,358		4,311
Other reimbursements	(5)		977		633

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

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

(3)	Includes due diligence costs. Acquisition fees are capitalized to real estate assets on the consolidated balance sheets.

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

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

11. Related Party Transactions

Advisory and Administrative Fee

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

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

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

Pursuant to the terms of the Advisory Agreement, the Company will reimburse the Adviser for all documented Operating Expenses and Offering Expenses it incurs on behalf of the Company. “Operating Expenses” include legal, accounting, financial and due diligence services performed by the Adviser that outside professionals or outside consultants would otherwise perform, the Company’s pro rata share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Adviser required for the Company’s operations, and compensation expenses under the 2016 LTIP. Operating Expenses do not include expenses for the advisory and administrative services described in the Advisory Agreement. Certain Operating Expenses, such as the Company’s ratable share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses incurred by the Adviser or its affiliates that relate to the operations of the Company, may be billed monthly to the Company under a shared services agreement. “Offering Expenses” include all expenses (other than underwriters’ discounts) in connection with an offering, including, without limitation, legal, accounting, printing, mailing and filing fees and other documented offering expenses. For the three months ended March 31, 2020 and 2019, the Adviser did not bill any Operating Expenses or Offering Expenses to the Company and any such expenses the Adviser incurred during the periods are considered to be permanently waived.

Expense Cap

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

For the three months ended March 31, 2020 and 2019, the Company incurred advisory and administrative fees of $1.9 million and $1.8 million, respectively. The amount paid for the three months ended March 31, 2020 and 2019 represents the maximum fee allowed on Contributed Assets under the Advisory Agreement plus approximately $0.5 million and $0.5 million, respectively, of advisory and administrative fees incurred on New Assets.

For the three months ended March 31, 2020 and 2019, the Adviser elected to voluntarily waive the advisory and administrative fees incurred on 17 and 11 properties acquired subsequent to October 2016, respectively, which totaled approximately $3.9 million and $1.6 million, respectively, and are considered to be permanently waived. The Adviser is not contractually obligated to waive fees on New Assets in the future and may cease waiving fees on New Assets at its discretion.

Other Related Party Transactions

The Company has in the past, and may in the future, utilize the services of affiliated parties. For the three months ended March 31, 2020 and 2019, the Company paid approximately $0.1 million and $0.0 million, respectively, to NexBank Title, Inc. (“NexBank Title”). NexBank Title is an affiliate of the Adviser through common beneficial ownership. NexBank Title provides title insurance and work related to providing title insurance on properties related to acquisitions, dispositions and refinancing transactions. These amounts are either capitalized as real estate assets or deferred financing costs, expensed as loss on extinguishment of debt and modification costs, or expensed as selling costs when determining gain (loss) on sales of real estate, depending on the appropriate accounting as determined for each specific transaction.

12. Commitments and Contingencies

Commitments

In the normal course of business, the Company enters into various rehabilitation construction related purchase commitments with parties that provide these goods and services. In the event the Company were to terminate rehabilitation construction services prior to the completion of projects, the Company could potentially be committed to satisfy outstanding or uncompleted purchase orders with such parties. As of March 31, 2020, management does not anticipate any material deviations from schedule or budget related to rehabilitation projects currently in process.

Contingencies

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

The Company is not aware of any environmental liability with respect to the properties that could have a material adverse effect on the Company’s business, assets, or results of operations. However, there can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have an adverse effect on the Company’s results of operations and cash flows.

Self-Insurance Program

Effective March 1, 2019, the Company maintains a partial self-insurance program for property and casualty claims whereby it incurs the “first-loss” portion of a claim up to an aggregate loss amount. Claims resulting in losses in excess of a $100,000 per occurrence property deductible will be paid by the Company up to an aggregate amount of $1.2 million (the “2019 Aggregate Amount”). For the period from March 1, 2019 to February 29, 2020, the Company has incurred a claim related to Cutter’s Point (see Note 5) as part of the 2019 Aggregate Amount. The claim related to Cutter’s Point required the Company to fund the full 2019 Aggregate Amount with $0.6 million being funded in December 2019 and the remaining $0.6 million funded during the three months ended March 31, 2020. For the period from March 1, 2019 to February 29, 2020, there were no other potential claims, besides the claim involving Cutter’s Point, that met the criteria as set forth under ASC 450-20. On March 1, 2020, the Company entered into a new policy resulting in a new aggregate amount of $2,365,000 (the “2020 Aggregate Amount”). Under ASC 450-20 “Loss Contingencies”, the Company does not reserve for the 2020 Aggregate Amount or any portion thereof until a claim is made and the amount of the claim and the timing of payment on the claim can be reasonably estimated. As of March 31, 2020, none of the 2020 Aggregate Amount has been used. The Company believes it has sufficient resources through cash reserves to fund any potential future claims toward the 2020 Aggregate Amount.

13. Subsequent Events

Dividends Declared

On May 4, 2020, the Company’s Board declared a quarterly dividend of $0.3125 per share, payable on June 30, 2020 to stockholders of record on June 15, 2020.

COVID-19

The Company continues to monitor the impact of the COVID-19 crisis. As of April 28, 2020, 992 residents have been placed on payment plans for the month of April due to the COVID-19 crisis with a total amount of approximately $1.2 million. The duration of the payment plans are determined on a case by case basis, in which time the tenant is expected to make rent payments in full. As of May 6, 2020, 87 residents have been placed on payment plans for the month of May due to the COVID-19 crisis with a total amount of approximately $0.1 million. For current payment plans, 69.0% are “in-month” plans, meaning the residents have agreed to pay the full rent within the same month, with the remainder collected in future months. For the April in-month payment plans, we collected 51.7% of the expected rent. The Company has not granted any rent concessions to residents in response to the crisis as of April 30, 2020 for either April or May.

Share Repurchase Program

Pursuant to the Company’s Share Repurchase Program (see Note 8), 553,417 shares of the Company’s common stock have been repurchased subsequent to March 31, 2020, at an average price of $24.41 per share for a total cost of $13.5 million between April 1, 2020 and May 8, 2020.

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

The following is a discussion and analysis of our financial condition and our historical results of operations. The following should be read in conjunction with our financial statements and accompanying notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected, forecasted, or expected in these forward-looking statements as a result of various factors, including, but not limited to, those discussed below and elsewhere in this quarterly report. See “Cautionary Statement Regarding Forward-Looking Statements” in this report, and “Risk Factors” in Part I, Item 1A, “Risk Factors” of our annual report on Form 10-K (our “Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on February 21, 2020.

Overview

As of March 31, 2020, our Portfolio consisted of 37 multifamily properties primarily located in the Southeastern and Southwestern United States encompassing 14,104 units of apartment space that was approximately 94.2% leased with a weighted average monthly effective rent per occupied apartment unit of $1,110. Substantially all of our business is conducted through the OP. We own the Portfolio through the OP and our TRS. The OP owns approximately 99.9% of the Portfolio; our TRS owns approximately 0.1% of the Portfolio. The OP GP is the sole general partner of the OP. As of March 31, 2020, there were 23,819,402 OP Units outstanding, of which 23,746,169, or 99.7%, were owned by us and 73,233, or 0.3%, were owned by an unaffiliated limited partner (see Note 10 to our consolidated financial statements).

We are primarily focused on directly or indirectly acquiring, owning, and operating well-located multifamily properties with a value-add component in large cities and suburban submarkets of large cities, primarily in the Southeastern and Southwestern United States. We generate revenue primarily by leasing our multifamily properties. We intend to employ targeted management and a value-add program at a majority of our properties in an attempt to improve rental rates and the net operating income (“NOI”) at our properties and achieve long-term capital appreciation for our stockholders. We are externally managed by the Adviser through the Advisory Agreement, by and among the OP, the Adviser and us. The Advisory Agreement was renewed on February 17, 2020 for a one-year term. The Adviser is wholly owned by NexPoint Advisors, L.P.

On February 20, 2019, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of Jefferies LLC (“Jefferies”), Raymond James & Associates, Inc. (“Raymond James”) and SunTrust Robinson Humphrey, Inc. (“SunTrust” and together with Raymond James and Jefferies, the “2019 ATM Sales Agents”), pursuant to which the Company may issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $100,000,000 (the “ 2019 ATM Program”). Sales of shares of common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange, to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices (the “ 2019 ATM Program”). In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies and Raymond James, or their respective affiliates, through the 2019 ATM Program. During the year ended December 31, 2019, the Company issued 1,565,322 shares of common stock at an average price of $45.98 per share for gross proceeds of approximately $72.0 million. The Company paid approximately $1.1 million in fees to the 2019 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $1.0 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. During the three months ended March 31, 2020, the Company issued 560,000 shares of common stock at an average price of $50.00 per share for gross proceeds of $28.0 million. The Company paid approximately $0.4 million in fees to the 2019 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $0.4 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. On February 27, 2020, the 2019 ATM Program reached aggregate sales of $100,000,000 and has therefore expired.

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, and expect to continue to qualify as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the three months ended March 31, 2020 and 2019.

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, or other third party management companies for managing each property (see Note 10 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 11 to our consolidated financial statements).

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

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

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

Other Income and Expense

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

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

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

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

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

Results of Operations for the Three Months Ended March 31, 2020 and 2019

The following table sets forth a summary of our operating results for the three months ended March 31, 2020 and 2019 (in thousands):

	For the Three Months Ended March 31,
	2020			2019			$ Change
Total revenues	$	52,582		$	41,491		$	11,091
Total expenses		(51,030	)		(37,776	)		(13,254	)
Operating income before gain on sales of real estate		1,552			3,715			(2,163	)
Gain on sales of real estate		38,972			—			38,972
Operating income		40,524			3,715			36,809
Interest expense		(11,662	)		(8,088	)		(3,574	)
Loss on extinguishment of debt and modification costs		(874	)		—			(874	)
Casualty gains		51			—			51
Net income (loss)		28,039			(4,373	)		32,412
Net income (loss) attributable to redeemable noncontrolling interests in the Operating Partnership		84			(13	)		97
Net income (loss) attributable to common stockholders	$	27,955		$	(4,360	)	$	32,315

The change in our net income for the three months ended March 31, 2020 as compared to the net income for the three months ended March 31, 2019 primarily relates to an increase in gain on sales of real estate, increase in total revenues, and was partially offset by an increase in operating expenses and interest expense. The change in our net income (loss) between the periods was also due to our acquisition and disposition activity in 2020 and 2019 and the timing of the transactions (we acquired three properties in January 2019 and disposed of three properties in March 2020).

Revenues

Rental income. Rental income was $51.1 million for the three months ended March 31, 2020 compared to $40.5 million for the three months ended March 31, 2019, which was an increase of approximately $10.6 million. The increase between the periods was primarily due to a 10.2% increase in the weighted average monthly effective rent per occupied apartment unit in our Portfolio to $1,110 as of March 31, 2020 from $1,007 as of March 31, 2019. The increase in effective rent was primarily driven by the value-add program that we have implemented and organic growth in rents in the markets where our properties are located.

Other income. Other income was $1.5 million for the three months ended March 31, 2020 compared to $1.0 million for the three months ended March 31, 2019, which was an increase of approximately $0.5 million. The increase between the periods was primarily due to a $0.6 million increase in cable TV income.

Expenses

Property operating expenses. Property operating expenses were $11.7 million for the three months ended March 31, 2020 compared to $9.6 million for the three months ended March 31, 2019, which was an increase of approximately $2.1 million. The increase between the periods was primarily due to our acquisition and disposition activity in 2020 and 2019 and the timing of the transactions, as described above. The increase between the periods was also due to a $0.8 million, or 18.9%, increase in payroll costs.

Real estate taxes and insurance. Real estate taxes and insurance costs were $8.0 million for the three months ended March 31, 2020 compared to $5.8 million for the three months ended March 31, 2019, which was an increase of approximately $2.2 million. The increase between the periods was primarily due to a $1.8 million, or 36.0%, increase in property taxes. Property taxes incurred in the first year of ownership may be significantly less than subsequent years since the purchase price of the property may trigger a significant increase in assessed value by the taxing authority in subsequent years, increasing the cost of real estate taxes.

Property management fees. Property management fees were $1.6 million for the three months ended March 31, 2020 compared to $1.2 million for the three months ended March 31, 2019, which was an increase of approximately $0.4 million. The increase between the periods was primarily due to an increase in total revenues, which the fee is primarily based on.

Advisory and administrative fees. Advisory and administrative fees remained flat at $1.9 million for the three months ended March 31, 2020 and $ 1.8 million for the three months ended March 31, 2019. The amount incurred during the three months ended March 31, 2020 and 2019 represents the maximum fee allowed on properties defined as Contributed Assets under the Advisory Agreement plus approximately $0.5 million and $0.5 million, respectively, of advisory and administrative fees incurred on certain properties defined as New Assets. For the three months ended March 31, 2020, our Adviser elected to voluntarily waive the advisory and administrative fees incurred on the 17 properties we acquired subsequent to October 2016, which totaled approximately $3.9 million and are considered to be permanently waived. For the three months ended March 31, 2019, our Adviser elected to voluntarily waive the advisory and administrative fees incurred on the 11 properties we acquired subsequent to October 2016, which totaled approximately $1.6 million and are considered to be permanently waived for the period. 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 $2.7 million for the three months ended March 31, 2020 compared to $2.2 million for the three months ended March 31, 2019, which was an increase of approximately $0.5 million. The increase between the periods was primarily due to approximately $1.3 million of equity-based compensation expense recognized during the three months ended March 31, 2020 related to the grants of restricted stock units to our directors, officers, employees and certain key employees of our Adviser pursuant to our long-term incentive plan (the “2016 LTIP”), compared to $1.2 million of equity-based compensation expense recognized during the three months ended March 31, 2019 (see Note 8 to our consolidated financial statements). Subject to the Expense Cap, corporate general and administrative expenses may increase in future periods as we acquire additional properties or if the Board issues additional equity grants under the 2016 LTIP.

Property general and administrative expenses. Property general and administrative expenses were $1.8 million for the three months ended March 31, 2020 compared to $1.7 million for the three months ended March 31, 2019, which was an increase of approximately $0.1 million. The increase between the periods was primarily due to our acquisition and disposition activity in 2020 and 2019 and the timing of the transactions, as described above.

Depreciation and amortization. Depreciation and amortization costs were $23.3 million for the three months ended March 31, 2020 compared to $15.4 million for the three months ended March 31, 2019, which was an increase of approximately $7.9 million. The increase between the periods was primarily due to the amortization of intangible lease assets of $4.8 million related to five properties for the three months ended March 31, 2020 compared to $2.2 million related to six properties for the three months ended March 31, 2019, which was an increase of approximately $2.6 million. The increase between the periods was also due to an increase of $5.3 million in depreciation expense, primarily due to our acquisition activity in 2020 and 2019 and the timing of the transactions, as described above. The amortization of intangible lease assets over a six-month period from the date of acquisition is expected to increase the amortization expense during the year of acquisition for each property.

Other Income and Expense

Interest expense. Interest expense was $11.7 million for the three months ended March 31, 2020 compared to $8.1 million for the three months ended March 31, 2019, which was an increase of approximately $3.6 million. The increase between the periods was primarily due an increase in interest on debt of $2.1 million related to our acquisition activity in 2020 and 2019. The following table details the various costs included in interest expense for the three months ended March 31, 2020 and 2019 (in thousands):

	For the Three Months Ended March 31,
	2020			2019			$ Change
Interest on debt	$	11,576		$	9,510		$	2,066
Amortization of deferred financing costs		735			432			303
Interest rate swaps		(609	)		(1,880	)		1,271
Interest rate caps expense		(41	)		26			(67	)
Total	$	11,662		$	8,088		$	3,574

Loss on extinguishment of debt and modification costs. There was $0.9 million loss on extinguishment of debt and modification costs for the three months ended March 31, 2020. There was no loss on extinguishment of debt and modification costs for the three months ended March 31, 2019. The increase between the periods was primarily due to increases in prepayment penalties and defeasance costs of approximately $0.4 million and an increase in write-off of deferred financing costs of approximately $0.5 million. The following table details the various costs included in loss on extinguishment of debt and modification costs for the three months ended March 31, 2020 and 2019 (in thousands):

	For the Three Months Ended March 31,
	2020		2019		$ Change
Prepayment penalties and defeasance costs	$	416	$	—	$	416
Write-off of deferred financing costs		455		—		455
Write-off of fair market value adjustment of assumed debt		—		—		—
Debt modification and other extinguishment costs		3		—		3
Total	$	874	$	—	$	874

Gain on sales of real estate. Gain on sale of real estate was $39.0 million during the three months ended March 31, 2020 compared to no gain for the three months ended March 31, 2019, which was an increase of approximately $39.0 million. The increase between the periods was primarily due to our acquisition and disposition activity in 2020 and 2019 and the timing of the transactions, as described above.

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 not affected by (1) the cost of funds, (2) acquisition costs, (3) advisory and administrative fees, (4) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP, (5) corporate general and administrative expenses, (6) other gains and losses that are specific to us, (7) casualty-related expenses/(recoveries) and (8) 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 and franchise tax fees.

The cost of funds is eliminated from net income (loss) because it is specific to our particular financing capabilities and constraints. The cost of funds is also eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital, which may have changed or may change in the future. Acquisition costs and non-operating fees to affiliates are eliminated because they do not reflect continuing operating costs of the property owner. Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our multifamily properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale, which will usually change from period to period. Casualty-related expenses and recoveries are excluded because they do not reflect continuing operating costs of the property owner. Entity level general and administrative expenses incurred at the properties are eliminated as they are specific to the way in which we have chosen to hold our properties and are the result of our ownership structuring. Also, expenses that are incurred upon acquisition of a property do not reflect continuing operating costs of the property owner. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed purchases or sales. We believe that eliminating these items from net income is useful because the resulting measure captures the actual ongoing revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs.

However, the usefulness of NOI is limited because it excludes corporate general and administrative expenses, interest expense, loss on extinguishment of debt and modification costs, acquisition costs, certain fees to affiliates such as advisory and administrative fees, depreciation and amortization expense and gains or losses from the sale of properties, and other gains and losses as determined under GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income, which further limits its usefulness.

NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income (loss) as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income (loss) computed in accordance with GAAP and discussions elsewhere in “—Results of Operations” regarding the components of net income (loss) that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.

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

Net Operating Income for Our Same Store and Non-Same Store Properties for the Three Months Ended March 31, 2020 and 2019

There are 25 properties encompassing 9,521 units of apartment space in our same store pool for the three months ended March 31, 2020 and 2019 (our “Same Store” properties). Our Same Store properties exclude the following twelve properties in our Portfolio as of March 31, 2020: 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 and Cutter’s Point.

The following table reflects the revenues, property operating expenses and NOI for the three months ended March 31, 2020 and 2019 for our Same Store and Non-Same Store properties (dollars in thousands):

	For the Three Months Ended March 31,
	2020		2019		$ Change			% Change
Revenues
Same Store
Rental income	$	31,213	$	29,489	$	1,724			5.8	%
Other income		587		712		(125	)		-17.6	%
Same Store revenues		31,800		30,201		1,599			5.3	%
Non-Same Store
Rental income		19,902		10,962		8,940			81.6	%
Other income		880		328		552			168.3	%
Non-Same Store revenues		20,782		11,290		9,492			84.1	%
Total revenues		52,582		41,491		11,091			26.7	%

Operating expenses
Same Store
Property operating expenses (1)		7,093		6,799		294			4.3	%
Real estate taxes and insurance		5,040		4,669		371			7.9	%
Property management fees (2)		953		903		50			5.5	%
Property general and administrative expenses (3)		867		924		(57	)		-6.2	%
Same Store operating expenses		13,953		13,295		658			4.9	%
Non-Same Store
Property operating expenses (4)		4,568		2,805		1,763			62.9	%
Real estate taxes and insurance		2,983		1,089		1,894			173.9	%
Property management fees (2)		597		337		260			77.2	%
Property general and administrative expenses (5)		496		378		118			31.2	%
Non-Same Store operating expenses		8,644		4,609		4,035			87.5	%
Total operating expenses		22,597		17,904		4,693			26.2	%

NOI
Same Store		17,847		16,906		941			5.6	%
Non-Same Store		12,138		6,681		5,457			81.7	%
Total NOI	$	29,985	$	23,587	$	6,398			27.1	%

(1)	For the three months ended March 31, 2020 and 2019, excludes approximately $50,000 and $27,000, respectively, of casualty-related expenses.

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

(3)

For the three months ended March 31, 2020 and 2019, excludes approximately $191,000 and $229,000, 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 and franchise tax fees.

(4)	For the three months ended March 31, 2020 and 2019, excludes approximately $10,000 and $8,000, respectively, of casualty-related expenses.

(5)

For the three months ended March 31, 2020 and 2019, excludes approximately $278,000 and $127,000, 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 and franchise tax fees.

See reconciliation of net income (loss) to NOI below under “NOI and Same Store NOI for the Three Months Ended March 31, 2020 and 2019.”

Same Store Results of Operations for the Three Months Ended March 31, 2020 and 2019

As of March 31, 2020, our Same Store properties were approximately 94.5% leased with a weighted average monthly effective rent per occupied apartment unit of $1,035. As of March 31, 2019, our Same Store properties were approximately 93.6% leased with a weighted average monthly effective rent per occupied apartment unit of $1,006. For our Same Store properties, we recorded the following operating results for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019:

Revenues

Rental income. Rental income was $31.2 million for the three months ended March 31, 2020 compared to $29.5 million for the three months ended March 31, 2019, which was an increase of approximately $1.7 million, or 5.8%. The majority of the increase is related to a 2.9% increase in the weighted average monthly effective rent per occupied apartment unit to $1,035 as of March 31, 2020 from $1,006 as of March 31, 2019, and a 0.9% increase in occupancy.

Other income. Other income was $0.6 million for the three months ended March 31, 2020 compared to $0.7 million for the three months ended March 31, 2019, which was a decrease of approximately $0.1 million, or 17.6%.

Expenses

Property operating expenses. Property operating expenses were $7.1 million for the three months ended March 31, 2020 compared to $6.8 million for the three months ended March 31, 2019, which was an increase of approximately $0.3 million, or 4.3%. The majority of the increase is related to a $0.2 million, or 9.4%, increase in repair and maintenance costs and an increase in payroll of $0.1 million, or 3.1%.

Real estate taxes and insurance. Real estate taxes and insurance costs were $5.0 million for the three months ended March 31, 2020 compared to $4.7 million for the three months ended March 31, 2019, which was an increase of approximately $0.3 million, or 7.9%. The majority of the increase is related to a $0.4 million, or 10.1%, increase in property taxes due to higher assessments of value by taxing authorities.

Property management fees. Property management fees were $1.0 million for the three months ended March 31, 2020 compared to $0.9 million for the three months ended March 31, 2019, which was an increase of approximately $0.1 million, or 5.5%. The majority of the increase is related to a $1.7 million, or 5.8%, increase in rental income, which the fee is primarily based on.

Property general and administrative expenses. Property general and administrative expenses remained flat at $0.9 million for the three months ended March 31, 2020 compared to $0.9 million for the three months ended March 31, 2019.

NOI and Same Store NOI for the Three Months Ended March 31, 2020 and 2019

The following table, which has not been adjusted for the effects of noncontrolling interests, reconciles our NOI and our Same Store NOI for the three months ended March 31, 2020 and 2019 to net income (loss), the most directly comparable GAAP financial measure (in thousands):

		For the Three Months Ended March 31,
		2020			2019
Net income (loss)		$	28,039		$	(4,373	)
Adjustments to reconcile net income (loss) to NOI:
Advisory and administrative fees			1,865			1,850
Corporate general and administrative expenses			2,701			2,233
Casualty-related expenses	(1)		60			35
Casualty gains			(51	)		—
Property general and administrative expenses	(2)		469			356
Depreciation and amortization			23,338			15,398
Interest expense			11,662			8,088
Loss on extinguishment of debt and modification costs			874			—
Gain on sales of real estate			(38,972	)		—
NOI		$	29,985		$	23,587
Less Non-Same Store
Revenues			(20,782	)		(11,290	)
Operating expenses			8,644			4,609
Same Store NOI		$	17,847		$	16,906

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

(2)	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 and franchise tax fees.

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 and impairment charges. 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 (1) noncontrolling interests in consolidated joint ventures and (2) 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 either not likely to occur on a regular basis or are otherwise not representative of the ongoing operating performance of our portfolio. Core FFO adjusts FFO to remove items such as acquisition expenses, losses on extinguishment of debt and modification costs (including prepayment penalties and defeasance costs incurred on the early repayment of debt, 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-related expenses and recoveries, the amortization of deferred financing costs incurred in connection with obtaining short-term debt financing, the ineffective portion of fair value adjustments on interest rate derivatives designated as cash flow hedges (see Notes 2 and 7 to our consolidated financial statements), and the noncontrolling interests (as described above) related to these items. We believe Core FFO is useful to investors as a supplemental gauge of our operating performance and is useful in comparing our operating performance with other REITs that are not as involved in the aforementioned activities.

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

The effect of the conversion of OP Units held by noncontrolling limited partners is not reflected in the computation of basic and diluted FFO, Core FFO and AFFO per share, as they are exchangeable for common stock on a one-for-one basis. The FFO, Core FFO and AFFO allocable to such units is allocated on this same basis and reflected in the adjustments for noncontrolling interests in the table below. As such, the assumed conversion of these units would have no net impact on the determination of diluted FFO, Core FFO and AFFO per share. See Note 9 to our consolidated financial statements for additional information.

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

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 three months ended March 31, 2020 and 2019 (in thousands, except per share amounts):

		For the Three Months Ended March 31,
		2020			2019			% Change (1)
Net income (loss)		$	28,039		$	(4,373	)	N/M
Depreciation and amortization			23,338			15,398		N/M
Gain on sales of real estate			(38,972	)		—			0.0	%
Adjustment for noncontrolling interests			(37	)		(33	)		12.1	%
FFO attributable to common stockholders			12,368			10,992			12.5	%

FFO per share - basic		$	0.49		$	0.47			4.4	%
FFO per share - diluted		$	0.48		$	0.46			4.7	%

Loss on extinguishment of debt and modification costs			874			—			0.0	%
Casualty-related expenses			60			35		N/M
Casualty gains			(51	)		—			0.0	%
Amortization of deferred financing costs - acquisition term notes			349			—			0.0	%
Adjustment for noncontrolling interests			(4	)		—			0.0	%
Core FFO attributable to common stockholders			13,596			11,027			23.3	%

Core FFO per share - basic		$	0.54		$	0.47			14.4	%
Core FFO per share - diluted		$	0.53		$	0.46			14.7	%

Amortization of deferred financing costs - long term debt			386			432			-10.6	%
Equity-based compensation expense			1,300			1,235			5.3	%
Adjustment for noncontrolling interests			(5	)		(5	)		0.0	%
AFFO attributable to common stockholders			15,277			12,689			20.4	%

AFFO per share - basic		$	0.60		$	0.54			11.7	%
AFFO per share - diluted		$	0.59		$	0.53			12.0	%

Weighted average common shares outstanding - basic			25,388			23,550			7.8	%
Weighted average common shares outstanding - diluted			25,851			24,044			7.5	%

Dividends declared per common share		$	0.3125		$	0.275			14	%

FFO Coverage - diluted	(2)	1.53x			1.66x				-7.91	%
Core FFO Coverage - diluted	(2)	1.68x			1.67x				0.92	%
AFFO Coverage - diluted	(2)	1.89x			1.92x				-1.46	%

(1)	Represents the percentage change for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.

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

The three months ended March 31, 2020 as compared to the three months ended March 31, 2019

FFO was $12.4 million for the three months ended March 31, 2020 compared to $11.0 million for the three months ended March 31, 2019, which was an increase of approximately $1.4 million. The change in our FFO between the periods primarily relates to an increase in total revenues of $11.1 million, partially offset by increases in total property operating expenses of $4.8 million, interest expense of $3.6 million, corporate general and administrative expenses of $0.5 million, and adjustments for amounts attributable to noncontrolling interests.

Core FFO was $13.6 million for the three months ended March 31, 2020 compared to $11.0 million for the three months ended March 31, 2019, which was an increase of approximately $2.6 million. The change in our Core FFO between the periods primarily relates to an increase in FFO and an increase in loss on extinguishment of debt and modification costs of $0.9 million, partially offset by an increase in casualty gains of approximately $0.1 million.

AFFO was $15.3 million for the three months ended March 31, 2020 compared to $12.7 million for the three months ended March 31, 2019, which was an increase of approximately $2.6 million. The change in our AFFO between the periods primarily relates to increases in Core FFO and equity-based compensation expense of $0.1 million.

Liquidity and Capital Resources

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

•

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

•

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

•

recurring maintenance necessary to maintain our multifamily properties;

•

distributions necessary to qualify for taxation as a REIT;

•

acquisition of additional properties;

•

advisory and administrative fees payable to our Adviser;

•

general and administrative expenses;

•

reimbursements to our Adviser; and

•

property management fees payable to BH.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations and existing cash balances and any unused capacity on the Corporate Credit Facility. As of March 31, 2020, we had approximately $15.4 million of renovation value-add reserves for our planned capital expenditures to implement our value-add program. Renovation value-add reserves are not required to be held in escrow by a third party. We may reallocate these funds, at our discretion, to pursue other investment opportunities or meet our short-term liquidity requirements.

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

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

On February 20, 2019, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of Jefferies, Raymond James and SunTrust, pursuant to which the Company may issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $100,000,000. Sales of shares of common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act, including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange, to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices. In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies and Raymond James, or their respective affiliates, through the 2019 ATM Program. During the year ended December 31, 2019, the Company issued 1,565,322 shares of common stock at an average price of $45.98 per share for gross proceeds of approximately $72.0 million. The Company paid approximately $1.1 million in fees to the 2019 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $1.0 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. During the three months ended March 31, 2020, the Company issued 560,000 shares of common stock at an average price of $50.00 per share for gross proceeds of $28.0 million. The Company paid approximately $0.4 million in fees to the 2019 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $0.4 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. On February 27, 2020, the 2019 ATM Program reached aggregate sales of $100,000,000 and has therefore expired.

On March 4, 2020, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of Jefferies, Raymond James, KeyBanc and SunTrust, pursuant to which the Company may issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $225,000,000. Sales of shares of common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act, including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange, to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices. In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies, KeyBanc and Raymond James, or their respective affiliates, through the 2020 ATM Program. During the three months ended March 31, 2020, no shares were issued under the 2020 ATM Program.

We believe that our available cash, expected operating cash flows, and potential debt or equity financings will provide sufficient funds for our operations, anticipated scheduled debt service payments and dividend requirements for the twelve-month period following March 31, 2020.

Cash Flows

The following table presents selected data from our consolidated statements of cash flows for the three months ended March 31, 2020 and 2019 (in thousands):

	For the Three Months Ended March 31,
	2020			2019
Net cash provided by operating activities	$	11,418		$	3,723
Net cash provided by (used in) investing activities		72,289			(131,726	)
Net cash (used in) provided by financing activities		(49,308	)		123,157
Net increase (decrease) in cash, cash equivalents and restricted cash		34,399			(4,846	)
Cash, cash equivalents and restricted cash, beginning of period		71,182			43,129
Cash, cash equivalents and restricted cash, end of period	$	105,581		$	38,283

Cash flows from operating activities. During the three months ended March 31, 2020, net cash provided by operating activities was $11.4 million compared to net cash provided by operating activities of $3.7 million for the three months ended March 31, 2019. The change in cash flows from operating activities was mainly due to our acquisition and disposition activity in 2020 and 2019 and the timing of the transactions, as described above.

Cash flows from investing activities. During the three months ended March 31, 2020, net cash provided by investing activities was $72.3 million compared to net cash used in investing activities of $131.7 million for the three months ended March 31, 2019. The change in cash flows from investing activities was mainly due to our acquisition and disposition activity in 2020 and 2019 and the timing of the transactions, as described above.

Cash flows from financing activities. During the three months ended March 31, 2020, net cash used in financing activities was $49.3 million compared to net cash provided by financing activities of $123.2 million for the three months ended March 31, 2019. The change in cash flows from financing activities was mainly due to a net decrease in debt of approximately $166.1 million, an increase in common stock repurchases of approximately $31.0 million, and an increase in common stock dividends paid of approximately $2.3 million. These were partially offset by an increase in proceeds from the issuance of common stock through the 2019 ATM Program of approximately $27.2 million (net of Sales Agents fees and other legal fees) between the periods.

Debt, Derivatives and Hedging Activity

Mortgage Debt

As of March 31, 2020, our subsidiaries had aggregate mortgage debt outstanding to third parties of approximately $1.2 billion at a weighted average interest rate of 2.61% and an adjusted weighted average interest rate of 3.00%. For purposes of calculating the adjusted weighted average interest rate of our mortgage debt outstanding, we have included the weighted average fixed rate of 1.3792% for one-month LIBOR on our combined $1.2 billion notional amount of interest rate swap agreements, which effectively fixes the interest rate on $1.2 billion of our floating rate debt. See Notes 6 and 7 to our consolidated financial statements for additional information.

We have entered into and expect to continue to enter into interest rate swap and cap agreements with various third parties to fix or cap the floating interest rates on a majority of our floating rate mortgage debt outstanding. The interest rate swap agreements generally have a term of four to five years and effectively establish a fixed interest rate on debt on the underlying notional amounts. The interest rate swap agreements involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of March 31, 2020, interest rate swap agreements effectively covered 100% of our $1.1 billion of floating rate mortgage debt outstanding and 38.4% of our $225.0 million floating rate Credit Facility.

The interest rate cap agreements generally have a term of three to four years, cover the outstanding principal amount of the underlying debt and are generally required by our lenders. Under the interest rate cap agreements, we pay a fixed fee in exchange for the counterparty to pay any interest above a maximum rate. As of March 31, 2020, interest rate cap agreements covered $346.5 million of our $1.1 billion of floating rate mortgage debt outstanding. These interest rate cap agreements effectively cap one-month LIBOR on $346.5 million of our floating rate mortgage debt at a weighted average rate of 5.74%.

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

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

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

Corporate Credit Facility

On January 28, 2019, the Company, through the OP, entered into a $75.0 million credit facility (the “Corporate Credit Facility”) with SunTrust Bank, as administrative agent and the lenders party thereto, and immediately drew $52.5 million to fund a portion of the purchase price of Bella Vista, The Enclave, and The Heritage. The Corporate Credit Facility is a full-term, interest-only facility with an initial 24-month term, has one 12-month extension at the option of the Company, and the Company has the right to request an increase in the facility amount up to $150 million (the “Accordion Feature”). The facility bears interest at a rate of one-month LIBOR plus a range from 2.00% to 2.50%, depending on the Company’s leverage level as determined under the Corporate Credit Facility agreement, and is guaranteed by the Company. On June 29, 2019, the Company, through the OP, exercised its option under the Accordion Feature of the Corporate Credit Facility and increased the amount of the facility from $75 million to $125 million. In conjunction with the increase in the facility, the Company incurred costs of $0.5 million in obtaining the additional financing through the Accordion Feature (see Note 6 for additional information related to our deferred financing costs). On August 28, 2019, the Company, through the OP, increased the amount of the Corporate Credit Facility by $25 million, resulting in aggregate commitments of $150 million as of September 30, 2019. In conjunction with the increase in the facility, the Company incurred costs of $0.2 million of deferred financing costs. On November 20, 2019, the Company, through the OP, increased the amount of the Corporate Credit Facility by $75 million, resulting in aggregate commitments of $225 million as of December 31, 2019. In conjunction with the increase in the facility, the Company incurred costs of $0.8 million of deferred financing costs. As of March 31, 2020, there was $225 million in aggregate principal outstanding on the Corporate 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 11 interest rate swap transactions with KeyBank and two with SunTrust Bank (collectively the “Counterparties”) with a combined notional amount of $1.2 billion. As of March 31, 2020, the interest rate swaps we have entered into effectively replace the floating interest rate (one-month LIBOR) with respect to $1.2 billion of our floating rate debt outstanding with a weighted average fixed rate of 1.3792%. During the term of these interest rate swap agreements, we are required to make monthly fixed rate payments of 1.3792%, on a weighted average basis, on the notional amounts, while the Counterparties are obligated to make monthly floating rate payments based on one-month LIBOR to us referencing the same notional amounts. For purposes of hedge accounting under FASB ASC 815, Derivatives and Hedging, we have designated these interest rate swaps as cash flow hedges of interest rate risk. See Notes 6 and 7 to our consolidated financial statements for additional information.

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

Effective Date	Termination Date	Counterparty	Notional		Fixed Rate (1)
July 1, 2016	June 1, 2021	KeyBank	$	100,000		1.1055	%
July 1, 2016	June 1, 2021	KeyBank		100,000		1.0210	%
July 1, 2016	June 1, 2021	KeyBank		100,000		0.9000	%
September 1, 2016	June 1, 2021	KeyBank		100,000		0.9560	%
April 1, 2017	April 1, 2022	KeyBank		100,000		1.9570	%
May 1, 2017	April 1, 2022	KeyBank		50,000		1.9610	%
July 1, 2017	July 1, 2022	KeyBank		100,000		1.7820	%
June 1, 2019	June 1, 2024	KeyBank		50,000		2.0020	%
June 1, 2019	June 1, 2024	SunTrust		50,000		2.0020	%
September 1, 2019	September 1, 2026	KeyBank		100,000		1.4620	%
September 1, 2019	September 1, 2026	KeyBank		125,000		1.3020	%
January 3, 2020	September 1, 2026	KeyBank		92,500		1.6090	%
March 4, 2020	June 1, 2026	SunTrust		100,000		0.8200	%
			$	1,167,500		1.3792	%	(2)

(1)	The floating rate option for the interest rate swaps is one-month LIBOR. As of March 31, 2020, one-month LIBOR was 0.9929%.

(2)	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 March 31, 2020 for the next five calendar years subsequent to March 31, 2020. We used one-month LIBOR as of March 31, 2020 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		2020		2021		2022		2023		2024		Thereafter
Operating Properties Mortgage Debt
Principal payments		$	1,151,683	$	559	$	894	$	1,492	$	21,271	$	424,663	$	702,804
Interest expense	(1)		181,982		26,389		34,989		33,428		31,897		25,771		29,508
Total		$	1,333,665	$	26,948	$	35,883	$	34,920	$	53,168	$	450,434	$	732,312


Credit Facility
Principal payments	(2)	$	225,000	$	—	$	225,000	$	—	$	—	$	—	$	—
Interest expense			6,132		5,584		548		—		—		—		—
Total		$	231,132	$	5,584	$	225,548	$	—	$	—	$	—	$	—

Total contractual obligations and commitments		$	1,564,797	$	32,532	$	261,431	$	34,920	$	53,168	$	450,434	$	732,312

(1)

Interest expense obligations includes the impact of expected settlements on interest rate swaps which have been entered into in order to fix the interest rate on the hedged portion of our floating rate debt obligations. As of March 31, 2020, we had entered into 13 interest rate swap transactions with a combined notional amount of $1.2 billion. We have allocated the total impact of expected settlements on the $1.2 billion notional amount of interest rate swaps to ‘Operating Properties Mortgage Debt.’ We used one-month LIBOR as of March 31, 2020 to determine our expected settlements through the terms of the interest rate swaps.

(2)

The Company has the option to extend the maturity date of the Corporate Credit Facility to January 28, 2022 given it is in compliance with each covenant. As of March 31, 2020, the Company believes it was in compliance with each of the covenants required for extending the maturity date of the revolver.

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 March 31, 2020, we had approximately $15.4 million of renovation value-add reserves for our planned capital expenditures and other expenses to implement our value-add program, which will complete approximately 1,600 planned interior rehabs. The following table sets forth a summary of our capital expenditures related to our value-add program for the three months ended March 31, 2020 and 2019 (in thousands):

		For the Three Months Ended March 31,
Rehab Expenditures		2020		2019
Interior	(1)	$	2,358	$	2,488
Exterior and common area			5,619		1,785
Total rehab expenditures		$	7,977	$	4,273

(1)	Includes total capital expenditures during the period on completed and in-progress interior rehabs. For the three months ended March 31, 2020 and 2019, we completed full and partial interior rehabs on 412 and 245 units, respectively.

Freddie Mac Multifamily Green Advantage Program

In order to obtain more favorable pricing on our mortgage debt financing with Freddie Mac, we have decided to participate in Freddie Mac’s new Multifamily Green Advantage program (the “Green Program”). In the second quarter of 2017, we escrowed approximately $4.2 million to finance smarter, greener property improvements at 18 of our properties. In connection with the three acquisitions and seven refinancings we completed in 2018, we escrowed approximately $1.2 million related to the Green Program. Since the start of the Green Program, we have spent approximately $6.2 million on green improvements and completed 34 Green Programs. As of March 31, 2020, the Company has completed its Green Program improvements on all but one property. We will complete the green improvements on this property during 2020. We expect to reduce water/sewer costs at each property where the Green Program is implemented by at least 15% through the replacement of showerheads, plumbing fixtures and toilets with modern energy efficient upgrades. Due to changes in Freddie Mac’s requirements to participate in the Green Program, we are not implementing this on acquisitions going forward.

Income Taxes

We anticipate that we will continue to qualify to be taxed as a REIT for U.S. federal income tax purposes, and we intend to continue to be organized and to operate in a manner that will permit us to qualify as a REIT. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to stockholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the three months ended March 31, 2020 and 2019.

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

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

We recognize our tax positions and evaluate them using a two-step process. First, we determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, we will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.

We had no material unrecognized tax benefit or expense, accrued interest or penalties as of March 31, 2020. We and our subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2019, 2018 and 2017 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 federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We intend to make regular quarterly dividend payments of all or substantially all of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our Board. Before we make any dividend payments, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets, borrow funds or raise additional capital to make cash dividends or we may make a portion of the required dividend in the form of a taxable distribution of stock or debt securities.

We will make dividend payments based on our estimate of taxable earnings per share of common stock, but not earnings calculated pursuant to GAAP. Our dividends and taxable income and GAAP earnings will typically differ due to items such as depreciation and amortization, fair value adjustments, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses. Our quarterly dividends per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share. Our Board declared our first quarterly dividend of 2020 of $0.3125 per share on February 17, 2020, which was paid on March 31, 2020 and funded out of cash flows from operations.

Off-Balance Sheet Arrangements

As of March 31, 2020 and December 31, 2019, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates

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

Purchase Price Allocation

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

The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (see Note 7 to our consolidated financial statements), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.

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 affected significantly by inflation in the past several years due to a relatively low inflation rate. 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. Should inflation return, 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. Currently, interest rates are less than historical averages. However, the Federal Reserve, in response to or in anticipation of continued inflation concerns, could continue to raise interest rates. We intend to mitigate these risks through long-term fixed interest rate loans and interest rate hedges, which to date have included interest rate cap and interest rate swap agreements.

REIT Tax Election

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code and expect to continue to qualify as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our “REIT taxable income,” as defined by the Code, to our stockholders. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the three months ended March 31, 2020 and 2019. We believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the adverse effect on the value of assets and liabilities that results from a change in market conditions. Our primary market risk exposure is interest rate risk with respect to our indebtedness and counterparty credit risk with respect to our interest rate derivatives. In order to minimize counterparty credit risk, we enter into and expect to enter into hedging arrangements only with major financial institutions that have high credit ratings. As of March 31, 2020, we had total indebtedness of $1.4 billion at a weighted average interest rate of 3.05%, of which $1.3 billion was debt with a floating interest rate. As of March 31, 2020, interest rate swap agreements effectively covered 100% of our $1.1 billion of floating rate mortgage debt outstanding and 38.4% of our $225.0 million floating rate Credit Facility. For purposes of calculating the adjusted weighted average interest rate of the total indebtedness, we have included the weighted average fixed rate of 1.3792% for one-month LIBOR on the $1.2 billion notional amount of interest rate swap agreements that we have entered into as of March 31, 2020.

An increase in interest rates could make the financing of any acquisition by us more costly. Rising interest rates could also limit our ability to refinance our debt when it matures or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. We may manage, or hedge, interest rate risks related to our borrowings by means of interest rate cap and interest rate swap agreements. As of March 31, 2020, the interest rate cap agreements we have entered into effectively cap one-month LIBOR on $346.5 million of our floating rate mortgage debt at a weighted average rate of 5.74% for the term of the agreements, which is generally three to four years. We also expect to manage our exposure to interest rate risk by maintaining a mix of fixed and floating rates for our indebtedness.

In order to fix a portion of, and mitigate the risk associated with, our floating rate indebtedness (without incurring substantial prepayment penalties or defeasance costs typically associated with fixed rate indebtedness when repaid early or refinanced), we, through the OP, have entered into 13 interest rate swap transactions with the Counterparties with a combined notional amount of $1.2 billion. The interest rate swaps we have entered into effectively replace the floating interest rate (one-month LIBOR) with respect to that amount with a weighted average fixed rate of 1.3792%. During the term of these interest rate swap agreements, we are required to make monthly fixed rate payments of 1.3792%, on a weighted average basis, on the notional amounts, while the Counterparties are obligated to make monthly floating rate payments based on one-month LIBOR to us referencing the same notional amounts. We have designated these interest rate swaps as cash flow hedges of interest rate risk.

Until our interest rates reach the caps provided by our interest rate cap agreements, each quarter point change in LIBOR would result in an approximate increase to annual interest expense costs on our floating rate indebtedness, reduced by any payments due from the Counterparties under the terms of the interest rate swap agreements we had entered into as of March 31, 2020, of the amounts illustrated in the table below for our indebtedness as of March 31, 2020 (dollars in thousands):

Change in Interest Rates	Annual Increase to Interest Expense
0.25%	$	350
0.50%		700
0.75%		1,050
1.00%		1,400

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

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

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our President and Chief Financial Officer, evaluated, as of March 31, 2020, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2020, to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

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

Changes in Internal Control over Financial Reporting

There has been no change in internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are party to legal proceedings that arise in the ordinary course of our business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by government agencies.

Item 1A. Risk Factors

Except as set forth below, there have been no material changes to the risk factors previously disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report, filed with the SEC on February 21, 2020:

The current pandemic of the novel coronavirus, or COVID-19, and the future outbreak of other highly infectious or contagious diseases, could materially and adversely impact or disrupt our financial condition, results of operations, cash flows and performance.

Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.

The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and financial markets. The outbreak of COVID-19 in many countries has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and, as cases of COVID-19 have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel.

Certain states and cities, including where we own properties and operate our business, have reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on the types of business that may continue to operate, and/or restrictions on the types of construction projects that may continue. We expect that additional states and cities will implement similar restrictions and cannot predict when such restrictions will expire. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly and may adversely impact the ability of our tenants, many of whom may be restricted in their ability to work, to pay their rent as and when due. In addition, our property manager may be limited in its ability to properly maintain our properties.

The COVID-19 pandemic, and other future pandemics, could also materially and adversely impact or disrupt our financial condition, results of operations, cash flows and performance due to, among other factors:

•

reduced economic activity may cause certain of our tenants to be unable to meet their rent obligations to us in full, or at all, or to otherwise seek modifications of such obligations;

•

reduced economic activity could result in a prolonged recession, which could negatively impact our prospects for leasing additional apartment units and/or renewing leases with existing tenants;

•

difficulty accessing debt and equity capital on attractive terms, or at all, impacts to our credit ratings, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis, or at all;

•

the financial impact of the COVID-19 pandemic could negatively impact our future compliance with financial covenants of our Corporate Credit Facility and other debt agreements and result in a default and potentially an acceleration of indebtedness, which non-compliance could negatively impact our ability to request further increase to our Corporate Credit Facility and pay dividends, among other things;

•

weaker economic conditions due to the COVID-19 pandemic could require us to recognize future impairment losses;

•

a general decline in business activity and demand for real estate transactions could adversely affect our ability to sell or purchase properties; and

•

the potential negative impact on the health of the employees of our Adviser and our property manager, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during this disruption.

The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including additional actions taken to contain COVID-19 or treat its impact, among others. The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic presents material uncertainty and risk with respect to our financial condition, results of operations, cash flows and performance. Moreover, many risk factors set forth in our Annual Report should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.

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

Repurchase of Shares

On June 15, 2016, we announced that our Board authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $30.0 million during a two-year period that was set to expire on June 15, 2018 (the “Share Repurchase Program”). On April 30, 2018, our Board increased the Share Repurchase Program from $30.0 million to up to $40.0 million and extended it by an additional two years to June 15, 2020. On March 13, 2020, the Board increased the Share Repurchase Program from $40.0 million to up to $100.0 million and extended it to March 12, 2023. During the three months ended March 31, 2020, the Company repurchased 1,090,480 shares of its common stock. Since the inception of the Share Repurchase Program through March 31, 2020, the Company had repurchased 1,827,938 shares of its common stock, par value $0.01 per share, at a total cost of approximately $47.7 million, or $26.09 per share as shown in the table below:

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that may yet be Purchased under the Plans or Programs (in millions)
Beginning Balance		737,458	$	22.64		737,458	$	83.3
January 1 – January 31		—		—		—		83.3
February 1 – February 29		—		—		—		83.3
March 1 – March 31		1,090,480		28.43		1,090,480		52.3
Balance as of March 31, 2020		1,827,938	$	26.09		1,827,938	$	52.3

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

EXHIBIT INDEX

Exhibit Number		Description

10.1		Revolving Credit Agreement by and among NexPoint Residential Trust Operating Partnership, L.P., as Borrower, the Lenders from time to time party thereto, and SunTrust Bank, a Georgia banking corporation, as Administrative Agent, dated as of January 28, 2019, as amended (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, field with the SEC on February 21, 2020).

31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1⁺		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002

101.INS*		Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document)

101.SCH*		Inline XBRL Taxonomy Extension Schema

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase
104*		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*	Filed herewith.

+	Furnished herewith.

SIGNATURES

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

NEXPOINT RESIDENTIAL TRUST, INC.

Signature	Title	Date

/s/ Jim Dondero	President and Director	May 8, 2020
Jim Dondero	(Principal Executive Officer)

/s/ Brian Mitts	Chief Financial Officer and Director	May 8, 2020
Brian Mitts	(Principal Financial Officer and Principal Accounting Officer)