UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment
No. 1)
(Mark One)
x |
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 |
For the quarterly
period ended June 30, 2015
or
¨ |
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 |
For the transition
period from to
Commission File
Number: 001-32365
Trade Street Residential, Inc. |
(Exact Name of Registrant as Specified in Its Charter) |
Maryland |
13-4284187 |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
|
|
19950 West Country Club Drive |
|
Aventura, Florida |
33180 |
(Address of Principal Executive Offices) |
(Zip Code) |
(786) 248-5200
(Registrant’s
Telephone Number, Including Area Code)
n/a
(Former Name, Former
Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. ). Yes x No
¨
Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x No ¨
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
¨ |
|
Accelerated filer |
|
x |
|
|
|
|
Non-accelerated filer |
|
¨ (Do not check if a smaller reporting company) |
|
Smaller reporting company |
|
¨ |
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨
No x
As of August 5, 2015, 36,799,570 shares
of the registrant’s common stock, $0.01 par value per share, were outstanding.
EXPLANATORY NOTE
This Amendment No. 1 to Form 10-Q is being filed solely
to amend the cover page of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, which was
filed with the Securities and Exchange Commission on August 10, 2015 (the “Original Report”) to uncheck the “Yes”
box that incorrectly identified the Registrant as a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of
1934, as amended) and to check the “No” box to correctly indicate that the Registrant is not a shell company.
Other than the changes to the cover page noted in the preceding sentence, no other changes were made to the Original Report.
TABLE OF CONTENTS
QUARTERLY REPORT
ON FORM 10-Q
TRADE STREET RESIDENTIAL,
INC.
TRADE STREET RESIDENTIAL,
INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(in thousands, except
per share amounts)
(unaudited)
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
Real estate assets | |
| | | |
| | |
Land and improvements | |
$ | 91,190 | | |
$ | 88,766 | |
Buildings and improvements | |
| 477,602 | | |
| 464,002 | |
Furniture, fixtures, and equipment | |
| 16,168 | | |
| 15,774 | |
| |
| 584,960 | | |
| 568,542 | |
Less accumulated depreciation | |
| (34,916 | ) | |
| (27,475 | ) |
Net investment in operating properties | |
| 550,044 | | |
| 541,067 | |
Real estate assets held for sale | |
| 2,702 | | |
| 3,492 | |
Net real estate assets | |
| 552,746 | | |
| 544,559 | |
| |
| | | |
| | |
Other assets | |
| | | |
| | |
Cash and cash equivalents | |
| 8,047 | | |
| 13,308 | |
Restricted cash and lender reserves | |
| 3,020 | | |
| 2,590 | |
Deferred financing costs, net | |
| 4,140 | | |
| 4,599 | |
Intangible assets, net | |
| 440 | | |
| 588 | |
Prepaid expenses and other assets | |
| 2,014 | | |
| 2,475 | |
Assets related to real estate assets held for sale | |
| 549 | | |
| 549 | |
| |
| 18,210 | | |
| 24,109 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 570,956 | | |
$ | 568,668 | |
| |
| | | |
| | |
LIABILITIES | |
| | | |
| | |
Indebtedness | |
$ | 359,406 | | |
$ | 344,756 | |
Accrued interest payable | |
| 870 | | |
| 887 | |
Accounts payable and accrued expenses | |
| 6,367 | | |
| 7,531 | |
Dividends payable | |
| 3,719 | | |
| 3,709 | |
Security deposits, deferred rent and other liabilities | |
| 1,995 | | |
| 1,783 | |
TOTAL LIABILITIES | |
| 372,357 | | |
| 358,666 | |
| |
| | | |
| | |
Commitments & contingencies | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS' EQUITY | |
| | | |
| | |
Class A preferred stock; $0.01 par value; 423 shares authorized at
both June 30, 2015 and December 31, 2014 | |
| - | | |
| - | |
Common stock, $0.01 par value per share; 1,000,000
authorized; 36,800 and 36,699 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively | |
| 368 | | |
| 367 | |
Additional paid-in capital | |
| 267,827 | | |
| 274,733 | |
Accumulated deficit | |
| (84,226 | ) | |
| (80,417 | ) |
TOTAL STOCKHOLDERS' EQUITY - TRADE STREET RESIDENTIAL, INC. | |
| 183,969 | | |
| 194,683 | |
Noncontrolling interest | |
| 14,630 | | |
| 15,319 | |
TOTAL STOCKHOLDERS' EQUITY | |
| 198,599 | | |
| 210,002 | |
| |
| | | |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | |
$ | 570,956 | | |
$ | 568,668 | |
The accompanying notes are an integral
part of these condensed consolidated financial statements.
TRADE STREET RESIDENTIAL,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(in thousands, except
per share amounts)
(unaudited)
| |
Three Months Ended June
30, | | |
Six Months Ended June
30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Property revenues | |
| | | |
| | | |
| | | |
| | |
Rental revenue | |
$ | 14,602 | | |
$ | 13,233 | | |
$ | 28,715 | | |
$ | 23,499 | |
Other property revenues | |
| 1,669 | | |
| 1,420 | | |
| 3,185 | | |
| 2,564 | |
Total property revenues | |
| 16,271 | | |
| 14,653 | | |
| 31,900 | | |
| 26,063 | |
| |
| | | |
| | | |
| | | |
| | |
Property expenses | |
| | | |
| | | |
| | | |
| | |
Property operations and maintenance | |
| 4,253 | | |
| 4,279 | | |
| 8,169 | | |
| 7,649 | |
Real estate taxes and insurance | |
| 2,372 | | |
| 2,310 | | |
| 4,809 | | |
| 4,241 | |
Total property expenses | |
| 6,625 | | |
| 6,589 | | |
| 12,978 | | |
| 11,890 | |
| |
| | | |
| | | |
| | | |
| | |
Other expenses | |
| | | |
| | | |
| | | |
| | |
General and administrative | |
| 1,590 | | |
| 2,318 | | |
| 3,678 | | |
| 4,413 | |
Management transition expenses | |
| - | | |
| 250 | | |
| - | | |
| 9,291 | |
Interest expense | |
| 3,495 | | |
| 3,318 | | |
| 6,889 | | |
| 6,191 | |
Depreciation and amortization | |
| 4,010 | | |
| 5,747 | | |
| 7,894 | | |
| 10,467 | |
Development and pursuit costs | |
| 7 | | |
| 94 | | |
| 10 | | |
| 139 | |
Acquisition and recapitalization costs | |
| 3,117 | | |
| 136 | | |
| 3,270 | | |
| 1,641 | |
Amortization of deferred financing costs | |
| 229 | | |
| 236 | | |
| 458 | | |
| 552 | |
Loss on early extinguishment of debt | |
| - | | |
| - | | |
| - | | |
| 1,629 | |
Total other expenses | |
| 12,448 | | |
| 12,099 | | |
| 22,199 | | |
| 34,323 | |
| |
| | | |
| | | |
| | | |
| | |
Other income | |
| 15 | | |
| 1 | | |
| 15 | | |
| 44 | |
Income from unconsolidated joint venture | |
| - | | |
| 10 | | |
| - | | |
| 1 | |
Impairment associated with land holdings | |
| (790 | ) | |
| - | | |
| (790 | ) | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
| (3,577 | ) | |
| (4,024 | ) | |
| (4,052 | ) | |
| (20,105 | ) |
Net loss allocated to noncontrolling interest | |
| 214 | | |
| 242 | | |
| 243 | | |
| 1,341 | |
Dividends declared and accreted on preferred stock | |
| - | | |
| (231 | ) | |
| - | | |
| (459 | ) |
Adjustments attributable to participating securities | |
| - | | |
| 14 | | |
| - | | |
| 30 | |
Net loss attributable to common stockholders | |
$ | (3,363 | ) | |
$ | (3,999 | ) | |
$ | (3,809 | ) | |
$ | (19,193 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss per common share - basic and diluted | |
$ | (0.09 | ) | |
$ | (0.11 | ) | |
$ | (0.10 | ) | |
$ | (0.56 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average number of shares - basic and diluted | |
| 36,538 | | |
| 36,452 | | |
| 36,528 | | |
| 34,112 | |
The accompanying notes are an integral
part of these condensed consolidated financial statements.
TRADE STREET RESIDENTIAL,
INC.
CONDENSED CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
SIX MONTHS ENDED
JUNE 30, 2015
(in thousands)
(unaudited)
| |
Trade
Street Residential, Inc. | | |
| | |
| |
| |
| | |
| | |
| | |
| | |
Additional | | |
| | |
| | |
| |
| |
Preferred
Stock | | |
Common
Stock | | |
Paid-in | | |
Accumulated | | |
Noncontrolling | | |
Total | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Interests | | |
Equity | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Equity balance, January 1, 2015 | |
| - | | |
$ | - | | |
| 36,699 | | |
$ | 367 | | |
$ | 274,733 | | |
$ | (80,417 | ) | |
$ | 15,319 | | |
$ | 210,002 | |
Resale registration statement costs | |
| - | | |
| - | | |
| - | | |
| - | | |
| (78 | ) | |
| - | | |
| - | | |
| (78 | ) |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (3,809 | ) | |
| (243 | ) | |
| (4,052 | ) |
Distributions to stockholders and unit holders | |
| - | | |
| - | | |
| - | | |
| - | | |
| (6,982 | ) | |
| - | | |
| (446 | ) | |
| (7,428 | ) |
Stock-based compensation, net of forfeitures | |
| - | | |
| - | | |
| 101 | | |
| 1 | | |
| 213 | | |
| - | | |
| - | | |
| 214 | |
Surrender of shares
to cover tax withholding of stock compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| (59 | ) | |
| - | | |
| - | | |
| (59 | ) |
Equity balance, June 30, 2015 | |
| - | | |
$ | - | | |
| 36,800 | | |
$ | 368 | | |
$ | 267,827 | | |
$ | (84,226 | ) | |
$ | 14,630 | | |
$ | 198,599 | |
The accompanying notes are an integral
part of this condensed consolidated financial statement.
TRADE STREET RESIDENTIAL,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| |
Six Months Ended June
30, | |
| |
2015 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (4,052 | ) | |
$ | (20,105 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 7,894 | | |
| 10,467 | |
Impairment associated with land holdings | |
| 790 | | |
| - | |
Amortization of tax abatement | |
| 149 | | |
| 176 | |
Amortization of deferred financing costs | |
| 458 | | |
| 552 | |
Loss on early extinguishment of debt | |
| - | | |
| 1,629 | |
Non-cash compensation from conversion of Class B
contingent units into common OP Units | |
| - | | |
| 2,453 | |
Stock compensation | |
| 214 | | |
| 3,497 | |
Income of unconsolidated joint venture | |
| - | | |
| (1 | ) |
Interest accrued on related party receivable | |
| - | | |
| (15 | ) |
Net changes in assets and liabilities: | |
| | | |
| | |
Restricted cash and lender reserves | |
| (952 | ) | |
| 529 | |
Prepaid expenses and other assets | |
| 410 | | |
| 3,711 | |
Accounts payable, accrued expenses and accrued interest
payable | |
| (1,182 | ) | |
| 349 | |
Due to related parties | |
| - | | |
| (119 | ) |
Security deposits, deferred
rent and other liabilities | |
| 214 | | |
| 585 | |
Net cash provided by operating activities | |
| 3,943 | | |
| 3,708 | |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Insurance proceeds received | |
| 540 | | |
| - | |
Cash distributions received from unconsolidated joint venture | |
| 50 | | |
| 101 | |
Payments for acquisitions of real estate communities | |
| (15,000 | ) | |
| (135,098 | ) |
Payments for improvements of real estate communities | |
| (1,889 | ) | |
| (1,720 | ) |
Deconsolidation of variable interest entity | |
| - | | |
| (148 | ) |
Net cash used in investing activities | |
| (16,299 | ) | |
| (136,865 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from issuance of common stock, net of offering costs | |
| (78 | ) | |
| 147,220 | |
Proceeds from indebtedness | |
| 15,000 | | |
| 134,750 | |
Repayments of indebtedness | |
| (350 | ) | |
| (137,694 | ) |
Payments of deferred loan costs | |
| - | | |
| (3,596 | ) |
Prepayment fees for early extinguishment of debt | |
| - | | |
| (706 | ) |
Distributions to stockholders and unitholders | |
| (7,418 | ) | |
| (5,021 | ) |
Decrease in related party receivable | |
| - | | |
| 842 | |
Shares surrendered for payment of withholding taxes | |
| (59 | ) | |
| (1,010 | ) |
Net cash provided by financing activities | |
| 7,095 | | |
| 134,785 | |
| |
| | | |
| | |
Net change in cash and cash equivalents | |
| (5,261 | ) | |
| 1,628 | |
Cash and cash equivalents at beginning of period | |
| 13,308 | | |
| 9,037 | |
Cash and cash equivalents at end of period | |
$ | 8,047 | | |
$ | 10,665 | |
| |
| | | |
| | |
Supplemental Disclosure of Cash Flow Information: | |
| | | |
| | |
| |
| | | |
| | |
Cash paid during the period for interest. | |
$ | 6,906 | | |
$ | 6,131 | |
| |
| | | |
| | |
Supplemental Disclosure of Non-Cash Investing & Financing Activities: | |
| | | |
| | |
Note payable issued as consideration for purchase of business | |
$ | - | | |
$ | 103,325 | |
Stock issued in connection with rights offering | |
$ | - | | |
$ | 7,500 | |
Acquisition consideration payable in preferred stock | |
$ | - | | |
$ | 294 | |
The accompanying notes are an integral
part of these condensed consolidated financial statements.
TRADE
STREET RESIDENTIAL, INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE A—NATURE OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES
Trade Street Residential, Inc. (the “Company”
or “TSRE”), formerly Feldman Mall Properties, Inc. (the “Predecessor"), is a Maryland corporation that
qualifies and has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes.
The Company conducts substantially all of its operations through Trade Street Operating Partnership, LP (the “Operating
Partnership”). The Company’s condensed consolidated financial statements as of and for the three and six months ended
June 30, 2015 and 2014 represent the combination of certain real estate entities and management
operations under common control that were contributed to the Company on
June 1, 2012 in a transaction accounted for as a reverse recapitalization (the “2012
Recapitalization”), as it was a capital transaction in substance, rather than a business combination, with no goodwill
being recorded. For accounting purposes, the legal acquiree (the
Company) was treated as the continuing reporting entity that acquired the legal acquirer (the
Predecessor).
The Company completed its initial public
offering in May 2013. On January 16, 2014, the Company completed a subscription rights offering
(the “Rights Offering”) to the Company’s existing stockholders and on March 19, 2015, pursuant to certain contractual
obligations, the Company filed a Registration Statement (the “Resale Registration Statement”) on Form S-3 with the
Securities and Exchange Commission (“SEC”) that provides certain stockholders
with the ability to sell, or otherwise transfer, from time to time, up to 9,316,055 shares of our common stock. The Resale Registration
Statement became effective April 2, 2015 (see Note F – “Common Stock Offerings”).
The Company is engaged in the business
of acquiring, owning, operating and managing high quality, conveniently located apartment communities in mid-sized cities and
suburban submarkets of larger cities primarily in the southeastern United States, including Texas.
As of June 30, 2015, the Company owned
4,989 apartment units in 19 communities. The Company’s revenues are primarily derived
from rents received from residents in its apartment communities. Under the terms of those leases,
residents are obligated to reimburse the Company for certain utility costs. These utility
reimbursements are recorded as other property revenues in the consolidated statements of operations.
The Company, through its affiliates, actively
manages the acquisition and operations of its real estate investments.
Merger with Independence Realty Trust, Inc.
On May 11, 2015, the Company announced
that, after conducting a thorough review of strategic alternatives, the Company and the Operating Partnership entered into a definitive
agreement (the “Merger Agreement”) with Independence Realty Trust, Inc., a Maryland corporation (“IRT”),
Independence Realty Operating Partnership, LP, a Delaware limited partnership and a subsidiary of IRT (“IRT OP”),
IRT Limited Partner, LLC, a Delaware limited liability company and a wholly-owned subsidiary of IRT (“IRT LP LLC”),
and Adventure Merger Sub LLC, a Delaware limited liability company and a wholly-owned subsidiary of IRT OP (“OP Merger Sub”),
pursuant to which OP Merger Sub will be merged with and into the Operating Partnership, with the Operating Partnership surviving
as a wholly owned subsidiary of IRT OP (the “Partnership Merger”), and TSRE will be merged with and into IRT LP LLC,
with IRT LP LLC surviving as a wholly-owned subsidiary of IRT (the “Company Merger” and collectively with the Partnership
Merger, the “Merger”).
At the effective time of the Company Merger
and in accordance with the Merger Agreement, each share of the Company’s common stock issued and outstanding immediately
prior to the effective time of the Company Merger shall be converted automatically into the right to receive, subject to certain
adjustments, (i) an amount in cash equal to $3.80 (provided that IRT may elect prior to the closing of the Merger to increase
the per share cash amount up to $4.56) (such cash amount, the “Per Share Cash Amount”), and (ii) a number of shares
of IRT’s common stock equal to the quotient determined by dividing (a) $7.60 less the Per Share Cash Amount, by (b) $9.25,
and rounding the result to the nearest 1/10,000 (the “Exchange Ratio”). At the effective time of the Partnership Merger,
each OP Unit, issued and outstanding immediately prior to the effective time of the Partnership Merger and owned by a party other
than the Company or one of its subsidiaries will be converted automatically into the right to receive (i) an amount in cash equal
to the Per Share Cash Amount, and (ii) a number of common units of limited partnership interest in IRT OP equal to the Exchange
Ratio.
The transaction has been approved by the
Company’s Board of Directors. Completion of the transaction, which is currently expected to occur in the third quarter
of 2015, is contingent upon customary closing conditions, (i) the approval of the Merger by the affirmative vote of the Company’s
stockholders, who will vote on the Company Merger at a special meeting to be held on September 15, 2015, and (ii) the approval
of the issuance of shares of IRT common stock in connection with the Merger by the affirmative vote of a majority of the votes
cast by holders of IRT’s common stock entitled to vote on the matter. The transaction is not contingent upon receipt of
financing by IRT. However, the Company can provide no assurances that this transaction will close, or if it closes, that it will
close in the timeframe or on the terms described herein. More information on the terms of the Merger was included in a Current
Report on Form 8-K filed by the Company with the SEC on May 11, 2015.
The Company incurred recapitalization
costs primarily consisting of financial advisory and legal expenses in support of our planned merger with IRT, which5 would not
have been incurred as part of normal operations, of $3.1 million and $3.2 million for the three and six months ended June 30,
2015, respectively. Recapitalization costs are charged to expense in the period incurred and are included in acquisition and recapitalization
costs in the condensed consolidated statements of operations.
Summary of Significant Accounting Policies
Basis of Presentation: The accompanying
interim condensed consolidated financial statements have been prepared by the Company’s management pursuant to the rules
and regulations of the SEC and in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim
financial information and represent the assets and liabilities and operating results of the Company, the
Operating Partnership and their wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated
in consolidation. Accordingly, certain information and footnotes required by GAAP for complete financial statements have
been omitted. It is the opinion of management that all adjustments considered necessary for a fair presentation have been included,
and that all such adjustments are of a normal recurring nature.
The consolidated results of operations
for three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year or
any other period. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2014.
Under Financial Accounting Standards Board
(“FASB”) Accounting Standard Codification (“ASC”) 810, “Consolidation,” when a reporting entity
is the primary beneficiary of an entity that is a variable interest entity (“VIE”) as defined in FASB ASC 810, the
VIE must be consolidated into the financial statements of the reporting entity. The determination of which owner is the primary
beneficiary of a VIE requires management to make significant estimates and judgments about the rights, obligations, and economic
interests of each interest holder in the VIE. A primary beneficiary has both the power to direct the activities that most significantly
impact the VIE and the obligation to absorb losses or the right to receive benefits from the VIE.
During the first quarter of 2013, the
Company began consolidation of a VIE that held a loan receivable from BSP/Sunnyside, LLC (“Sunnyside”), which owned
undeveloped land located in Panama City, Florida. In December 2013, the Company initiated foreclosure proceedings, which were
completed on March 10, 2014, with the Company obtaining title to the Sunnyside land parcel. Accordingly, the VIE was deconsolidated
during the first quarter of 2014 due to lack of ongoing variable interest. The deconsolidation of Sunnyside did not have a material
impact on the condensed consolidated financial statements of the Company.
Joint ventures in which the Company does
not have a controlling interest but exercises significant influence are accounted for using the equity method, under which the
Company recognizes its proportionate share of the joint venture’s earnings and losses in its results of operations.
The Company held a 50% interest in BSF/BR
Augusta JV, LLC (the “Perimeter JV”), the owner of The Estates at Perimeter (“Perimeter”), a multifamily
apartment community located in Augusta, Georgia, comprised of 240 garden-style apartment units contained in ten three-story residential
buildings located on approximately 13 acres of land, which was accounted for under the equity method until the Company sold its
interest in that operating property on December 10, 2014. As of December 31, 2014, the Company accrued a receivable of approximately
$0.1 million relating to final funds due from Perimeter JV. During the second quarter of 2015, the Company received a portion
of these funds which are included in net cash used in investing activities in the condensed consolidated statements of cash flows.
The Company expects to receive the remaining amount due from Perimeter JV in the third quarter of 2015.
The Perimeter JV followed GAAP and its
accounting policies were similar to those of the Company. The Company shared in profits and losses of the Perimeter JV in accordance
with the Perimeter JV operating agreement, which was reported as income from unconsolidated joint venture in the Company’s
consolidated statements of operations. The Company received operating cash distributions of $0.1 million during the six months
ended June 30, 2014, but no contributions were made during that same period.
The following table summarizes the condensed
consolidated financial information for the Perimeter JV for the periods presented:
| |
Three Months Ended | | |
Six Months Ended | |
(in thousands) | |
June 30, 2014 | | |
June 30, 2014 | |
Total property revenue | |
$ | 701 | | |
$ | 1,366 | |
Net income | |
$ | 20 | | |
$ | 2 | |
Company share of income from unconsolidated joint venture activities | |
$ | 10 | | |
$ | 1 | |
Use of Estimates: The preparation
of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect amounts reported in these condensed consolidated financial statements and accompanying notes. The more significant estimates
include those related to whether the carrying values of real estate assets have been impaired. While management believes that
the estimates used are reasonable, actual results could differ from the estimates.
Acquisition of Operating Properties:
The Company has accounted for acquisitions of its operating properties, consisting of multifamily apartment communities, as business
combinations in accordance with GAAP. Estimates of fair value based on future cash flows and other valuation techniques are used
to allocate the purchase price between land, buildings, building improvements, equipment, identifiable intangible assets such
as in-place leases and tax abatements, and other assets and liabilities.
Transaction costs related to the acquisition
of an operating property, such as broker fees, certain transfer taxes, legal, accounting, valuation, and other professional and
consulting fees, are expensed as incurred and are included in acquisition and recapitalization costs
in the condensed consolidated statements of operations.
Real Estate Assets: Real estate
assets are stated at the lower of depreciated cost or fair value, if deemed impaired, as described below. Depreciation on real
estate is computed using the straight-line method over the estimated useful lives of the related assets, generally 35 to 50 years
for buildings, 2 to 15 years for long-lived improvements and 3 to 7 years for furniture, fixtures and equipment. Expenditures
that enhance the value of existing real estate assets or substantially extend the lives of those assets are capitalized and depreciated
over the expected useful lives of such enhancements. Expenditures necessary to maintain a real estate asset in ordinary operating
condition are expensed as incurred.
Construction and improvement costs incurred
in connection with the development of new properties or the redevelopment of existing properties are capitalized to the extent
the total carrying value of the property does not exceed the estimated net realizable value of the completed property. Capitalization
of these costs begins when the activities and related expenditures commence and ceases when the project is substantially complete
and ready for its intended use, at which time the project is placed in service and depreciation commences. Real estate taxes,
construction costs, insurance, and interest costs incurred during construction periods are capitalized. Capitalized real estate
taxes and interest costs are amortized over periods which are consistent with the constructed assets. If the Company determines
the completion of development or redevelopment is no longer probable, it expenses all capitalized costs which are not recoverable.
Real Estate Assets Held for Sale:
The Company periodically classifies real estate assets, including land, as held for sale. An asset is classified as real estate
assets held for sale after the Company’s Board of Directors commits to a plan to sell an asset, the asset is ready to be
sold in its current condition, an active program to locate buyers has been initiated and the sale is expected to be completed
in one year. Upon the classification of a real estate asset as held for sale, the carrying value of the asset is reported at the
lower of net book value or estimated fair value, less costs to sell the asset. Real estate assets held for sale are stated separately
in the accompanying condensed consolidated balance sheets. Subsequent to classifying an operating property as held for sale, no
further depreciation expense is recorded. For periods beginning January 1, 2014, operating results from real estate assets held
for sale are included in loss from continuing operations in the accompanying condensed statements of operations.
Impairment of Real Estate Assets:
The Company periodically evaluates its real estate assets when events or circumstances indicate that the carrying amounts of such
assets may not be recoverable. The Company assesses the recoverability of such carrying amounts by comparing the carrying amount
of the property to its estimate of the undiscounted future operating cash flows expected to be generated over the holding period
of the asset including its eventual disposition. If the carrying amount exceeds the aggregate undiscounted future operating cash
flows, an impairment loss is recognized to the extent the carrying amount exceeds the estimated fair value of the property and
is reported as a component of continuing operations. In estimating fair value, management uses appraisals, internal estimates,
and discounted cash flow calculations, which maximizes inputs from a marketplace participant’s perspective.
Noncontrolling Interests: The Company
accounts for noncontrolling interests in accordance with ASC Topic 810, “Consolidation.” ASC Topic 810, in conjunction
with other applicable GAAP guidance, established criterion used to evaluate the characteristics of noncontrolling interests in
consolidated entities to determine whether noncontrolling interests are classified and accounted for as permanent equity or “temporary”
equity (presented between liabilities and permanent equity on the consolidated balance sheet). ASC Topic 810 also clarified the
treatment of noncontrolling interests with redemption provisions. If a noncontrolling interest has a redemption feature that permits
the issuer to settle in either cash or common shares at the option of the issuer but the equity settlement feature is deemed to
be outside of the control of the issuer, then those noncontrolling interests are classified as “temporary” equity.
At the periods presented, the Company had one type of noncontrolling interest related to
the common unitholders of the Operating Partnership and this is presented as part of permanent equity (see Note F).
For periods beginning January 1, 2014,
due to the conversion of all remaining contingent B units into common units (the “OP
Units”) of the Operating Partnership as discussed
in Note F, the Company allocates income and loss to noncontrolling interests based on the weighted-average common unit ownership
interest in the Operating Partnership, which was 6.0% for each of the three months ended June 30, 2015 and 2014 and 6.0% and 6.4%
for the six months ended June 30, 2015 and 2014, respectively.
Intangible Assets: The Company
allocates the purchase price of acquired properties to net tangible and identified intangible assets (consisting of the value
of in-place leases and any property tax abatement agreements) based on relative fair values. Fair value estimates are based on
information obtained from a number of sources, including independent appraisals that may be obtained in connection with the acquisition
or financing of the respective property and other market data.
The value of in-place leases is based
on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property
valued “as-if” vacant. As lease terms are typically one year or less, rates on in-place leases generally approximate
market rental rates. Factors considered in the valuation of in-place leases include an estimate of the carrying costs during the
expected lease-up period considering current market conditions, nature of the tenancy, and costs to execute similar leases. Carrying
costs include estimates of lost rentals at market rates during the expected lease-up period, as well as marketing and other operating
expenses. The value of in-place leases is amortized over the remaining initial term of the respective leases, typically a period
of six months from the date of acquisition. The purchase prices of acquired properties are not expected to include allocations
to tenant relationships, considering the short terms of the leases and the high expected levels of renewals.
Property tax abatements provide graduated
tax relief for a defined period of time from the completion of development of the respective
property. Amortization of tax abatement intangible assets is recorded based on the actual tax savings in each period over the
five-year term of the abatement and is included in “Property expenses - real estate taxes and insurance” in the condensed
consolidated statements of operations (see Note E).
See Note C for a detailed discussion of
the property acquisitions completed during the six months ended June 30, 2015 and 2014.
Fair Value of Financial Instruments:
For financial assets and liabilities recorded at fair value on a recurring basis, fair value is the price the Company would receive
to sell an asset, or pay to transfer a liability, in an orderly transaction with a market participant at the measurement date.
In the absence of such data, fair value is estimated using internal information consistent with what market participants would
use in a hypothetical transaction.
In determining fair value, observable
inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s market assumptions;
preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
| · | Level 1: Quoted
prices for identical instruments in active markets. |
| · | Level 2: Quoted
prices for similar instruments in active markets: quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations whose inputs
are observable or whose significant value drivers are observable. |
| · | Level 3: Significant
inputs to the valuation model are unobservable. |
The following methods and assumptions
were used to estimate the fair value of each class of financial instruments:
| · | The
carrying amounts reported in the condensed consolidated balance sheets for cash and cash
equivalents, restricted cash and lender reserves, amounts due from related parties, accounts
payable and accrued expenses, security deposits, deferred rent and other liabilities
approximate their fair values due to the short-term nature of these items. |
| · | There
is no material difference between the carrying amounts and fair values of mortgage notes
payable as interest rates and other terms approximate current market rates and terms
for similar types of debt instruments available to the Company (Level 2). |
Disclosures about the fair value of financial
instruments are based on pertinent information available to management as of June 30, 2015 and December 31, 2014.
Non-recurring Fair Value Disclosures:
Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing
basis, but are subject to fair value adjustments in certain circumstances. These assets primarily include long-lived assets, which
are recorded at fair value when they are impaired. The fair value methodologies used to measure long-lived assets are described
above at “Impairment of Real Estate Assets”.
For the three and six months ended June
30, 2015, the Company recognized a $0.8 million impairment charge related to its real estate assets held for sale. For the three
and six months ended June 30 2014, the Company did not recognize any impairment charges related to its real estate assets held
for sale. See Note J, “Real estate assets held for sale – land investments”, for additional information associated
with impairment charges recognized by the Company during the periods presented. The inputs associated with the valuation of long-lived
assets are generally included in Level 3 of the fair value hierarchy.
Insurance Proceeds for Property Damages:
The Company maintains an insurance policy that provides coverage for property damages and business interruption. Losses due to
physical damages are recognized during the accounting period in which they occur, while the amount of monetary assets to be received
from the insurance policy is recognized when receipt of insurance recoveries is probable. Losses, which are reduced by the
related insurance recoveries, are recorded as casualty losses and reported as part of “Property expenses - real estate taxes
and insurance” on the accompanying consolidated statements of operations. Anticipated proceeds in excess of recognized losses
would be considered a gain contingency and recognized when the contingency related to the insurance claim has been resolved. Anticipated
recoveries for lost rental revenue due to property damages are recognized when the amount of rental revenue recovery is known
and the timing of receipt of those proceeds is determined.
On November 22, 2014, a 20-unit apartment
building at the Company’s Pointe at Canyon Ridge property in Sandy Springs, Georgia, was destroyed by fire. At the time
of the fire, the affected building had a carrying value of approximately $0.6 million. The Company maintains insurance coverage
on all of its properties and subsequently filed an insurance claim that is expected to cover the re-construction cost of the affected
building, less the Company’s loss deductible, as well as loss of rents under a business interruption provision of the applicable
insurance policy. During the three months ended December 31, 2014, the Company recorded a casualty loss of approximately $0.7
million related to the carrying value of the affected building plus the Company’s insurance loss deductible, which was offset
by an expected $0.7 million insurance recovery receivable that was included in prepaid expenses and other assets in the Company’s
condensed consolidated balance sheets as of December 31, 2014. During the first six months of 2015, net proceeds of $0.5 million
have been received and are included in restricted cash and lender reserves in the Company’s condensed consolidated balance
sheet at June 30, 2015. In addition, the Company recorded a recovery of lost rents relating to the 20 impacted units for the three
and six months ended June 30, 2015 as additional rental income in the Company’s consolidated statements of operations. The
Company anticipates that re-construction of this 20-unit building will be completed by the end of 2015.
Recent Accounting Standards: In
April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03").
ASU 2015-03 requires debt issuance costs to be presented in the balance
sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt
discount. Prior to the issuance of the standard, debt issuance costs were required to be presented in the balance sheet as an
asset. The Company is currently assessing the impact that adopting this new accounting guidance will have on its condensed consolidated
financial statements and related disclosures. ASU 2015-03 is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2015, but early adoption is permitted. Accordingly, the standard is effective for the Company on
January 1, 2016.
In February 2015, the FASB issued ASU
2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02"). ASU 2015-02
affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 modifies
the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the
presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting
entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02
is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption
is permitted. A reporting entity may apply the amendments in ASU 2015-02 using: (a) a modified retrospective approach by recording
a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption; or (b) by applying the amendments
retrospectively. The Company is currently assessing the potential impact that the adoption of ASU 2015-02 will have on its condensed
consolidated financial statements or related disclosures.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers, which converges the FASB and the International Accounting Standards Board standard
on revenue recognition. Areas of revenue recognition that will be affected include, but are not limited to, transfer of control,
variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures. This is
effective for the fiscal years and interim reporting periods beginning after December 15, 2017. The Company is currently evaluating
the impact that the adoption of ASU 2014-09 will have on its condensed consolidated financial statements or related disclosures.
NOTE B—EARNINGS PER SHARE
The Company reports earnings per share
(“EPS”) using the two-class method as required under GAAP. The two-class method is an earnings allocation method for
computing EPS when an entity’s capital structure includes either two or more classes of common stock or includes common
stock and participating securities. The two-class method calculates EPS based on distributed earnings and undistributed earnings.
Undistributed losses are not allocated to participating securities under the two-class method unless the participating security
has a contractual obligation to share in losses on a basis that is objectively determinable.
Potentially dilutive shares of common
stock, and the related impact to earnings, are considered when calculating EPS on a diluted basis using the treasury stock method.
For periods where the Company reports a net loss available for common stockholders, the effect of dilutive shares is excluded
from EPS calculations because including such shares would be anti-dilutive.
A reconciliation of basic and diluted
EPS computations for the three and six months ended June 30, 2015 and 2014 are presented below:
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
(in thousands, except per share amounts) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Net loss attributable to the Company | |
$ | (3,577 | ) | |
$ | (4,024 | ) | |
$ | (4,052 | ) | |
$ | (20,105 | ) |
Net loss allocated to noncontrolling interest | |
| 214 | | |
| 242 | | |
| 243 | | |
| 1,341 | |
Dividends declared and accreted on preferred stock | |
| - | | |
| (231 | ) | |
| - | | |
| (459 | ) |
Adjustments attributable to participating securities | |
| - | | |
| 14 | | |
| - | | |
| 30 | |
Net loss attributable to common stockholders | |
$ | (3,363 | ) | |
$ | (3,999 | ) | |
$ | (3,809 | ) | |
$ | (19,193 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average number of shares - basic and diluted | |
| 36,538 | | |
| 36,452 | | |
| 36,528 | | |
| 34,112 | |
| |
| | | |
| | | |
| | | |
| | |
Net loss per common share | |
| | | |
| | | |
| | | |
| | |
Basic and diluted net loss per share from continuing operations attributable to common stockholders | |
$ | (0.09 | ) | |
$ | (0.11 | ) | |
$ | (0.10 | ) | |
$ | (0.56 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average, potentially dilutive securities
excluded from diluted earnings (loss) per share because they were antidilutive or performance conditions were not met: | |
| | | |
| | | |
| | | |
| | |
Warrants (1) | |
| 139 | | |
| 139 | | |
| 139 | | |
| 139 | |
OP Units (2) | |
| 2,344 | | |
| 2,344 | | |
| 2,344 | | |
| 2,344 | |
Unvested restricted stock awards (3) | |
| 229 | | |
| 204 | | |
| 204 | | |
| 202 | |
| (1) | Warrants were exercisable until May 14, 2015 at
a split-adjusted exercise price of $21.60 of the Company’s common stock. |
| (2) | Class B contingent units were converted into OP
Units in February 2014 and were excluded from potentially dilutive shares of common stock
in the periods presented since their conversion would be anti-dilutive. |
| (3) | Granted pursuant to the Company’s Equity
Incentive Plan (see Note G). |
NOTE C—ACQUISITIONS OF MULTIFAMILY
APARTMENT COMMUNITIES
During the six months ended June 30, 2015
and 2014, the Company, through the Operating Partnership, completed various acquisitions of multifamily apartment communities
from unrelated, third-party sellers. The acquisitions involved the acquisition of the operating real estate, but no management
or other business operations were acquired in such acquisitions. The fair value of the net assets acquired and the related purchase
price allocation are summarized below.
2015 Acquisitions:
Waterstone at Big Creek (“Big
Creek”) – On March 26, 2015, the
Company completed the acquisition of the second phase of Big Creek, located in Alpharetta (Atlanta), Georgia. The Company closed
on the first phase of 270 units at Big Creek on April 7, 2014. The second phase was comprised of 100 vacant units within three
recently-constructed residential buildings on an adjacent land parcel. Total consideration for this purchase was $15.0 million,
which is consistent with the first phase, and was funded by a draw on the Company’s revolving credit facility (see Note
D).
The table below details the total fair
values assigned to the assets and liabilities acquired related to the above acquisition during the six months ended June 30, 2015:
(in thousands) | |
Big Creek | |
| |
| |
Fair Value of Net Assets Acquired and Purchase Price | |
$ | 15,000 | |
| |
| | |
Net Assets Acquired/Purchase Price Allocated: | |
| | |
Land | |
$ | 1,555 | |
Site Improvements | |
| 650 | |
Building | |
| 12,503 | |
Furniture, fixtures and equipment | |
| 292 | |
Total | |
$ | 15,000 | |
2014 Acquisitions:
Big Creek - On April
7, 2014, the Company acquired Big Creek, a 270-unit apartment community located in Alpharetta (Atlanta), Georgia for a total purchase
price of $40.5 million. The purchase price was funded with cash on hand of approximately $3.5 million and $37.0 million drawn
from the Revolver (see Note D). From the date of acquisition through June 30, 2014, Big Creek generated revenue of approximately
$0.9 million and a net loss of approximately ($0.03) million.
Avenues of Craig Ranch (“Craig
Ranch”) - On March 18, 2014, the Company acquired Craig Ranch, a 334-unit apartment community located in McKinney
(Dallas), Texas. The purchase price of $42.4 million was funded with approximately $21.2 million cash proceeds from the net proceeds
of the Rights Offering and the related transactions and a new mortgage loan in the amount of $21.2 million (see Note D). From
the date of acquisition through June 30, 2014, Craig Ranch generated revenue of approximately $1.1 million and a net loss of approximately
($0.5) million.
Waterstone at Brier Creek (“Brier
Creek”) - On March 10, 2014, the Company acquired Brier Creek, a 232-unit apartment community located in Raleigh,
North Carolina. The purchase price of $32.7 million was funded with approximately $16.4 million cash proceeds from the Rights
Offering and the related transactions and a new mortgage loan in the amount of $16.3 million (see Note D). From the date of acquisition
through June 30, 2014, Brier Creek generated revenue of approximately $0.5 million and a net loss of approximately ($0.7) million.
The Aventine Greenville (“Aventine”)
- On February 6, 2014, the Company acquired Aventine, a 346-unit apartment community located in Greenville, South Carolina.
The purchase price of $41.9 million was funded with approximately $20.9 million cash proceeds from the Rights Offering and the
related transactions and a new mortgage loan in the amount of $21.0 million (see Note D). From the date of acquisition through
June 30, 2014, Aventine generated revenue of approximately $1.5 million and a net loss of approximately ($0.8) million.
Aston (“Aston”) (formerly
The Estates at Wake Forest) - On January 21, 2014, the Company acquired Aston, a 288-unit apartment community located
in Wake Forest (Raleigh), North Carolina. The purchase price of $37.3 million was funded with approximately $18.7 million of cash
proceeds from the Rights Offering and the related transactions and a new mortgage loan in the amount of $18.6 million (see Note
D). From the date of acquisition through June 30, 2014, Aston generated revenue of approximately $1.0 million and a net loss of
approximately ($1.2) million.
Miller Creek at Germantown (“Miller
Creek”) - On January 21, 2014, the Company acquired Miller Creek, a 330-unit apartment community located in Germantown
(Memphis), Tennessee. The purchase price of approximately $43.8 million was funded with approximately $17.5 million of cash proceeds
from the Rights Offering and the related transactions and a new mortgage loan in the amount of $26.3 million (see Note D). From
the date of acquisition through June 30, 2014, Miller Creek generated revenue of approximately $1.9 million and a net loss of
approximately ($1.2) million.
The table below details the total fair values assigned to the
assets and liabilities acquired related to the above acquisitions during the six months ended June 30, 2014:
(in
thousands) | |
Miller
Creek | | |
Aston | | |
Aventine | | |
Brier
Creek | | |
Craig
Ranch | | |
Big
Creek | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Fair Value of Net Assets Acquired | |
$ | 43,750 | | |
$ | 37,250 | | |
$ | 41,866 | | |
$ | 32,682 | | |
$ | 42,375 | | |
$ | 40,500 | | |
$ | 238,423 | |
Purchase Price | |
$ | 43,750 | | |
$ | 37,250 | | |
$ | 41,866 | | |
$ | 32,682 | | |
$ | 42,375 | | |
$ | 40,500 | | |
$ | 238,423 | |
Net Assets Acquired/Purchase Price Allocated: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Land | |
$ | 2,173 | | |
$ | 2,677 | | |
$ | 2,888 | | |
$ | 3,031 | | |
$ | 3,444 | | |
$ | 3,910 | | |
$ | 18,123 | |
Site Improvements | |
| 2,460 | | |
| 2,618 | | |
| 1,926 | | |
| 1,681 | | |
| 3,210 | | |
| 1,763 | | |
| 13,658 | |
Building | |
| 37,332 | | |
| 30,633 | | |
| 34,720 | | |
| 26,989 | | |
| 33,317 | | |
| 33,106 | | |
| 196,097 | |
Furniture, fixtures and equipment | |
| 1,011 | | |
| 860 | | |
| 1,494 | | |
| 679 | | |
| 1,673 | | |
| 978 | | |
| 6,695 | |
Intangible assets - in place leases | |
| 774 | | |
| 462 | | |
| 838 | | |
| 302 | | |
| 731 | | |
| 743 | | |
| 3,850 | |
Total | |
$ | 43,750 | | |
$ | 37,250 | | |
$ | 41,866 | | |
$ | 32,682 | | |
$ | 42,375 | | |
$ | 40,500 | | |
$ | 238,423 | |
The Company incurred
approximately $0.1 million and $1.6 million acquisition-related costs during the six months ended June 30, 2015 and 2014,
respectively.
Pro Forma Financial Information:
The revenues and results of operations
of the acquired apartment communities are included in the condensed consolidated financial statements beginning on the date of
each respective acquisition. The following unaudited consolidated pro forma information for the six months ended June 30, 2015
and 2014 is presented as if the Company had acquired each apartment community on January 1, 2014.
The information presented below is not
necessarily indicative of what the actual results of operations would have been had the Company completed these transactions on
January 1, 2014, nor does it purport to represent the Company’s future operations.
(in thousands) | |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Unaudited pro forma financial information: | |
| | | |
| | | |
| | | |
| | |
Pro forma revenue | |
$ | 16,271 | | |
$ | 14,706 | | |
$ | 31,900 | | |
$ | 28,150 | |
Pro forma loss from continuing operations | |
$ | (3,577 | ) | |
$ | (4,041 | ) | |
$ | (4,052 | ) | |
$ | (21,212 | ) |
NOTE D—INDEBTEDNESS
As of June 30, 2015, the Company’s
indebtedness consisted of the following:
| |
Outstanding Principal | | |
| | |
Remaining | |
| |
Balance as of | | |
| | |
Term in | |
Property | |
June 30, 2015 | | |
Interest Rate | | |
Years | |
| |
(in thousands) | | |
| | |
| |
Fixed Rate Secured Indebtedness | |
| | | |
| | | |
| | |
Lakeshore on the Hill | |
$ | 6,567 | | |
| 4.48 | % | |
| 2.50 | |
The Trails of Signal Mountain | |
| 8,074 | | |
| 4.92 | % | |
| 2.92 | |
Westmont Commons | |
| 17,788 | | |
| 3.84 | % | |
| 7.50 | |
Bridge Pointe | |
| 11,217 | | |
| 4.19 | % | |
| 7.75 | |
The Pointe at Canyon Ridge | |
| 25,800 | | |
| 4.10 | % | |
| 9.92 | |
St. James | |
| 19,000 | | |
| 3.75 | % | |
| 8.00 | |
Creekstone | |
| 23,250 | | |
| 3.88 | % | |
| 7.94 | |
Talison | |
| 33,635 | | |
| 4.06 | % | |
| 8.19 | |
Millenia 700 | |
| 25,000 | | |
| 3.83 | % | |
| 5.68 | |
Southend | |
| 23,750 | | |
| 4.31 | % | |
| 8.60 | |
Miller Creek | |
| 26,250 | | |
| 4.60 | % | |
| 8.61 | |
Craig Ranch | |
| 21,200 | | |
| 3.78 | % | |
| 5.78 | |
Aston | |
| 18,625 | | |
| 3.94 | % | |
| 5.61 | |
Aventine | |
| 21,000 | | |
| 3.70 | % | |
| 5.61 | |
Brier Creek | |
| 16,250 | | |
| 3.70 | % | |
| 6.76 | |
Total fixed rate secured indebtedness | |
| 297,406 | | |
| 4.03 | % | |
| 7.25 | |
| |
| | | |
| | | |
| | |
Variable Rate Secured Indebtedness | |
| | | |
| | | |
| | |
Revolver | |
| 62,000 | | |
| 2.98 | % | |
| 1.58 | |
| |
| | | |
| | | |
| | |
Total outstanding indebtedness | |
$ | 359,406 | | |
| 3.85 | % | |
| 6.27 | |
Borrowings relate to individual property
mortgages as well as the Company’s Revolver (as defined below).
Revolving Credit Facility
On January 31, 2014, the Company and the
Operating Partnership entered into a Credit Agreement (the “Credit Agreement”), as amended from time to time, for
a $75 million senior secured credit facility (the “Revolver”) with Regions Bank as lead arranger and U.S. Bank National
Association as a participant. The Revolver is comprised of an initial $75 million commitment with an accordion feature allowing
the Company to increase borrowing capacity to $250 million (the “Revolver Amount”), subject to certain approvals and
meeting certain criteria. The Revolver also includes a sublimit for the issuance of standby letters of credit (“Letter of
Credit”) for up to the greater of $10.0 million and 10.0% of the Revolver Amount and a sublimit for discretionary swingline
loans (“Swingline Loan”) for up to the greater of $10.0 million and 10.0% of the Revolver Amount, in each case subject
to borrowing availability under the Revolver. No Swingline Loan may be outstanding for more than ten consecutive business days.
The Revolver has an initial three-year
term that can be extended at the Company's option for up to two additional one-year periods and has a variable interest rate of
LIBOR (as defined in the Credit Agreement) plus a spread of 1.75% to 2.75%, depending on the Company’s consolidated leverage
ratio. The current borrowing rate of the Revolver is LIBOR plus 2.75%. The Revolver is guaranteed by the Company and certain subsidiaries
of the Company and is secured by first priority mortgages on designated properties that make up the borrowing base (“Borrowing
Base”) as defined in the Credit Agreement. Availability under the Revolver is permitted up to 65% of the value of the Borrowing
Base subject to the limitations set forth in the Revolver. The Revolver contains customary affirmative and negative covenants
with respect to, among other things, insurance, maintaining at least one class of exchange listed common stock, the guaranty in
connection with the Revolver, liens, intercompany transfers, transactions with affiliates, mergers, consolidation and asset sales,
ERISA plan assets, modification of organizational documents and material contracts, derivative contracts, environmental matters,
and management agreements and fees. In addition, the Operating Partnership pays a commitment fee of 0.20% to 0.30% quarterly in
arrears based on the unused portion of the revolving credit commitment. The commitment fee was 0.20% on both June 30, 2015 and
December 31, 2014. The weighted average interest rate was approximately 2.98% and 2.70% at June 30, 2015 and December 31, 2014,
respectively.
The Revolver requires the Company to satisfy
certain financial covenants, including the following:
| · | minimum tangible
net worth of at least $123.0 million plus 75% of the net proceeds of any equity issuances
effected at any time after September 30, 2013 by the Operating Partnership or any of
its subsidiaries; |
| · | maintaining
a ratio of funded indebtedness to total asset value of no greater than 0.65 to 1.0; |
| · | maintaining
a ratio of adjusted EBITDA to fixed charges of no less than 1.5 to 1.0; |
| · | limits on investments
in unimproved land, mortgage receivables, interests in unconsolidated affiliates, construction-in-progress
on development properties, and marketable securities and non-affiliated entities, in
each case, based on the value of such investments relative to total asset value, as set
forth in the Credit Agreement; and |
| · | restrictions
on certain dividend and distribution payments. |
The Company was in compliance with all
applicable covenants, including these financial covenants, as of June 30, 2015.
During the six months ended June 30, 2015,
the Company borrowed $15.0 million under the Revolver to complete the acquisition of the second phase of 100 units on a land parcel
adjacent to Big Creek (see Note C above). As of June 30, 2015, the Revolver had an outstanding principal balance of $62.0 million,
which is secured by certain Borrowing Base properties, and there remained approximately $3.1
million available for draw on the Revolver.
During the six months ended June 30, 2014,
the Company drew approximately $27.0 million to pay down, in full, indebtedness secured by Fox Trails ($14.9 million), Vue at
Knoll Trail Apartments (formerly Mercé Apartments ($5.5 million)) and Post Oak ($5.3 million) and to pay fees associated
therewith, as these properties serve as collateral on the Revolver. The remainder of the amount borrowed was used for closing
costs and other expenses related to closing on the Revolver of approximately $0.9 million and approximately $0.4 million for general
corporate and working capital purposes, respectively. On April 7, 2014, the Company borrowed approximately $37.0 million to acquire
Big Creek (see Note C above) and repaid approximately $12.0 million under the Revolver. In connection with its sale in July 2014,
Post Oak was released from collateral for the Revolver.
Craig Ranch - On March 18,
2014, in conjunction with the acquisition of Craig Ranch (see Note C above) the Company, through its subsidiary, entered into
a mortgage note payable in the amount of $21.2 million, which bears a fixed interest rate of 3.78% and requires monthly payments
of interest only for the term of the loan and a payment of the unpaid principal amount due at maturity on April 10, 2021. The
mortgage note is secured by Craig Ranch.
Brier Creek - On March 10,
2014, in conjunction with the acquisition of Brier Creek (see Note C above) the Company, through its subsidiary, entered into
a mortgage note payable in the amount of $16.3 million, which bears a fixed interest rate of 3.70% and requires monthly payments
of interest only for the term of the loan and a payment of the unpaid principal amount due at maturity on April 5, 2022. The mortgage
note is secured by Brier Creek.
Aventine - On February 6,
2014, in conjunction with the acquisition of Aventine (see Note C above) the Company, through its subsidiary, entered into a mortgage
note payable in the amount of $21.0 million, which bears a fixed interest rate of 3.70% and requires monthly payments of interest
only for the initial 60 months and monthly payments of principal and interest thereafter based on a 30-year amortization schedule.
The loan matures on February 10, 2021. The mortgage note is secured by Aventine.
Aston - On January 21, 2014,
in conjunction with the acquisition at Aston (see Note C above) the Company, through its subsidiary, entered into a mortgage note
payable in the amount of $18.6 million, which bears a fixed interest rate of 3.94% and requires monthly payments of interest only
for the term of the loan and a payment of the unpaid principal amount due at maturity on February 10, 2021. The mortgage note
is secured by Aston.
Miller Creek - On January
21, 2014, in conjunction with the acquisition of Miller Creek (see Note C above) the Company, through its subsidiary entered into
a mortgage note payable in the amount of $26.3 million, which bears a fixed rate interest rate of 4.6% and requires monthly payments
of interest only for the initial 36 months and monthly payments of principal and interest thereafter based on a 30-year amortization
schedule. The loan matures on February 10, 2024. The mortgage note is secured by Miller Creek.
Indebtedness Refinancing and Payoffs
2014
On February 11, 2014, the Company, through
a subsidiary, completed the refinancing of Millenia 700 with a mortgage note payable in the amount of $25.0 million with a 7-year
term. The mortgage loan bears a fixed interest rate of 3.83% with monthly payments of interest only for the initial 48 months
and monthly payments of principal and interest thereafter based on a 30-year amortization schedule. The loan matures on March
5, 2021. The mortgage note is secured by Millenia 700. In conjunction with obtaining this loan, the Company repaid the existing
$35.0 million mortgage note payable with the proceeds from the new mortgage note payable and $10.0 million from cash proceeds
from the Rights Offering and the related transactions. In connection with the refinancing of the mortgage indebtedness, the Company
wrote-off of deferred financing costs (net of accumulated amortization) and incurred a prepayment penalty of $0.1 million and
$0.2 million, respectively, which are included in loss of early extinguishment of debt in the condensed consolidated statement
of operations for the six months ended June 30, 2014.
On January 23, 2014, the Company, through
a subsidiary, completed the refinancing of Fountains Southend with a mortgage note payable in the amount of $23.8 million with
a 10-year term. The mortgage loan bears a fixed interest rate of 4.31% with monthly payments of interest only for the initial
36 months and monthly payments of principal and interest thereafter based on a 30-year amortization schedule. The loan matures
on February 5, 2024. The mortgage note is secured by the Fountains Southend property. In conjunction with obtaining this loan,
the Company repaid the $30.0 million interim mortgage note payable with the proceeds from the new mortgage note payable and $6.2
million from cash proceeds from the Rights Offering and the related transactions. In connection with the refinancing of the mortgage
indebtedness, the Company wrote-off deferred financing costs (net of accumulated amortization) and incurred a prepayment penalty
of $0.1 million and $0.3 million, respectively, which are included in loss of early extinguishment of debt in the condensed consolidated
statement of operations for the six months ended June 30, 2014.
On January 21, 2014, the Company, through
a subsidiary, paid in full the indebtedness secured by the Estates at Maitland property in the amount of $4.2 million from the
cash proceeds from the Rights Offering and the related transactions.
On January 17, 2014 the Company, through
a subsidiary, paid in full the BMO Harris Bank N.A. secured revolving credit facility indebtedness secured by the Arbors River
Oaks in the amount of $9.0 million from the cash proceeds from the Rights Offering and the related transactions and the credit
agreement for such facility was terminated. In connection with the payoff of the indebtedness, the Company wrote-off deferred
financing costs (net of accumulated amortization) of $0.2 million, which is included in loss of early extinguishment of debt in
the condensed consolidated statement of operations for the six months ended June 30, 2014.
The following table summarizes the scheduled aggregate required
principal payments of indebtedness as of June 30, 2015:
(in thousands) | |
Amount | |
Remainder of 2015 | |
$ | 759 | |
2016 | |
| 1,900 | |
2017 | |
| 71,572 | |
2018 | |
| 11,367 | |
2019 | |
| 4,174 | |
Thereafter | |
| 269,634 | |
| |
$ | 359,406 | |
The weighted average interest rate on
the indebtedness balance outstanding at both June 30, 2015 and December 31, 2014 was 3.85%. The mortgage notes evidencing the
fixed rate secured indebtedness may be prepaid subject to a prepayment penalty equal to a yield-maintenance premium, defeasance,
or a percentage of the loan balances as defined in the respective loan agreements.
NOTE E – INTANGIBLE ASSETS
The following table provides gross and
net carrying amounts for each major class of intangible assets:
| |
As of June 30, 2015 | | |
As of December 31, 2014 | |
| |
Gross | | |
Accumulated | | |
Net book | | |
Gross | | |
Accumulated | | |
Net book | |
(in thousands) | |
amount | | |
amortization | | |
Value | | |
amount | | |
amortization | | |
Value | |
Intangible assets - in place leases | |
$ | 10,988 | | |
$ | (10,988 | ) | |
$ | - | | |
$ | 10,988 | | |
$ | (10,988 | ) | |
$ | - | |
Intangible assets - property tax abatement | |
| 1,015 | | |
| (575 | ) | |
| 440 | | |
| 1,015 | | |
| (427 | ) | |
| 588 | |
| |
$ | 12,003 | | |
$ | (11,563 | ) | |
$ | 440 | | |
$ | 12,003 | | |
$ | (11,415 | ) | |
$ | 588 | |
Amortization expense related to in-place
leases included in depreciation and amortization expense in the condensed consolidated statements of operations was $1.9 million
and $3.4 million for the three and six months ended June 30, 2014, respectively. The balance of
the remaining unamortized in-place leases was fully amortized during the year ended December 31, 2014. There was no amortization
expense for in-place leases during the three and six months ended June 30, 2015.
Amortization expense pertaining to the
tax abatement intangible asset of approximately $0.1 million and $0.2 million during each of the three months and six months ended
June 30, 2015 and 2014 is included in real estate taxes and insurance in the condensed consolidated statements of operations.
Estimated amortization expense for the
next four years related to the tax abatement intangible asset is as follows:
(in thousands) | |
Amount | |
Remainder of 2015 | |
$ | 126 | |
2016 | |
| 181 | |
2017 | |
| 102 | |
2018 | |
| 31 | |
| |
$ | 440 | |
NOTE F—STOCKHOLDERS’ EQUITY
Common Stock Offerings
On January 16, 2014, the Company completed
the Rights Offering and certain related transactions, which consisted of an offering of 15,797,789
shares of common stock at $6.33 per share to the holders of subscription rights granted to the Company’s existing stockholders
and the related transactions and a concurrent $50 million private placement (the "Private Placement") of shares of common
stock to certain investment entities managed or advised by Senator Investment Group LP (collectively, "Senator") at
$6.33 per share. In addition, Senator agreed to purchase all shares not purchased by holders of rights in the Rights Offering
(the "Backstop Commitment"). Former executives of the Company agreed to purchase an aggregate of approximately $1.8
million of common stock in a private placement concurrently with the closing of the Rights Offering.
In addition, the holders of subscription
rights in the Rights Offering, including these former executives who acquired their entire allotment in a private placement, acquired
an aggregate of 15,565,462 shares for gross proceeds to the Company of approximately $98.5 million, or approximately 98.5% of
the shares available in the Rights Offering. Pursuant to its Backstop Commitment, Senator acquired 232,327 shares of common stock
for gross proceeds to the Company of approximately $1.5 million, or approximately 1.5% of the shares available in the Rights Offering.
Combined with the shares acquired by Senator in the Private Placement and the shares issued to Senator as a fee for Senator's
Backstop Commitment and the Private Placement, Senator owned 9,316,055 shares, representing approximately 25.6% of the 36,350,182
shares of outstanding common stock of the Company after this recapitalization.
Pursuant
to a stockholder agreement entered into with
Senator (the “Stockholders Agreement”), in connection with the Private Placement
and Backstop Commitment, the Company was required to file and cause a registration statement to be declared effective by the SEC
no later than January 16, 2015 (the “Effective Deadline”), the first anniversary of the closing of the Rights Offering.
On December 16, 2014, Senator agreed to extend the Effective Deadline to April 16, 2015. If such registration statement was not
declared effective by April 16, 2015, the Company would have been required to pay Senator a fee, payable in additional shares
of the Company’s common stock (the “Additional Shares”), equal to 0.5% of the aggregate purchase price paid
by Senator for the shares acquired in the Private Placement and Backstop Commitment for each full 30 calendar days (prorated for
periods totaling less than 30 calendar days) thereafter until such registration statement was declared effective, divided by the
average of the volume-weighted average prices of the Company’s common stock over the 10 trading days prior to the issuance
of such shares. On March 19, 2015, the Company filed the Resale Registration Statement with the SEC, which filing was amended
on March 31, 2015 and declared effective on April 2, 2015. Further, Senator
has a right to seek liquidity with respect to shares of common stock that it owns if, on or after the 3.5-year anniversary of
the closing of the Rights Offering (the “Liquidity Right Measurement Date”), the closing price of the Company’s
common stock has not exceeded $10.00 per share (subject to certain adjustments set forth in the Stockholders Agreement) during
any consecutive 10 trading day period during the 180 days prior to the Liquidity Right Measurement Date and Senator continues
to own 4.9% or greater of the Company’s outstanding common stock.
The
Company contributed the net cash proceeds from the sale of 24,881,517 shares of the Company’s common stock offered in the
Rights Offering and the related transactions of approximately $147.1 million after deducting offering expenses of approximately
$2.9 million to the Operating Partnership in exchange for OP Units. The Operating Partnership
used approximately (i) $94.6 million to acquire five communities, (ii) $26.0 million to repay borrowings under the Revolver, (iii)
$16.7 million to pay down, in part, certain indebtedness secured by two communities in conjunction with refinancing, and (iv)
$4.2 million to pay down certain indebtedness secured by land held for development leaving approximately $5.6 million for working
capital and general corporate purposes.
Dividends Declared
The following table summarizes the dividends
declared and/or paid by the Company during the six months ended June 30, 2015:
| |
Dividends Per | | |
Total | | |
| |
|
| |
Share of Common | | |
Dividend declared | | |
Dividend | |
Dividend |
| |
Stock/OP Units | | |
(in thousands) | | |
Declared Date | |
Payable Date |
2015 | |
| | | |
| | | |
| |
|
Second Quarter | |
$ | 0.095 | | |
$ | 3,719 | | |
June 2, 2015 | |
July 15, 2015 |
First Quarter | |
$ | 0.095 | | |
$ | 3,709 | | |
February 23, 2015 | |
April 15, 2015 |
| |
| | | |
| | | |
| |
|
2014 | |
| | | |
| | | |
| |
|
Fourth Quarter | |
$ | 0.095 | | |
$ | 3,709 | | |
November 19, 2014 | |
January 15, 2015 |
There were no dividends in arrears as
of June 30, 2015.
OP Units and Contingent B Units
The following table presents the Company’s issued and
outstanding OP Units in the condensed consolidated balance sheets as of June 30, 2015 and December 31, 2014:
| |
Optional | |
| | |
| | |
| |
| |
Redemption | |
Annual | | |
As of | | |
As of | |
(in thousands, except share amounts) | |
Date | |
Dividend | | |
June 30, 2015 | | |
December 31, 2014 | |
| |
| |
| | |
| | |
| |
OP Units, 2,343,500 units outstanding at both June 30, 2015 and December 31, 2014, (2) | |
February 23, 2015 | |
| (1 | ) | |
$ | 14,630 | | |
$ | 15,319 | |
| (1) | Dividend per OP Unit is the same as
the dividend per share on the Company’s common stock. |
| (2) | On February 23, 2014, 210,915 Class
B contingent units were converted into 2,343,500 OP Units. |
On February 23, 2014, Amendment No. 1
to the Second Amended and Restated Agreement of Limited Partnership of Trade Street Operating Partnership, LP converted all of
the 210,915 Class B contingent units into 2,343,500 OP Units. The conversion of Class B contingent units into the OP Units was
accounted for as an extinguishment that increased additional paid-in capital and noncontrolling interest by approximately $1.9
million and $0.5 million, respectively, during the six months ended June 30, 2014. The OP Units were redeemable after February
23, 2015, at the Company’s option, for cash or shares of the Company’s common stock on a one-for-one basis.
Class A Preferred Stock
The Company has authorized 423,326 shares
of preferred stock. In October 2014, the Company redeemed the issued and outstanding shares of Class A preferred stock as discussed
in Note J.
The Class A preferred stock ranked senior
in preference to the Company’s common stock with respect to the payment of dividends and the distribution of assets in the
event of liquidation, dissolution or winding up of the Company (but excluding a merger, change of control, sale of substantially
all assets or bankruptcy of the Company, upon the occurrence of any of which all shares of Class A preferred stock would be automatically
converted). The Class A preferred stock ranked junior to any class or series of stock which specifically provided that the holders
thereof were entitled to receive dividends or amounts distributable upon liquidation, dissolution or winding up of the Company
in preference or priority to the holders of shares of Class A preferred stock. The Class A preferred stock ranked on parity with
any class or series of stock which specifically provided that the holders thereof were entitled to receive dividends or amounts
distributable upon liquidation, dissolution or winding up of the Company without preference or priority of one over the other.
The Class A preferred stock had no voting rights except in certain limited instances.
As of June 30, 2015 and December 31, 2014, there were no shares
of the Class A preferred stock issued or outstanding.
NOTE G –STOCK-BASED COMPENSATION AND MANAGEMENT TRANSITION
EXPENSES
Stock-based Compensation: On January
24, 2013, the Company’s stockholders approved the Trade Street Residential, Inc. 2013 Equity Incentive Plan (as amended,
the “2013 EIP”), which is intended to attract and retain independent directors, executive officers and other key employees
and individual service providers, including officers and employees of the Company’s affiliates. On May 15, 2014, the Company’s
stockholders approved an amendment to the 2013 EIP, which increased the shares of the Company’s common stock available for
issuance under the EIP by 2,500,000 shares to a new total of 2,881,206 shares. The shares can be issued as restricted stock awards
(“RSAs”), stock appreciation rights (“SARs”), performance units, incentive awards and other equity-based
awards.
On April 30, 2015, the Company issued
an aggregate of 110,639 RSAs pursuant to the 2013 EIP which were subject to (i) vesting over a period of four years and (ii) the
employees’ and directors’ continued service to the Company. In addition, on May 16, 2014, the Company issued an aggregate
of 174,310 RSAs, of which 5,283 were issued, vested and unrestricted and 169,027 were issued subject to (i) vesting over a period
of four years and (ii) the employees’ and directors’ continued service with the Company. RSAs
are entitled to receive any dividends paid by the Company on those shares during the vesting period.
Compensation expense associated with RSAs
was based on the 20-day trailing volume weighted average price, net of estimated forfeitures, for the April 2015 RSAs grant and
the market price of the shares on the date of the grant for previous RSAs grants, net of estimated forfeitures, and is amortized
on a straight-line basis over the applicable vesting period (generally four years). The forfeiture rate is revised, as necessary,
in subsequent periods if actual forfeiture experience exceeds prior expectations. As of June 30, 2015, the weighted-average forfeiture
rate for the three grants under the 2013 EIP was 3.2%. Compensation expense associated with RSAs was $0.1 million and $0.2 million
for each of the three and six months ended June 30, 2015 and 2014, respectively, and is recorded in general and administrative
expense in the condensed consolidated statement of operations.
During the six months ended June 30, 2014,
a total of 78,488 shares vested in connection with the resignation of a former executive officer and certain other members of
management, which was treated as a modification of stock based awards, resulting in additional cost of $0.5 million that is included
in management transition expenses in the condensed consolidated statement of operations for the six months ended June 30, 2014.
As of June 30, 2015, there was approximately
$1.6 million of unrecognized compensation cost related to non-vested RSAs granted under the 2013 EIP. This cost is expected to
be recognized over a period of approximately 2.9 years.
Following is a summary of the RSAs granted,
vested and forfeited to participants with the related weighted average grant value. Of the shares that vested during the six months
ended June 30, 2015 and 2014, the Company withheld 8,028 and 30,381 shares, respectively, to satisfy the tax obligations for those
participants who elected this option, as permitted under the 2013 EIP.
| |
Six Months Ended | |
| |
June 30, 2015 | | |
June 30, 2014 | |
| |
| | |
Weighted | | |
| | |
Weighted | |
| |
| | |
Average | | |
| | |
Average | |
| |
Shares | | |
Grant Value | | |
Shares | | |
Grant Value | |
Unvested shares, beginning of period | |
| 179,927 | | |
$ | 7.85 | | |
| 243,011 | | |
$ | 9.80 | |
Granted | |
| 110,639 | | |
| 7.14 | | |
| 174,310 | | |
| 7.26 | |
Vested | |
| (49,796 | ) | |
| 7.97 | | |
| (118,857 | ) | |
| 8.33 | |
Forfeited | |
| (1,510 | ) | |
| 9.80 | | |
| (27,546 | ) | |
| 9.80 | |
Unvested shares, end of period | |
| 239,260 | | |
$ | 7.48 | | |
| 270,918 | | |
$ | 8.22 | |
Management Transition Expenses:
Pursuant to the terms of a Separation Agreement and Release (the "Baumann Separation Agreement"), effective February
23, 2014, between Michael D. Baumann and the Company, Mr. Baumann resigned his employment as Chief Executive Officer of the Company
and as Chairman and a member of the Company's Board of Directors. In consideration of a mutual release of claims against the Company
and other related parties, and certain other agreements and covenants, Mr. Baumann received payments totaling approximately $2.4
million pursuant to the terms of the Separation Agreement. In addition, the Separation Agreement provided for the accelerated
vesting of 54,338 shares of unvested restricted stock and Mr. Baumann surrendered 14,373 shares to cover tax withholding obligations
applicable to the vesting of the shares. The agreement also provided for the conversion of 210,915 Class B contingent units held
by Mr. Baumann into 2,343,500 OP Units, which resulted in a non-cash compensation expense of $2.5 million that has been included
in management transition expenses in the condensed consolidated statement of operations for the six months ended June 30, 2014.
Pursuant
to the terms of a Separation Agreement and Release (the "Levin Separation Agreement"), effective
March 18, 2014, between the Company and David Levin, Mr. Levin resigned his employment as President and as Vice Chairman
and a member of the Company’s Board of Directors. In consideration of a mutual release of claims against the Company and
other related parties, and certain other agreements and covenants, pursuant to the terms of the Levin Separation Agreement, Mr.
Levin received approximately 375,000 fully vested shares of common stock in a private placement, of which he surrendered 102,563
shares to cover tax withholding obligations applicable to the issuance of the shares. This resulted in a non-cash stock
based compensation expense of $2.8 million which is included in management transition expenses in the condensed consolidated statement
of operations for the six months ended June 30, 2014.
During the three and six months ended
June 30, 2014, certain other members of management resigned and received cash payments totaling $0.2 million and $0.5 million,
respectively, as well as accelerated vesting of an aggregate of 24,140 share of unvested restricted stock that was reduced by
an aggregate of 6,491 shares to cover tax withholding obligations applicable to the vesting of the shares.
The
Company also incurred legal and certain other expenses related to this management transition of $0.1 million and $0.6 million
for the three and six months ended June 30, 2014, respectively.
As
a result of the above, the Company recognized total expense of $0.3 million and $9.3 million for the three and six months
ended June 30, 2014, respectively, which is included as management transition
expenses in the accompanying condensed consolidated statements of operations.
NOTE H – COMMITMENTS AND CONTINGENCIES
Merger Agreement: In the event
that (i) the Company terminates the Merger Agreement to enter into a definitive agreement with a superior company proposal, (ii)
the Company or IRT terminate the Merger Agreement for failure to close by October 15, 2015, (iii) the Company or IRT terminates
the Merger Agreement because the Company fails to obtain stockholder approval if prior to termination of the Merger Agreement,
subject to certain conditions, a Company takeover proposal is announced and has not been publicly withdrawn prior to the termination
of the Merger Agreement, or (iv) the Company or IRT terminates the Merger Agreement after the Company’s Board of Directors
withdraws or materially modifies its recommendation of the Merger and within 12 months following termination of the Merger Agreement
the Company either consummates a transaction or enters into a definitive agreement with respect to a Company takeover proposal,
the Company could become obligated for payment to IRT of (i) a $12.0 million termination fee and (ii) reimbursement of 100% of
IRT Merger expenses up to $2.5 million and 50% of IRT Merger expenses exceeding $2.5 million provided that the aggregate reimbursement
shall not exceed $5.0 million.
In the event that (i) the Company or IRT
terminates the Merger Agreement because the Merger has not closed by October 15, 2015 and the Company shall have obtained stockholder
approval and satisfied all of its other closing conditions and IRT is unable to close because of a failure to obtain financing,
or (ii) the Company or IRT terminate the Merger Agreement because the Merger has not closed by October 15, 2015 (as may be extended
to December 31, 2015) and the only closing conditions not satisfied are certain loan amendments, IRT could become obligated to
pay a $25.0 million reverse termination fee to the Company.
Legal Proceedings: The Company may from time to time
be involved in legal proceedings arising from the normal course of business. Other than routine litigation arising out of the
ordinary course of business, the Company is not presently subject to any litigation nor, to the
Company’s knowledge, is any litigation threatened against the Company.
On June 11, 2015, a complaint was filed
naming the Company and the members of the Company’s Board of Directors as defendants in the Circuit Court of Maryland for
Baltimore City. On July 15, 2015, plaintiffs amended their complaint and added Senator, Monarch Alternative Capital, LP (“Monarch”)
and BHR Capital LLC (“BHR”) as defendants. The amended complaint purports to assert class action claims alleging
that the members of the Company’s Board breached their fiduciary duties to the Company and the Company’s minority
stockholders by approving the Merger for inadequate consideration, that the process leading up to the Merger was flawed, and that
three directors of the Company, by virtue of their affiliations with certain stockholders of the Company, engaged in an alleged
self-interested scheme to force the sale of the Company. The amended complaint alleges that the stockholder defendants aided and
abetted these alleged violations and were unjustly enriched by the merger. Among other relief, the complaint seeks a finding
that the individual director defendants are liable for breaching their fiduciary duties; an order requiring that the directors
affiliated with the stockholder defendants disgorge all profits, compensation and other benefits obtained by them as a result
of their conduct in connection with the Merger; and an award of plaintiffs’ costs and disbursements of this action, including
attorney’s fees. The amended complaint does not seek an injunction against the shareholder vote or the closing of the transaction.
The deadline for an answer or other responsive pleading by the defendants has not yet passed. The Company and the director
defendants intend to vigorously defend against the claim and believe the probability of an unfavorable outcome as less than probable.
However, the Company cannot give any assurance as to the legal or financial outcome of this defense.
Due to the nature of the 2012 Recapitalization,
as described in Note A, the Company could find itself subject to a legal claim or proceeding associated with the previous business
operations of the Predecessor. On February 13, 2015, the Company completed the settlement of a claim involving disputed charges
on property previously owned by the Predecessor in the amount of approximately $0.7 million. The charge associated with
this settlement was included in accounts payable and accrued expenses in the Company’s consolidated balance sheet as of
December 31, 2014.
Due to the nature of the Company’s
operations, it is possible that the Company’s existing properties have or properties that the Company will acquire in the
future have asbestos or other environmental related liabilities.
Other Contingencies: In the ordinary
course of business, the Company issues letters of intent indicating a willingness to negotiate for acquisitions, dispositions,
or joint ventures and also enter into arrangements contemplating various transactions. Such letters of intent and other arrangements
are typically non-binding as to either party unless and until a definitive contract is entered into by the parties. Even if definitive
contracts relating to the purchase or sale of real property are entered into, these contracts generally provide the purchaser
with time to evaluate the property and conduct due diligence, during which periods the purchaser will have the ability to terminate
the contracts without penalty or forfeiture of any deposit or earnest money. There can be no assurance definitive contracts will
be entered into with respect to any matter covered by letters of intent or the Company will consummate any transaction contemplated
by any definitive contract. Furthermore, due diligence periods for real property are frequently extended as needed. An acquisition
or sale of real property generally becomes probable at the time the due diligence period expires and the definitive contract has
not been terminated. The Company is then at risk under a real property acquisition contract unless the agreement provides for
a right of termination, but generally only to the extent of any earnest money deposits associated with the contract, and are obligated
to sell under a real property sales contract. As of June 30, 2015 and December 31, 2014, the Company had non-refundable earnest
money deposits of approximately $0 million and $0.2 million, respectively, included in prepaid expenses and other assets in the
accompanying balance sheets.
NOTE I —INCOME TAXES
The Company has maintained and intends
to maintain its election as a REIT under the Internal Revenue Code of 1986, as amended. In order for the Company to continue to
qualify as a REIT it must meet a number of organizational and operational requirements, including a requirement to distribute
annual dividends to its stockholders equal to a minimum of 90% of its REIT taxable income, computed without regard to the dividends
paid deduction and its net capital gains. As a REIT, the Company generally will not be subject to federal income tax on its taxable
income at the corporate level to the extent such income is distributed to its stockholders annually. If taxable income exceeds
dividends in a tax year, REIT tax rules allow the Company to designate dividends from the subsequent tax year in order to avoid
current taxation on undistributed income. If the Company fails to qualify as a REIT in any taxable year, it will be subject to
federal and state income taxes at regular corporate rates, including any applicable alternative minimum tax. In addition, the
Company may not be able to re-qualify as a REIT for the four subsequent taxable years. Historically, the Company has incurred
only non-income based state and local taxes. The Operating Partnership is a flow through entity and is not subject to federal
income taxes at the entity level.
The Company has provided for non-income
based state and local taxes in the consolidated statement of operations for all periods presented. Prior to June 1, 2012, the
Company operated solely through partnerships that were flow-through entities and were not subject to federal income taxes at the
entity level. Other tax expense has been recognized related to entity level state and local taxes on certain ventures. The Company
accounts for the uncertainty in income taxes in accordance with GAAP, which requires recognition in the financial statements of
a tax position only after determining that the relevant tax authority would more likely than not sustain the position following
a tax audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is
the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant
tax authority. The Company has applied this guidance to its tax positions for the six months ended June 30, 2015. The Company
has no material unrecognized tax benefits and no adjustments to its financial position, results of operations or cash flows were
required. The Company recognizes accrued interest and penalties related to uncertain tax positions, if any, as income tax expense.
For certain entities that are part of
the Company, tax returns are open for examination by federal and state tax jurisdictions for the years 2012 through 2014. Because
many types of transactions are susceptible to varying interpretations under federal and state income tax laws, the amounts reported
in the accompanying consolidated financial statements may be subject to change at a later date upon final determination by the
respective taxing authorities. No such examination is presently in progress.
NOTE J – REAL ESTATE ASSETS HELD
FOR SALE AND DISPOSITIONS
The Company considers a real estate property
to be held for sale when it meets the criteria established under ASC 360, Property, Plant and Equipment, including when
it is probable that the property will be sold within a year. Real estate properties held for sale are reported at the
lower of the carrying amount or fair value less estimated costs to sell and are not depreciated while they are held for sale.
In April 2014, the FASB issued Accounting Standards Update
(ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity, which amends the requirements for reporting discontinued
operations. Under ASU 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be
reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an
entity's operations and financial results when the component or group of components meets the criteria to be classified as held
for sale or when the component or group of components is disposed of by sale or other than by sale. In addition, this ASU requires
additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity
that does not qualify for discontinued operations presentation in the financial statements. The Company adopted the provisions
of ASU 2014-08 effective January 1, 2014 and applied the provisions prospectively.
Real estate assets held for sale as of June 30, 2015
and December 31, 2014
The Company’s real estate assets held for sale as of
June 30, 2015 and December 31, 2014 included the following:
Property Name |
|
Location |
|
Date Sold |
Land Investments |
|
|
|
|
Midlothian Town Center – East (“Midlothian”) |
|
Midlothian, Virginia |
|
Held for sale |
The real estate assets held for sale and the other assets related
to real estate assets held for sale as of June 30, 2015 and December 31, 2014 were as follows:
(in thousands) | |
June 30, 2015 | | |
December 31, 2014 | |
Real estate assets held for sale | |
$ | 2,702 | | |
$ | 3,492 | |
Other assets, primarily restricted cash | |
| 549 | | |
| 549 | |
Total assets - real estate assets held for sale | |
$ | 3,251 | | |
$ | 4,041 | |
Contract for Sale – Midlothian
Land Parcel
On October 7, 2014, the Company entered
into a non-binding purchase and sale agreement (“PSA”) with a third party to purchase the Company’s undivided
interest in the Midlothian land parcel for $3.6 million. On June 18, 2015, the Company amended the terms of the PSA with the third
party, reducing the sale price to $3.4 million and assigning all its rights, title and interest in the escrow funds to the third
party purchaser. This sale is expected to close on or before October 15, 2015.
As a result of the modified terms of the PSA, the Company recorded
a $0.8 million impairment charge during the three and six months ended June 30, 2015. For the three and six months ended June
30 2014, the Company did not recognize any impairment charges related to its real estate assets held for sale.
Real estate assets held for sale or sold subsequent to
January 1, 2014
The Company’s real estate assets sold subsequent to January
1, 2014 include the following:
Property Name |
|
Location |
|
Date Sold or Disposed |
Operating Property |
|
|
|
|
Post Oak |
|
Louisville, Kentucky |
|
July 11, 2014 |
|
|
|
|
|
Land Investments |
|
|
|
|
Venetian |
|
Fort Myers, Florida |
|
October 17, 2014 |
The Estates at Maitland (“Maitland”) |
|
Maitland, Florida |
|
October 17, 2014 |
Millenia Phase II (“Millenia II”) |
|
Orlando, Florida |
|
October 17, 2014 |
Sunnyside |
|
Panama City, Florida |
|
October 17, 2014 |
Operating Property
In May 2014, the Company committed to
a plan to actively market the Post Oak operating property and on July 11, 2014, the Company completed that sale. The net cash
proceeds were approximately $7.8 million and the Company recognized a gain of approximately $0.4 million.
Land Investments
During the six months ended June 30, 2014,
the Company committed to a plan to actively market for sale the Venetian, Midlothian and Maitland Land Investments. Also, in March
2014, upon completion of foreclosure proceedings, the Company committed to a plan to actively market for sale the Sunnyside Land
Investment (see also Note A).
On October 17, 2014, the Company executed
and closed on an agreement with the holders of the Class A preferred stock to redeem all 309,130 shares outstanding in exchange
for the transfer of title to all of the Company’s Land Investments except for the Midlothian Land Investment, in which the
Company retained all rights and interests, plus a cash payment of $5.0 million.
The Company’s loss from real estate assets held for sale
or disposition which is included in net loss on the condensed consolidated statements of operations for the three and six months
ended June 30, 2015 and 2014 is as follows:
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
(in thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Total property revenues | |
$ | - | | |
$ | 298 | | |
$ | - | | |
$ | 592 | |
Total expenses | |
| (7 | ) | |
| (272 | ) | |
| (13 | ) | |
| (776 | ) |
Impairment associated with land holdings | |
| (790 | ) | |
| - | | |
| (790 | ) | |
| - | |
Income (loss) from real estate assets held for sale or disposition | |
$ | (797 | ) | |
$ | 26 | | |
$ | (803 | ) | |
$ | (184 | ) |
There were no real estate assets disposed
of during the six months ended June 30, 2015.
NOTE K – SUBSQUENT EVENTS
None – other than the amended complaint
filed on July 15, 2015 as described in “Note H – Commitments and Contingencies – Legal Proceedings”.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS.
The following discussion analyzes the
financial condition and results of operations of Trade Street Residential, Inc. (“TSRE”) and Trade Street Operating
Partnership, LP (“TSOP”). A wholly owned subsidiary of TSRE, Trade Street OP GP, LLC is the sole general partner of
TSOP. As of June 30, 2015, TSRE owned a 94.0% limited partner interest in TSOP. TSRE conducts all of its business and owns all
of its properties through TSOP and TSOP’s various subsidiaries. Except as otherwise required by the context, the “Company,”
“Trade Street,” “we,” “us” and “our” refer to TSRE and TSOP together, as well
as TSOP’s subsidiaries.
FORWARD-LOOKING STATEMENTS
Certain information
presented in this Quarterly Report on Form 10-Q constitutes “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). Although we believe that the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, our business, financial condition, liquidity, results of operations, funds from
operations and prospects could differ materially from those set forth in the forward-looking statements. Certain factors that
might cause such a material difference include the following: changes in general economic conditions, changes in real estate market
conditions in general and within our specific submarkets, continued availability of debt or equity capital to finance acquisitions,
our ability to locate suitable tenants for our properties, the ability of tenants to make payments under their respective leases,
the timing of acquisitions, and sales of properties, the ability to meet development schedules and other risks, uncertainties
and assumptions. Any forward-looking statement speaks only as of the date of this Quarterly Report on Form 10-Q, and we undertake
no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events
or changes to future operating results over time.
Except as required
by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. We caution investors not to place undue reliance on these forward-looking statements and urge investors
to carefully review the disclosures we make concerning risks and uncertainties in the section entitled “Risk Factors”
within our Annual Report on Form 10-K for the year ended December 31, 2014, which is accessible on the Securities and Exchange
Commission (the “SEC”) website at www.sec.gov, as well as risks, uncertainties and other factors discussed in this
Quarterly Report on Form 10-Q and identified in other documents filed by us with the SEC.
Overview
of Our Company
We
are a vertically integrated and self-managed real estate investment trust (“REIT”), focused on acquiring, owning,
operating and managing high-quality, conveniently-located apartment communities in mid-sized cities and suburban submarkets of
larger cities primarily in the southeastern United States and Texas. We currently have approximately 140 full-time employees who
provide property management, maintenance, landscaping, administrative and accounting services for the properties we own. We elected
to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2004.
We
seek to own and operate apartment communities in cities that have:
| • | a
stable work force comprised of a large number of “echo boomers” augmented
by positive net population migration; |
| • | well-paying
jobs provided by a diverse mix of employers across the education, government, healthcare,
insurance, manufacturing and tourist sectors; |
| • | a
favorable cost of living; |
| • | reduced
competition from larger multifamily REITs and large institutional real estate investors
who tend to focus on select coastal and gateway markets; and |
| • | a
limited supply of new housing and new apartment construction. |
We
recognize that economic conditions could deteriorate and that the current economic recovery may not be sustainable. However, with
the growth in multi-family supply expected to continue below historical averages for the next few years and with employment in
our markets steady or increasing, we do not anticipate any significant slowdown in the multi-family sector.
Merger with Independence Realty Trust, Inc.
On May 11, 2015,
we announced that, after conducting a thorough review of strategic alternatives, TSRE and the Operating Partnership entered into
a definitive agreement (the “Merger Agreement”) with Independence Realty Trust, Inc., a Maryland corporation (“IRT”),
Independence Realty Operating Partnership, LP, a Delaware limited partnership and a subsidiary of IRT (“IRT OP”),
IRT Limited Partner, LLC, a Delaware limited liability company and a wholly-owned subsidiary of IRT (“IRT LP LLC”),
and Adventure Merger Sub LLC, a Delaware limited liability company and a wholly-owned subsidiary of IRT OP (“OP Merger Sub”),
pursuant to which OP Merger Sub will be merged with and into the Operating Partnership, with the Operating Partnership surviving
as a wholly owned subsidiary of IRT OP (the “Partnership Merger”), and TSRE will be merged with and into IRT LP LLC,
with IRT LP LLC surviving as a wholly-owned subsidiary of IRT (the “Company Merger” and collectively with the Partnership
Merger, the “Merger”).
At the effective
time of the Company Merger and in accordance with the Merger Agreement, each share of our common stock issued and outstanding
immediately prior to the effective time of the Company Merger shall be converted automatically into the right to receive, subject
to certain adjustments, (i) an amount in cash equal to $3.80 (provided that IRT may elect prior to the closing of the Merger to
increase the per share cash amount up to $4.56) (such cash amount, the “Per Share Cash Amount”), and (ii) a number
of shares of IRT’s common stock equal to the quotient determined by dividing (a) $7.60 less the Per Share Cash Amount, by
(b) $9.25, and rounding the result to the nearest 1/10,000 (the “Exchange Ratio”). At the effective time of the Partnership
Merger, each OP Unit, issued and outstanding immediately prior to the effective time of the Partnership Merger and owned by a
party other than us or one of its subsidiaries will be converted automatically into the right to receive (i) an amount in cash
equal to the Per Share Cash Amount, and (ii) a number of common units of limited partnership interest in IRT OP equal to the Exchange
Ratio.
The transaction has
been approved by our Board of Directors. Completion of the transaction, which is currently expected to occur in the third
quarter of 2015, is contingent upon customary closing conditions and (i) the approval of the Merger by the affirmative vote of
the our stockholders, who will vote on the Company Merger at a special meeting to be held on September 15, 2015, and (ii) the
approval of the issuance of shares of IRT common stock in connection with the Merger by the affirmative vote of a majority of
the votes cast by holders of IRT’s common stock entitled to vote on the matter. The transaction is not contingent upon receipt
of financing by IRT. However, we can provide no assurances that this transaction will close, or if it closes, that it will close
in the timeframe or on the terms described herein. More information on the terms of the Merger was included in a Current Report
on Form 8-K filed by the Company with the SEC on May 11, 2015.
Emerging Growth Company
We are an “emerging
growth company” under the federal securities laws and, as such, we have elected to provide reduced public company reporting
requirements in this and in future filings. In addition, Section 107 of the JOBS Act also provides that an “emerging growth
company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying
with accounting standards newly issued or revised after April 5, 2012. In other words, an “emerging growth company”
can delay the adoption of accounting standards until those standards would otherwise apply to private companies.
Our Properties
As of June 30, 2015,
our portfolio primarily consisted of an aggregate of 4,989 apartment units located in 19 wholly-owned properties as detailed in
the following table:
| |
| |
| |
| |
| | |
Average | | |
Average | |
| |
| |
Year Built | |
Date | |
Number of | | |
Unit Size | | |
Physical | |
Property
Name | |
Location | |
Renovated
(1) | |
Acquired | |
Units | | |
(Sq.
Ft.) | | |
Occupancy
(2) | |
| |
| |
| |
| |
| | |
| | |
| |
The Pointe at Canyon Ridge (3) | |
Sandy Springs, GA | |
1986/2007 | |
09/18/08 | |
| 494 | | |
| 920 | | |
| 96.5 | % |
Arbors River Oaks | |
Memphis, TN | |
1990/2010 | |
06/09/10 | |
| 191 | | |
| 1,136 | | |
| 97.2 | % |
Lakeshore on the Hill | |
Chattanooga, TN | |
1969/2005 | |
12/14/10 | |
| 123 | | |
| 1,168 | | |
| 96.2 | % |
The Trails of Signal Mountain | |
Chattanooga, TN | |
1975 | |
05/26/11 | |
| 172 | | |
| 1,185 | | |
| 97.2 | % |
Vue at Knoll Trail Apartments (4) | |
Addison, TX | |
1991/2007 | |
10/31/11 | |
| 114 | | |
| 653 | | |
| 97.0 | % |
Fox Trails | |
Plano, TX | |
1981 | |
12/06/11 | |
| 286 | | |
| 960 | | |
| 96.1 | % |
Millenia 700 | |
Orlando, FL | |
2012 | |
12/03/12 | |
| 297 | | |
| 952 | | |
| 97.6 | % |
Westmont Commons | |
Asheville, NC | |
2003/2008 | |
12/12/12 | |
| 252 | | |
| 1,009 | | |
| 97.2 | % |
Bridge Pointe | |
Huntsville, AL | |
2002 | |
03/04/13 | |
| 178 | | |
| 1,047 | | |
| 96.0 | % |
St. James at Goose Creek | |
Goose Creek, SC | |
2009 | |
05/16/13 | |
| 244 | | |
| 976 | | |
| 95.5 | % |
Creekstone at RTP | |
Durham, NC | |
2013 | |
05/17/13 | |
| 256 | | |
| 1,043 | | |
| 96.1 | % |
Talison Row at Daniel Island | |
Charleston, SC | |
2013 | |
08/26/13 | |
| 274 | | |
| 989 | | |
| 95.3 | % |
Fountains Southend | |
Charlotte, NC | |
2013 | |
09/24/13 | |
| 208 | | |
| 844 | | |
| 96.8 | % |
Aston (5) | |
Wake Forest, NC | |
2013 | |
01/21/14 | |
| 288 | | |
| 1,047 | | |
| 92.3 | % |
Miller Creek at Germantown | |
Memphis, TN | |
2012/2013 | |
01/21/14 | |
| 330 | | |
| 1,049 | | |
| 97.9 | % |
The Aventine Greenville | |
Greenville, SC | |
2013 | |
02/06/14 | |
| 346 | | |
| 961 | | |
| 93.7 | % |
Waterstone at Brier Creek | |
Raleigh, NC | |
2013/2014 | |
03/10/14 | |
| 232 | | |
| 1,137 | | |
| 96.0 | % |
Avenues at Craig Ranch | |
McKinney, TX | |
2013 | |
03/18/14 | |
| 334 | | |
| 1,006 | | |
| 93.9 | % |
Waterstone at Big Creek (6) | |
Alpharetta, GA | |
2013/2015 | |
04/07/14 | |
| 370 | | |
| 1,143 | | |
| 78.8 | % |
Total / Weighted Average | |
| |
| |
| |
| 4,989 | | |
| 1,011 | | |
| 94.6 | % |
| (1) | The extent of the
renovations included within the term “renovated” depends on the individual
apartment community, but “renovated” generally refers to the replacement
of siding, roof, wood, windows or boilers, updating of gutter systems, renovation of
leasing centers and interior rehabilitation, including updated appliances, countertops,
vinyl plank flooring, fixtures, fans and lighting, or some combination thereof. |
| (2) | Average physical occupancy
for the three months ended June 30, 2015 represents the average occupancy of the total
number of units occupied at each apartment community during the period divided by the
total number of units at each apartment community. |
| (3) | On November 22, 2014,
a 20-unit building at this community was destroyed by fire. We maintain insurance coverage
on all of our properties and subsequently filed an insurance claim that is expected to
cover the re-construction cost of this building, less our loss deductible, as well as
loss of rents under a business interruption provision in the applicable insurance policy.
Accordingly, for the six months ended June 30, 2015, a recovery of lost rents relating
to the 20 impacted units was recorded as additional rental income for this property.
We anticipate that re-construction of this 20-unit building will be completed by the
end of 2015. |
| (4) | Formerly known as
Mercé Apartments. |
| (5) | Formerly known as
The Estates at Wake Forest. |
| (6) | On March 26, 2015,
we completed the acquisition of the second phase of our Waterstone at Big Creek community.
This second phase was comprised of 100 vacant units within three recently-constructed
residential buildings on an adjacent land parcel. These units had an average physical
occupancy of 33.3% for the three months ended June 30, 2015. As of June 30, 2015, these
phase two units had a physical occupancy rate of 72.0%. |
For the three months
ended June 30, 2015, the weighted average monthly rent and monthly effective rent per occupied unit for operating properties was
$1,053 and $1,041, respectively. Average monthly rent is market rent after “loss to lease” and concessions but before
vacancy, discounted employee units, model units, and bad debt during the period. Effective rent per occupied unit is equal to
the average of gross monthly rent minus any leasing discounts offered for each month during the period divided by the total number
of occupied units each month during the period. Discounts include concessions, discounted employee units and model units. Operating
properties acquired during the period are not included in these per unit results.
Our Land Investments
consist of the parcels described in the table below.
Property Name | |
Location | |
Potential Use | |
Acreage | |
Midlothian (1) | |
Midlothian, VA | |
Apartments | |
| 8.4 | |
| (1) | On October 7, 2014,
the Company entered into a non-binding purchase and sale agreement (“PSA”)
with a third party to purchase the Company’s undivided interest in the Midlothian
land parcel for $3.6 million. On June 18, 2015, the Company amended the terms of the
PSA with the third party, reducing the sale price to $3.4 million and assigning all its
rights, title and interest in the escrow funds to the third party purchaser. This sale
is expected to close on or before October 15, 2015. As a result of the modified terms
of the PSA, the Company recorded a $0.8 million impairment charge during the three and
six months ended June 30, 2015. For the three and six months ended June 30 2014, the
Company did not recognize any impairment charges related to its real estate assets held
for sale. |
Summary Results of Operations
The following discussion
of results of operations for the three and six months ended June 30, 2015 and 2014 should
be read in conjunction with the Condensed Consolidated Statements of Operations of the Company and the related notes thereto included
in Item 1 of this Form 10-Q.
Throughout this
section, we have provided certain information on a “same store” property basis. We define “same store”
properties as properties that were owned and stabilized since January 1, 2014 through June 30,
2015. For newly constructed or lease-up properties or properties undergoing significant redevelopment, we consider a property
stabilized at the earlier of (i) attainment of 90% physical occupancy or (ii) the one-year anniversary of completion of development
or redevelopment. For comparison of the three and six months ended June 30 2015, and 2014, the same store properties included
operating properties owned since January 1, 2014, excluding operating properties disposed of during the six months ended June
30, 2015 and 2014 (see below). No operating properties owned since January 1, 2014 were under construction or undergoing
redevelopment and, as a result, no operating properties owned since January 1, 2014 were excluded from the same store portfolio.
For the three months
ended June 30, 2015, we reported net loss attributable to common stockholders of ($3.4) million,
compared with net loss attributable to common stockholders of ($4.0) million for the prior year period. For the six months ended
June 30, 2015, we reported net loss attributable to common stockholders of ($3.8) million,
compared with net loss attributable to common stockholders of ($19.2) million in the prior year period.
The principal factors
that impacted our results from continuing operations for the three months ended June 30, 2015 as compared to the same period of
the prior year were:
| · | Increases
in same-store revenues of $0.5 million, or 5.9%, and net operating income of $0.6 million,
or 11.3%; |
| · | Increases
in revenue and net operating income of $1.4 million and $1.1 million, respectively, from
the six operating properties acquired since January 2014; |
| · | Increases
in recapitalization expenses associated with financial advisory and legal costs incurred
in support of our planned merger with IRT of $3.1 million; |
| · | The
current year period includes a $0.8 million charge for impairment of our real estate
assets held for sale; |
| · | A
decrease in management transition expenses of approximately $0.3 million related to reduced
personnel expenses due to the transition of management during the prior year; |
| · | A
decrease of $1.7 million in depreciation and amortization expense primarily due to the
absence of in-place amortization expense as recognized in the prior year from the six
operating properties acquired since January 2014; and |
| · | A
decrease of $0.7 million in general and administrative expenses. |
In addition to the factors described above,
the principal factors that impacted our results from continuing operations for the six months ended June 30, 2015 included:
| · | Increases
in same-store revenues of $0.9 million, or 4.8%, and net operating income of $1.0 million,
or 10.1%; |
| · | Increases
in revenue and net operating income of $5.5 million and $4.0 million, respectively, from
the six operating properties acquired since January 2014; |
| · | Increases
in recapitalization expenses associated with financial advisory and legal costs incurred
in support of our planned merger with IRT of $3.2 million; |
| · | The
current year period includes $0.8 million charge for impairment of our real estate assets
held for sale; |
| · | A
decrease in management transition expenses of approximately $9.3 million related to the
resignation of certain executive officers and other members of management during the
six months ended June 30, 2014; |
| · | A
decrease of $2.6 million in depreciation and amortization expense primarily due to no
in-place amortization expense recognized in the current year from the six operating properties
acquired since January 2014; |
| · | A
decrease of $1.5 million in acquisitions costs due to only one acquisition taking place
in 2015; |
| · | A
decrease of $0.7 million in general and administrative expenses; and |
| · | The
prior year period also included a $1.6 million in loss on early extinguishment from debt
associated with refinancing of certain operating properties. There was no similar loss
recognized in the current year. |
RESULTS OF OPERATIONS
Comparison
of three and six months ended June 30, 2015 to the three and six ended June 30, 2014
Below are the results
of operations for the three and six months ended June 30, 2015 and 2014. In the comparative
tables presented below, increases in revenues/income or decreases in expenses (favorable variances) are shown without parentheses
while decreases in revenues/income or increases in expenses (unfavorable variances) are shown with parentheses. For purposes of
comparing our results of operations for the periods presented below, all of our properties in the “same store” reporting
group were wholly owned from January 1, 2014 through June 30, 2015. Property Revenues include
rental revenue and other property revenues. Property Expenses include property operations, real estate taxes and insurance.
| |
Apartment | | |
Three
Months Ended June 30, | | |
Change | | |
Six
Months Ended June 30, | | |
Change | |
(in thousands) | |
Units | | |
2015 | | |
2014 | | |
$ | | |
% | | |
2015 | | |
2014 | | |
$ | | |
% | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Property Revenues | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Same Store (13 properties) | |
| 3,089 | | |
$ | 9,911 | | |
$ | 9,361 | | |
$ | 550 | | |
| 5.9 | % | |
$ | 19,547 | | |
$ | 18,650 | | |
$ | 897 | | |
| 4.8 | % |
Non Same Store (6 properties) | |
| 1,900 | | |
| 6,360 | | |
| 4,997 | | |
| 1,363 | | |
| 27.3 | % | |
| 12,353 | | |
| 6,819 | | |
| 5,534 | | |
| 81.1 | % |
Other (1 property) | |
| - | | |
| - | | |
| 295 | | |
| (295 | ) | |
| * | | |
| - | | |
| 594 | | |
| (594 | ) | |
| * | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total property revenues | |
| 4,989 | | |
$ | 16,271 | | |
$ | 14,653 | | |
$ | 1,618 | | |
| 11.0 | % | |
$ | 31,900 | | |
$ | 26,063 | | |
$ | 5,837 | | |
| 22.4 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Property Expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Same Store (13 properties) | |
| 3,089 | | |
$ | 4,141 | | |
$ | 4,177 | | |
$ | 36 | | |
| 0.9 | % | |
$ | 8,217 | | |
$ | 8,363 | | |
$ | 146 | | |
| 1.7 | % |
Non Same Store (6 properties) | |
| 1,900 | | |
| 2,484 | | |
| 2,240 | | |
| (244 | ) | |
| (10.9 | )% | |
| 4,761 | | |
| 3,193 | | |
| (1,568 | ) | |
| (49.1 | )% |
Other (1 property) | |
| - | | |
| - | | |
| 172 | | |
| 172 | | |
| * | | |
| - | | |
| 334 | | |
| 334 | | |
| * | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total property expenses | |
| 4,989 | | |
$ | 6,625 | | |
$ | 6,589 | | |
$ | (36 | ) | |
| (0.5 | )% | |
$ | 12,978 | | |
$ | 11,890 | | |
$ | (1,088 | ) | |
| (9.2 | )% |
* Not a meaningful percentage.
Same Store Properties—Property
Revenues and Property Expenses
Same store property
revenues increased approximately $0.5 million, or 5.9%, for the three months ended June 30, 2015 as compared to the same period
in 2014 primarily due to a 4.4% increase in average monthly rental rates and an increase of $0.1 million in other property revenues.
Same store property revenues increased approximately $0.9 million, or 4.8%, for the six months ended June 30, 2015 as compared
to the same period in 2014 primarily due to a 4.1% increase in average monthly rental rates and an increase of $0.1 million in
other property revenues.
| |
Three
Months Ended June 30, | | |
| | |
| | |
Six
Months Ended June 30, | | |
| | |
| |
(in thousands) | |
2015 | | |
2014 | | |
$
Change | | |
%
Change | | |
2015 | | |
2014 | | |
$
Change | | |
%
Change | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Property expenses | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Property taxes | |
$ | 1,168 | | |
$ | 1,213 | | |
$ | 45 | | |
| 3.7 | % | |
$ | 2,449 | | |
$ | 2,443 | | |
$ | (6 | ) | |
| (0.2 | )% |
Salaries and benefits for on-site employees | |
| 1,034 | | |
| 1,034 | | |
| - | | |
| 0.0 | % | |
| 2,036 | | |
| 2,099 | | |
| 63 | | |
| 3.0 | % |
Utilities | |
| 681 | | |
| 688 | | |
| 7 | | |
| 1.0 | % | |
| 1,396 | | |
| 1,397 | | |
| 1 | | |
| 0.1 | % |
Repairs and maintenance | |
| 288 | | |
| 212 | | |
| (76 | ) | |
| (35.8 | )% | |
| 494 | | |
| 378 | | |
| (116 | ) | |
| (30.7 | )% |
Make ready/turnover | |
| 202 | | |
| 228 | | |
| 26 | | |
| 11.4 | % | |
| 367 | | |
| 390 | | |
| 23 | | |
| 5.9 | % |
Property insurance | |
| 211 | | |
| 224 | | |
| 13 | | |
| 5.8 | % | |
| 426 | | |
| 481 | | |
| 55 | | |
| 11.4 | % |
Other | |
| 557 | | |
| 578 | | |
| 21 | | |
| 3.6 | % | |
| 1,049 | | |
| 1,175 | | |
| 126 | | |
| 10.7 | % |
Total same store property
expenses | |
$ | 4,141 | | |
$ | 4,177 | | |
$ | 36 | | |
| 0.9 | % | |
$ | 8,217 | | |
$ | 8,363 | | |
$ | 146 | | |
| 1.7 | % |
During the three
months ended June 30, 2015, same store property expenses decreased 0.9% as compared to the same period in 2014 primarily due to
reduced advertising expenses and unit turnover costs due to the stable occupancies of the same store portfolio, as well as favorable
property taxes expense, as routine accruals were moderated based on preliminary tax valuations for 2015. Those favorable variances
were somewhat muted by increased repair and maintenance expenses as a result of both periodic and seasonal maintenance projects,
as well as addressing the impacts of winter weather. During the six months ended June 30, 2015, same store expenses decreased
1.7% as compared to the same period in 2014 primarily as a result of reduced advertising expenses due to stable occupancies and
reduced casualty losses due to costs incurred during the prior period to address issues caused by the polar vortex. Also favorable
was the reduction in salaries and benefits due to reduced compensation for leasing, temporary labor and payroll support costs.
Offsetting somewhat this benefit was increased repairs and maintenance expenses primarily due to the reasons discussed previously.
Non-Same Store Properties—Property
Revenues and Property Expenses
Non-same store property
revenues and expenses increased substantially in the three and six month periods ended June 30, 2015 compared to the same periods
last year as a result of all six properties acquired since January 2014 going through lease up during the comparable periods in
2014.
| |
Three Months Ended | | |
| |
(in thousands) | |
March 31, 2015 | | |
June 30, 2015 | | |
YTD 2015 | |
Property revenues | |
| | | |
| | | |
| | |
Rental Revenue | |
$ | 5,448 | | |
$ | 5,743 | | |
$ | 11,191 | |
Other property revenues | |
| 545 | | |
| 617 | | |
| 1,162 | |
Total property revenues | |
$ | 5,993 | | |
$ | 6,360 | | |
$ | 12,353 | |
| |
| | | |
| | | |
| | |
Property expenses | |
| | | |
| | | |
| | |
Property operations and maintenance | |
$ | 1,327 | | |
$ | 1,479 | | |
$ | 2,806 | |
Real estate taxes and insurance | |
| 950 | | |
| 1,005 | | |
| 1,955 | |
Total property expenses | |
$ | 2,277 | | |
$ | 2,484 | | |
$ | 4,761 | |
Number of Communities, end of period | |
| 6 | | |
| 6 | | |
| | |
| |
Three Months Ended | | |
| |
| |
March 31, 2014 | | |
June 30, 2014 | | |
YTD 2014 | |
Property revenues | |
| | | |
| | | |
| | |
Rental Revenue | |
$ | 1,634 | | |
$ | 4,565 | | |
$ | 6,199 | |
Other property revenues | |
| 188 | | |
| 432 | | |
| 620 | |
Total property revenues | |
$ | 1,822 | | |
$ | 4,997 | | |
$ | 6,819 | |
| |
Three Months Ended | | |
| |
| |
March 31, 2014 | | |
June 30, 2014 | | |
YTD 2014 | |
Property expenses | |
| | | |
| | | |
| | |
Property operations and maintenance | |
$ | 548 | | |
$ | 1,400 | | |
$ | 1,948 | |
Real estate taxes and insurance | |
| 405 | | |
| 840 | | |
| 1,245 | |
Total property expenses | |
$ | 953 | | |
$ | 2,240 | | |
$ | 3,193 | |
Number of Communities, end of period | |
| 5 | | |
| 6 | | |
| | |
Property revenues and expenses classified
as other for the current periods presented are primarily associated with our former Post Oak operating property that was sold
in July 2014.
Other Expenses
| |
Three
Months Ended June 30, | | |
Change | | |
Six
Months Ended June 30, | | |
Change | |
(in thousands) | |
2015 | | |
2014 | | |
$ | | |
% | | |
2015 | | |
2014 | | |
$ | | |
% | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
General and administrative | |
$ | 1,590 | | |
$ | 2,318 | | |
$ | 728 | | |
| 31.4 | % | |
$ | 3,678 | | |
$ | 4,413 | | |
$ | 735 | | |
| 16.7 | % |
Management transition expenses | |
$ | - | | |
$ | 250 | | |
$ | 250 | | |
| * | | |
$ | - | | |
$ | 9,291 | | |
$ | 9,291 | | |
| * | |
Interest expense | |
$ | 3,495 | | |
$ | 3,318 | | |
$ | (177 | ) | |
| (5.3 | )% | |
$ | 6,889 | | |
$ | 6,191 | | |
$ | (698 | ) | |
| (11.3 | )% |
Depreciation and amortization | |
$ | 4,010 | | |
$ | 5,747 | | |
$ | 1,737 | | |
| 30.2 | % | |
$ | 7,894 | | |
$ | 10,467 | | |
$ | 2,573 | | |
| 24.6 | % |
Development and pursuit costs | |
$ | 7 | | |
$ | 94 | | |
$ | 87 | | |
| 92.6 | % | |
$ | 10 | | |
$ | 139 | | |
$ | 129 | | |
| 92.8 | % |
Acquisition and recapitalization costs | |
$ | 3,117 | | |
$ | 136 | | |
$ | (2,981 | ) | |
| (2,191.9 | )% | |
$ | 3,270 | | |
$ | 1,641 | | |
$ | (1,629 | ) | |
| (99.3 | )% |
Amortization of deferred financing costs | |
$ | 229 | | |
$ | 236 | | |
$ | 7 | | |
| 3.0 | % | |
$ | 458 | | |
$ | 552 | | |
$ | 94 | | |
| 17.0 | % |
Loss from early extinguishment of debt | |
$ | - | | |
$ | - | | |
$ | - | | |
| - | | |
$ | - | | |
$ | 1,629 | | |
$ | 1,629 | | |
| * | |
* Not a meaningful percentage. |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
General and administrative
expense decreased approximately $0.7 million, or 31.4%, for the three months ended June 30, 2015 and $0.7 million, or 16.7%, for
the six months ended June 30, 2015 as compared to the prior year periods attributed primarily to decreases in salaries and benefits
and both short- and long-term incentive compensation associated with the separation of two executives and other corporate staff,
as well as decreased cost of contract and temporary staffing required during the prior year management transition, which were
partially offset by increases in franchise taxes due to prior year property acquisitions.
Management transition
expenses for the three and six months ended June 30, 2014 approximated $0.3 million and $9.0 million, respectively. Those
costs were associated with the restructuring of our management team, of which approximately $3.5 million was paid in cash, $3.3
million was paid in shares of our common stock, and $2.5 million was charged relating to the conversion of Class B contingent
units into OP Units.
Interest expense
increased approximately $0.2 million, or 5.3%, for the three months ended June 30, 2015, largely due to the increase in debt as
a result of the aforementioned acquisition of the second phase of 100 units at Big Creek completed in March 2015. Interest
expense increased approximately $0.7 million, or 11.3%, for the six months ended June 30, 2015, primarily due to the additional
debt incurred with the aforementioned acquisition of six properties during the first four months of 2014 and the second phase
of 100 units at Big Creek completed in March 2015.
Depreciation and
amortization expense for the three months ended June 30, 2015 decreased approximately $1.7 million, or 30.2%, as compared to the
same period in 2014. This decrease was primarily due to the absence of $1.9 million of amortization expense associated with
in-place leases at the six properties acquired during the first four months of the prior year. Depreciation and amortization expense
for the six months ended June 30, 2015 decreased approximately $2.6 million, or 24.6%, as compared to the same period in 2014.
This decrease was primarily due to the absence of $3.4 million of in-place lease amortization expense relating to the aforementioned
six property acquisitions. This decrease was offset by a net additional $0.8 million of depreciation expense associated with the
aforementioned six properties acquired during the first four months of 2014 and the second phase of 100 units at Big Creek acquired
in March 2015.
Acquisition and
recapitalization costs are comprised of acquisition costs that include direct costs such as broker fees, certain transfer taxes,
legal, accounting, valuation, and other professional and consulting fees incurred in the acquisition of apartment communities
and recapitalization costs incurred as part of our strategic alternatives review and eventual merger agreement, which would not
have been incurred as part of normal operations. Acquisition and recapitalization costs are charged to expense in the period incurred.
For the three months ended June 30, 2015, we incurred approximately $3.1 million of recapitalization expenses associated with
financial advisory and legal costs in support of our planned merger with IRT. For the three months ended June 30, 2014,
acquisition expenses incurred in the purchase of the first phase of Big Creek were approximately $0.1 million. For the six months
ended June 30, 2015, we incurred approximately $0.1 million of acquisition expenses for the purchase of the 100 phase two units
at Big Creek and $3.2 million for recapitalization expenses. For the six months ended June 30, 2014, aggregate acquisition expenses
were approximately $1.6 million, primarily due to costs incurred in the acquisition of Miller Creek, Aston, Aventine, Brier Creek,
Craig Ranch and Big Creek.
Amortization of
deferred financing costs decreased approximately $0.1 million for the six months ended June 30, 2015 as compared to the same periods
in 2014. The decrease was primarily due to the refinancing of debt on Millenia 700 and Fountains Southend, which are amortized
over a longer period than the previous debt.
Loss from early
extinguishment of debt for the six months ended June 30, 2014 includes prepayment penalties and write-off of unamortized deferred
loan costs related to the refinancing of a bridge loan for Southend, refinancing of the mortgage note payable for Millenia 700
and the pay down in full of indebtedness on Fox Trails, Vue at Knoll Trail Apartments and our former Post Oak Property.
Other Income and Expenses
| |
Three
Months Ended June 30, | | |
Change | | |
Six
Months Ended June 30, | | |
Change | |
(in thousands) | |
2015 | | |
2014 | | |
$ | | |
% | | |
2015 | | |
2014 | | |
$ | | |
% | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Other income | |
$ | 15 | | |
$ | 1 | | |
$ | 14 | | |
| 1,400.0 | % | |
$ | 15 | | |
$ | 44 | | |
$ | (29 | ) | |
| (65.9 | )% |
Impairment associated with land holdings | |
$ | (790 | ) | |
$ | - | | |
$ | (790 | ) | |
| * | | |
$ | (790 | ) | |
$ | - | | |
$ | (790 | ) | |
| * | |
Loss allocated to noncontrolling interest | |
$ | 214 | | |
$ | 242 | | |
$ | 28 | | |
| 11.6 | % | |
$ | 243 | | |
$ | 1,341 | | |
$ | 1,098 | | |
| 81.9 | % |
* Not a meaningful percentage.
During the three
and six months ended June 30, 2015, we recognized a $0.8 million charge for impairment of the value of our real estate asset held
for sale. This non-cash impairment charge was based on the modification of a contract for sale we executed in June 2015 to reduce
the purchase price and assign our rights to development escrow deposits to the third-party purchaser. No impairment was recorded
in the three and six months ended June 30, 2014.
Loss allocated to noncontrolling interests
for the above periods primarily represents the noncontrolling interest in the Operating Partnership. The proportionate allocation
of loss to noncontrolling interest as a percentage decreased during the three and six months ended June 30, 2015 as compared to
the same period in 2014 due to the conversion of 210,915 Class B contingent units into 2,343,500 OP Units during the first quarter
of 2014 and the increase in common stock outstanding due to the Rights Offering that was completed on January 16, 2014.
Non-GAAP Financial Measures
Net Operating Income
We believe that
net operating income (“NOI”) is a useful measure of our operating performance. We define NOI as total property revenues
less total property operating expenses, excluding depreciation and amortization. Other REITs may use different methodologies for
calculating NOI, and accordingly, our NOI may not be comparable to other REITs.
We believe that
this measure provides an operating perspective not immediately apparent from GAAP operating income or net income. NOI should not
be considered an alternative to net income (determined in accordance with GAAP) as an indication of our performance. We use NOI
to evaluate our performance on a same store and non-same store basis because NOI allows us to evaluate the operating performance
of our properties as it measures the core operations of property performance by excluding corporate level expenses and other items
not related to property operating performance and captures trends in rental housing and property operating expenses.
| |
| | |
| | |
| | |
| |
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
in thousands | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Net Operating Income | |
| | | |
| | | |
| | | |
| | |
Same Store (13 properties) (1) | |
$ | 5,770 | | |
$ | 5,184 | | |
$ | 11,330 | | |
$ | 10,287 | |
Non Same Store (6 properties) | |
| 3,876 | | |
| 2,757 | | |
| 7,592 | | |
| 3,626 | |
Other (1 property) | |
| - | | |
| 123 | | |
| - | | |
| 260 | |
Total property net operating income | |
$ | 9,646 | | |
$ | 8,064 | | |
$ | 18,922 | | |
$ | 14,173 | |
| |
| | | |
| | | |
| | | |
| | |
Total property net operating income | |
$ | 9,646 | | |
$ | 8,064 | | |
$ | 18,922 | | |
$ | 14,173 | |
Other income | |
| 15 | | |
| 1 | | |
| 15 | | |
| 44 | |
Depreciation and amortization | |
| (4,010 | ) | |
| (5,747 | ) | |
| (7,894 | ) | |
| (10,467 | ) |
Development and pursuit costs | |
| (7 | ) | |
| (94 | ) | |
| (10 | ) | |
| (139 | ) |
Interest expense | |
| (3,495 | ) | |
| (3,318 | ) | |
| (6,889 | ) | |
| (6,191 | ) |
Amortization of deferred financing costs | |
| (229 | ) | |
| (236 | ) | |
| (458 | ) | |
| (552 | ) |
Loss on early extinguishment of debt | |
| - | | |
| - | | |
| - | | |
| (1,629 | ) |
General and administrative | |
| (1,590 | ) | |
| (2,318 | ) | |
| (3,678 | ) | |
| (4,413 | ) |
Management transition expenses | |
| - | | |
| (250 | ) | |
| - | | |
| (9,291 | ) |
Impairment associated with land holdings | |
| (790 | ) | |
| - | | |
| (790 | ) | |
| - | |
Acquisition and recapitalization costs | |
| (3,117 | ) | |
| (136 | ) | |
| (3,270 | ) | |
| (1,641 | ) |
Loss from unconsolidated joint venture | |
| - | | |
| 10 | | |
| - | | |
| 1 | |
Loss from continuing operations | |
| (3,577 | ) | |
| (4,024 | ) | |
| (4,052 | ) | |
| (20,105 | ) |
Loss allocated to noncontrolling interest | |
| 214 | | |
| 242 | | |
| 243 | | |
| 1,341 | |
Adjustments related to earnings per share computation (2) | |
| - | | |
| (217 | ) | |
| - | | |
| (429 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss attributable to common stockholders | |
$ | (3,363 | ) | |
$ | (3,999 | ) | |
$ | (3,809 | ) | |
$ | (19,193 | ) |
(1) |
We define “Same Store” as properties
owned and stabilized since January 1, 2014 through June 30, 2015. For newly constructed or lease-up properties or properties
undergoing significant redevelopment, we consider a property to be stabilized at the earlier of (i) attainment of 90% physical
occupancy or (ii) the one-year anniversary of completion of development or redevelopment. No properties owned since January
1, 2014 were under construction or undergoing redevelopment and, as a result, no properties owned since January 1, 2014 were
excluded from the same store portfolio. For the periods presented, "Same Store" properties are comprised of: The
Pointe at Canyon Ridge, Arbor River Oaks, Lakeshore on the Hill, The Trails of Signal Mountain, Vue at Knoll Trail Apartments
(formerly Mercé Apartments), Fox Trails, Millenia 700, Westmont Commons, Bridge Pointe, St. James at Goose Creek, Creekstone
at RTP, Talison Row at Daniel Island and Fountains Southend. |
(2) |
See Notes B and F to the accompanying Condensed Consolidated
Financial Statements. |
Funds from Operations, Core FFO and
Adjusted FFO
Funds from operations
(“FFO”) is defined by the National Association of Real Estate Investment Trusts (“NAREIT”), as net income
(computed in accordance with GAAP), excluding gains (losses) from sales of property and bargain purchase gains and recognized
impairment of real estate assets, plus real estate-related depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Our calculation of FFO is in accordance with the NAREIT definition. FFO meets the definition
of “non-GAAP financial measures” as set forth in Item 10(e) of Regulation S-K promulgated by the SEC.
Management considers
FFO to be useful in evaluating potential property acquisitions and measuring operating performance. FFO does not represent net
income or cash flows from operations as defined by GAAP. You should not consider FFO to be an alternative to net income as a reliable
measure of our operating performance; nor should you consider FFO to be an alternative to cash flows from operating, investing
or financing activities (as defined by GAAP) as measures of liquidity. Further, FFO as disclosed by other REITs might not be comparable
to our calculation of FFO.
Management believes
that the computation of FFO in accordance with NAREIT’s definition includes certain items, such as gains and losses on early
extinguishment of debt, transaction costs related to acquisitions and recapitalization, management transition expenses and certain
other non-cash or non-comparable items that are not indicative of the results provided by our operating portfolio and affect the
comparability of our period-over-period performance with other multifamily REITs. Accordingly, management believes that it is
helpful to investors to add back non-comparable and non-cash items to arrive at Core FFO.
Management also
uses Adjusted FFO (“AFFO”) as an operating measure, which is defined as FFO or, alternatively, Core FFO, depending
on the existence of any non-cash, non-comparable items as described above, less recurring and non-recurring capital expenditures.
Management believes that AFFO is a relevant operating measure as it provides an indication as to whether a REIT can fund from
its operating performance the capital expenditures necessary to maintain the condition of its operating real estate assets.
The following table
sets forth a reconciliation of FFO, Core FFO and AFFO for the periods presented to net loss attributable to common stockholders,
as computed in accordance with GAAP:
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
(in thousands, except per share data) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Net loss attributable to common stockholders | |
$ | (3,363 | ) | |
$ | (3,999 | ) | |
$ | (3,809 | ) | |
$ | (19,193 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss allocated to noncontrolling interest | |
| (214 | ) | |
| (242 | ) | |
| (243 | ) | |
| (1,341 | ) |
Adjustments related to earnings per share computation | |
| - | | |
| (14 | ) | |
| - | | |
| (30 | ) |
Impairment associated with land holdings | |
| 790 | | |
| - | | |
| 790 | | |
| - | |
Real estate depreciation and amortization - continuing operations | |
| 4,084 | | |
| 5,835 | | |
| 8,043 | | |
| 10,643 | |
Real estate depreciation and amortization - unconsolidated joint venture | |
| - | | |
| 100 | | |
| - | | |
| 200 | |
| |
| | | |
| | | |
| | | |
| | |
Funds from operations | |
$ | 1,297 | | |
$ | 1,680 | | |
$ | 4,781 | | |
$ | (9,721 | ) |
| |
| | | |
| | | |
| | | |
| | |
Management transition expenses | |
| - | | |
| 250 | | |
| - | | |
| 9,291 | |
Acquisition and recapitalization costs | |
| 3,117 | | |
| 136 | | |
| 3,270 | | |
| 1,641 | |
Loss on early extinguishment of debt | |
| - | | |
| - | | |
| - | | |
| 1,629 | |
Non-cash stock awards | |
| 122 | | |
| 154 | | |
| 214 | | |
| 183 | |
Non-cash accretion of preferred stock | |
| - | | |
| 154 | | |
| - | | |
| 307 | |
Core funds from operations | |
$ | 4,536 | | |
$ | 2,374 | | |
$ | 8,265 | | |
$ | 3,330 | |
Recurring capital expenditures | |
| (389 | ) | |
| (358 | ) | |
| (709 | ) | |
| (519 | ) |
Non-recurring capital expenditures | |
| (329 | ) | |
| (412 | ) | |
| (843 | ) | |
| (510 | ) |
Adjusted funds from operations | |
$ | 3,818 | | |
$ | 1,604 | | |
$ | 6,713 | | |
$ | 2,301 | |
| |
| | | |
| | | |
| | | |
| | |
Per share data | |
| | | |
| | | |
| | | |
| | |
Funds from operations - diluted | |
$ | 0.03 | | |
$ | 0.04 | | |
$ | 0.12 | | |
$ | (0.27 | ) |
Core funds from operations - diluted | |
$ | 0.12 | | |
$ | 0.06 | | |
$ | 0.21 | | |
$ | 0.09 | |
Adjusted funds from operations - diluted | |
$ | 0.10 | | |
$ | 0.04 | | |
$ | 0.17 | | |
$ | 0.06 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding - diluted (1) | |
| 36,768 | | |
| 36,656 | | |
| 36,734 | | |
| 34,316 | |
Weighted average OP Units outstanding - diluted | |
| 2,344 | | |
| 2,344 | | |
| 2,344 | | |
| 2,344 | |
Weighted average common shares and OP Units outstanding - diluted (1) | |
| 39,112 | | |
| 39,000 | | |
| 39,078 | | |
| 36,660 | |
(1) |
Includes non-vested portion of restricted stock
awards. |
Liquidity and Capital Resources
As of June 30, 2015,
our outstanding indebtedness was $359.4 million, which is comprised of $297.4 million of fixed-rate mortgage indebtedness secured
by our properties and $62.0 million of variable-rate borrowings under our Revolver.
Factors which could
increase or decrease our future liquidity include, but are not limited to, access to and volatility in capital and credit markets;
sources of financing; our ability to complete asset purchases, sales or developments; and the effect our debt level and changes
in credit ratings could have on our cost of funds.
Financial Condition and Sources
of Liquidity
Our primary sources
of liquidity are cash on hand, availability under our Revolver, proceeds from refinancing of existing mortgaged apartment communities,
proceeds from new mortgage loans on newly stabilized apartment communities, net cash from the operation of our apartment communities,
net proceeds from the sale of certain properties, and net proceeds from offerings of our securities. As of June 30, 2015, we had
$8.0 million of available cash on hand, and $3.1 million available for future borrowings under the Revolver that can be used for
general corporate purposes.
As of the date of
this Quarterly Report, we had approximately $8.2 million of available cash on hand and approximately $3.1 million available for
future borrowings under the Revolver that can be used for acquisition and general corporate purposes.
Short-Term Liquidity Requirements
Our short-term liquidity requirements will primarily be to
fund operating expenses, recurring capital expenditures, property taxes and insurance, interest and scheduled debt principal payments,
general and administrative expenses and distributions to stockholders and unitholders. We expect to meet these requirements using
our cash on hand, the net cash provided by operations and, to the extent available, by accessing our Revolver.
Dividend Declared
On June 2, 2015
the Board of Directors approved a dividend in the amount of $0.095 per share, payable to holders of record of shares of common
stock as of June 30, 2015, totaling approximately $3.7 million which was paid on July 15, 2015.
As a REIT, we are
required to distribute at least 90% of our REIT taxable income, excluding net capital gains, to stockholders on an annual basis.
We expect that these needs will be met from cash generated from operations and other sources, including proceeds from secured
mortgage and unsecured indebtedness, proceeds from additional equity issuances, cash generated from the sale of property and the
formation of joint ventures.
Long-Term Liquidity Requirements
Our long-term liquidity
requirements will necessarily be subject to the completion of the planned Merger with IRT, as discussed earlier. Although we can
provide no assurances that the Merger will close, or if it closes, that it will close in the timeframe or on the terms discussed
previously, if the Merger with IRT were not to close, our principal long-term liquidity requirements will primarily be to fund
additional property acquisitions, major renovation and upgrading projects and debt payments and retirements at maturities. We
do not expect that net cash provided by operations will be sufficient to meet all of these long-term liquidity needs. We anticipate
meeting our long-term liquidity requirements by using cash, short-term credit facilities and net proceeds from the sale of certain
properties as an interim measure, to be replaced by funds from borrowing under public and private equity and debt offerings, long-term
secured and unsecured indebtedness, or joint venture investments. In addition, we may use OP Units to acquire properties from
existing owners seeking a tax-deferred transaction.
Cash Flows Summary
Below is a summary
of our recent cash flow activity:
| |
Six Months Ended June 30, | |
(In thousands) | |
2015 | | |
2014 | |
Sources (uses) of cash and cash equivalents: | |
| | | |
| | |
Operating activities | |
$ | 3,943 | | |
$ | 3,708 | |
Investing activities | |
| (16,299 | ) | |
| (136,865 | ) |
Financing activities | |
| 7,095 | | |
| 134,785 | |
Net change in cash and cash equivalents | |
$ | (5,261 | ) | |
$ | 1,628 | |
Cash Flows for the Six Months Ended
June 30, 2015 Compared to the Six Months Ended June 30, 2014
Operating Activities
Net cash provided by operating activities increased $0.2 million
to $3.9 million for the six months ended June 30, 2015 compared to approximately $3.7 million for the six months ended June 30,
2014. This increase was primarily the result of a $4.7 million increase in net operating income primarily associated with our
operating communities, a $3.3 million reduction in prepaid expenses and other assets, a $3.5 million decrease in cash expenditures
associated with the prior year management transition, and a $0.7 million decrease in general and administrative expenses. Partially
offsetting these cash in-flows is a $0.7 million increase in net interest payments, a $1.5 million increase in restricted cash
and lender escrows, a $1.4 million decrease in accounts payable and other accrued expenses, a $0.3 million decrease in security
deposits, deferred rent and other liabilities and a $1.6 million increase in acquisition and recapitalization associated with
financial advisory and legal costs incurred in support of our planned merger with IRT.
Investing Activities
Net cash used in
investing activities was approximately $16.3 million during the six months ended June 30, 2015 compared to approximately $136.9
million during the six months ended June 30, 2014. Nearly all of the cash used in each period related to the acquisition of additional
apartment communities, so the decrease between the periods is a result of acquiring six communities during the six months ended
June 30, 2014 as compared to only closing on the 100 units of phase two at Big Creek during the six months ended June 30, 2015.
Additions from property capital expenditures during the six months ended June 30, 2015 totaled $1.9 million as compared to $1.7
million in the comparable prior year period. During the six months ended June 30, 2015, we received into restricted escrows with
our lender $0.6 million of insurance proceeds related to the 20-unit apartment building at our Pointe at Canyon Ridge property
in Sandy Springs, Georgia that was destroyed by fire on November 22, 2014.
Financing Activities
Net cash provided by financing activities
was approximately $7.1 million during the six months ended June 30, 2015 compared to approximately $134.8 million net cash provided
by financing activities during the six months ended June 30, 2014. The decrease in net cash provided by financing activities was
primarily due to $147.3 million of additional net proceeds from the issuance of our common stock, net of offering costs, a $119.8
million decrease in proceeds from indebtedness, a $2.4 million increase in distributions to stockholders and OP Unit holders,
and a $0.8 million reduction in related parties receivable. Partially offsetting the cash provided by financing activities is
$137.3 million decrease in debt repayment, a $3.6 million decrease in payment of deferred loan costs, a $0.7 million reduction
in prepayment fees for early extinguishment of debt, and reduction in cash payments of $1.0 million to cover withholding taxes
related to restricted shares vested during the periods presented.
Off-Balance Sheet Arrangements
As of June 30, 2015, 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 conditions, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures that is
material to stockholders.
Income Taxes
No provision has
been made for income taxes since all of our operations are held in pass-through entities and accordingly the income or loss of
the Company is included in the individual income tax returns of the partners or members.
We elected to be
taxed as a REIT under the Code beginning with our taxable year ended December 31, 2004. As a REIT, we generally are not subject
to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we
will be subject to federal income tax on our taxable income at regular corporate tax rates. We believe that we are organized and
operate in a manner to qualify and be taxed as a REIT and we intend to operate so as to remain qualified as a REIT for federal
income tax purposes.
Inflation
Inflation in the United
States has been relatively low in recent years and did not have a significant impact on the results of operations for the Company’s
business for the periods shown in the consolidated historical financial statements. We do not believe that inflation poses a material
risk to the Company. The leases at our apartment properties are short term in nature. None are longer than two years, and most
are one year or less.
Although the impact
of inflation has been relatively insignificant in recent years, it does remain a factor in the United States economy and could
increase the cost of acquiring or replacing properties in the future.
Critical Accounting
Policies
Our 2014 Annual Report
on Form 10-K contains a description of our critical accounting policies, including purchase price allocation and related depreciation
and amortization, capital expenditures, impairment of real estate assets, revenue recognition, property expenses, share-based
compensation, accounting for recapitalization and accounting for the variable interest entity. For the six months ended June 30,
2015, there were no material changes to these policies.
We evaluate our estimates,
assumptions and judgments on an ongoing basis, based on information that is then available to us, our experience and various matters
that we believe are reasonable and appropriate for consideration under the circumstances. Our critical accounting policies have
not changed materially from information reported in our Annual Report on Form 10-K for the year ended December 31, 2014 which
was filed with the SEC on March 13, 2015.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
Our future income,
cash flows and fair value relevant to our financial instruments depends upon prevailing market interest rates. Market risk refers
to the risk of loss from adverse changes in market prices and interest rates. Based upon the nature of our operations, we are
not subject to foreign exchange rate or commodity price risk. The principal market risk to which we are exposed is the risk related
to interest rate fluctuations. Many factors, including governmental monetary and tax policies, domestic and international economic
and political considerations, and other factors that are beyond our control contribute to interest rate risk. Our interest rate
risk objective is to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing
costs. To achieve this objective, we manage our exposure to fluctuations in market interest rates for our borrowings through the
use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable. All of our financial instruments
were entered into for other than trading purposes.
Fixed Interest Rate Debt
As of June 30, 2015,
we had approximately $297.4 million of fixed rate debt, or approximately 82.7% of our total outstanding
debt, which limits our risk to fluctuating interest rates. Though a change in the market interest rates affects the fair market
value, it does not impact net income to stockholders or cash flows. Our total outstanding fixed rate mortgage debt had a weighted
average effective interest rate as of June 30, 2015 of 4.03% per annum with an average of 7.25 years to maturity.
Variable Interest Rate Debt
As of June 30, 2015,
we had approximately $62.0 million of variable rate debt, or approximately 17.3% of our total outstanding
debt, which was associated with the Revolver, but we did not have any interest rate swaps, caps or other derivative instruments
in place, leaving the variable debt subject to interest rate fluctuations. The impact of a 1% increase or decrease in interest
rates on the Revolver would result in a decrease or increase of annual net income of approximately $0.6 million, respectively.
The Revolver had a weighted average effective interest rate as of June 30, 2015 of approximately 2.98% per annum with 1.58 years
to maturity.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and
Procedures
Our management, under
the supervision of our Chief Executive Officer and Chief Accounting Officer (principal financial officer), evaluated the effectiveness
of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the
period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based on such evaluation, our Chief
Executive Officer and Chief Accounting Officer (principal financial officer) concluded that our disclosure controls and procedures
were effective at the reasonable assurance level as of the Evaluation Date. In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment
in evaluating the cost-benefit relationship of possible controls and procedures.
Changes in Internal Control Over Financial Reporting
During the quarter
ended June 30, 2015, there were no changes in our internal control over financial reporting that have materially affected, or
that are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In the normal course
of business, we are subject to claims, lawsuits and legal proceedings. While it is not possible to ascertain the ultimate outcome
of such matters, in management’s opinion, the liabilities, if any, in excess of amounts provided or covered by insurance,
are not expected to have a material adverse effect on our financial position, results of operations or liquidity. For discussion
regarding legal proceeding, see “Note H, Commitments and Contingencies” in the notes to the Condensed Consolidated
Financial Statements.
ITEM 1A. RISK FACTORS.
In addition to the
risk factors previously disclosed under Item 1A to Part I, “Risk Factors” in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2014, the Company is subject to the following additional risks:
If we are unable
to consummate the proposed merger with IRT, it could materially and adversely affect our business, financial condition, operating
results and stock price.
The completion of
the proposed merger transaction involving the Company and IRT (the “Merger”) is subject to the satisfaction of numerous
closing conditions, including the approval of the Company Merger by the Company’s common stockholders and the approval of
the issuance of shares of IRT common stock in connection with the Merger by the affirmative vote of a majority of the votes cast
by the holders of IRT’s common stock entitled to vote on the matter. In addition, the occurrence of certain material events,
changes or other circumstances could give rise to the termination of the Agreement and Plan of Merger (the “Merger Agreement”).
As a result, no assurances can be given that the Merger will be consummated. If our common stockholders choose not to approve
the Merger, we otherwise fail to satisfy, or obtain a waiver of the satisfaction of, the closing conditions to the transaction
and the Merger is not consummated, a material event, change or circumstance has occurred that results in the termination of the
Merger Agreement, or any legal proceeding results in enjoining the Merger, we could be subject to various adverse consequences,
including, but not limited to, the following:
|
|
|
|
· |
we would remain liable for significant costs relating to the Merger, including, among others, legal, accounting, financial
advisory and financial printing expenses; |
|
· |
we may face various disruptions to the operation of our business as a result of the substantial time and effort invested
by our management in connection with the Merger; |
|
· |
our decision to enter into the Merger may cause substantial harm to relationships with our employees and/or may divert
employee attention away from day-to-day operations of our business; |
|
|
|
|
· |
an announcement that we have abandoned the Merger could trigger a decline in our stock price to the extent that our stock
price reflects a market assumption that we will complete the Merger; |
|
· |
our inability to solicit competing acquisition proposals and the possibility that we could be required to pay a termination
fee of $12 million if the Merger Agreement is terminated under certain circumstances; and |
|
· |
we may forego alternative business opportunities or fail to respond effectively to competitive pressures. |
The occurrence of
any of the foregoing could materially and adversely affect our business, financial condition, operating results and stock price.
Certain restrictive
pre-closing covenants in the Merger Agreement may negatively affect our business, financial condition, operating results and cash
flows.
Pending completion
of the Merger, we have agreed to conduct our business in the ordinary course and consistent with our past practices. We also have
agreed, subject to certain exceptions, to various restrictive covenants, including with respect to acquisitions and other investments,
dispositions, indebtedness, leasing and capital expenditures. These restrictions could alter the manner in which we have customarily
conducted our business and therefore significantly disrupt the operation of our business, and could have a material adverse effect
on our business, financial condition, cash flows and operating results.
Pending consummation
of the Merger, existing or prospective tenants, vendors and other parties may delay or defer decisions concerning their business
transactions or relationships with us, which may harm our results of operations going forward if the Merger is not consummated.
Because the Merger
is subject to several closing conditions, including the approval of the Company Merger by our common stockholders, uncertainty
exists regarding the completion of the Merger. This uncertainty may cause existing or prospective tenants, vendors and other parties
to delay or defer decisions concerning their business transactions or relationships with our company, which could negatively affect
our business and results of operations.
A pending purported
class action lawsuit or other lawsuits could prevent or delay the consummation of the Merger and result in substantial costs.
Since the announcement
of the Merger on May 11, 2015 through the date of this Report on Form 10-Q, a purported class action lawsuit has been filed by
three stockholders of the Company in Maryland state court seeking, among other things, compensatory damages. The plaintiffs assert
claims of breach of fiduciary duty against members of the Company’s Board of Directors and unjust enrichment against three
members of the Company’s Board. It is possible that additional lawsuits may be filed against the Company or IRT, asserting
similar or different claims, including seeking to enjoin the Merger. If the purported class action is further amended or other
potential future lawsuits are filed, they could prevent or delay completion of the Merger and result in substantial costs to the
Company and/or IRT, including any costs associated with the indemnification of directors. There can be no assurance that any of
the defendants will prevail in the pending litigation or in any future litigation. The defense or settlement of any lawsuit or
claim may adversely affect the combined organization’s business, financial condition or results of operations. See “Merger-Related
Litigation” in Note H to the accompanying condensed consolidated financial statements.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS.
Unregistered Sales of Equity Securities
We did not sell any
securities during the quarter ended June 30, 2015 that were not registered under the Securities Act. We did not purchase any shares
of our common stock during the quarter ended June 30, 2015.
Issuer Repurchases of Equity Securities
The table below summarizes
the number of shares of our common stock that were withheld to satisfy the tax withholding obligations for our stock-based compensation
restricted stock that vested during the three months ended June 30, 2015.
| |
| | |
| | |
Total Number of | | |
Maximum | |
| |
| | |
| | |
Shares | | |
Dollar Value of | |
| |
| | |
| | |
Purchased as | | |
Shares that May | |
| |
| | |
| | |
Part of Publicly | | |
Yet be | |
| |
Total Number of | | |
Average Price | | |
Announced | | |
Purchased | |
| |
Shares | | |
Paid per | | |
Plans or | | |
Under the Plans | |
| |
Purchased (1) | | |
Share (1) | | |
Programs | | |
or Programs | |
| |
| | |
| | |
| | |
| |
Period | |
| | | |
| | | |
| | | |
| | |
April 1 to 30, 2015 | |
| - | | |
$ | - | | |
| - | | |
| - | |
May 1 to 31, 2015 | |
| 8,028 | | |
$ | 7.34 | | |
| - | | |
| - | |
June 1 to 30, 2015 | |
| - | | |
$ | - | | |
| - | | |
| - | |
Total | |
| 8,028 | | |
| | | |
| | | |
| | |
| (1) | Represents the surrender
of shares of common stock to the Company to satisfy the tax withholding obligations associated
with the vesting of restricted shares of common stock. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
The exhibits listed on the accompanying Exhibit Index are filed,
furnished or incorporated by reference (as stated therein) as part of this Quarterly Report.
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.
|
TRADE STREET RESIDENTIAL, INC. |
|
|
Date: August 24, 2015 |
By: |
/s/ Richard H. Ross |
|
|
Richard H. Ross, Chief Executive Officer |
|
|
|
Date: August 24, 2015 |
By: |
/s/ Randall C. Eberline |
|
|
Randall C. Eberline, Chief Accounting Officer and principal financial officer |
Exhibit Index
Exhibit
No. |
|
Description |
|
|
|
2.1 |
|
Agreement and Plan of Merger, dated as of May 11, 2015, by and among Independence Realty Trust, Inc., Independence Realty Operating Partnership, LP, Adventure Merger Sub LLC, IRT Limited Partner, LLC, Trade Street Residential, Inc. and Trade Street Operating Partnership, LP (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the Registrant on May 11, 2015 (File No. 001-32365)). |
|
|
|
10.1 |
|
Voting Agreement, dated as of May 11, 2015, by and between Trade Street Residential, Inc. and RAIT Financial Trust (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on May 11, 2015 (File No. 001-32365)). |
|
|
|
31.1* |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2* |
|
Certification of Chief Accounting Officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1* |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2* |
|
Certification of Chief Accounting
Officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
For the three and six months ended June 30, 2015 and 2014
|
|
|
101.INS* |
|
XBRL Instance Document |
101.SCH* |
|
XBRL Taxonomy Extension Schema Document |
101.CAL* |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* |
|
XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* |
|
XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
EXHIBIT 31.1
SARBANES-OXLEY SECTION 302(a) CERTIFICATION
I, Richard H. Ross, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q/A of Trade Street Residential, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting. |
Date: |
August 24, 2015 |
/s/ Richard H. Ross |
|
|
Richard H. Ross |
|
|
Chief Executive Officer |
EXHIBIT 31.2
SARBANES-OXLEY SECTION 302(a) CERTIFICATION
I, Randall C. Eberline, certify that:
|
1. |
I have reviewed this Quarterly Report on Form 10-Q/A of Trade Street Residential, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting. |
Date: |
August 24, 2015 |
/s/ Randall C. Eberline |
|
|
Randall C. Eberline |
|
|
Chief Accounting Officer and principal financial officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Trade Street Residential,
Inc. (the “Company”) on Form 10-Q/A for the period ended June 30, 2015, as filed with the Securities and Exchange Commission
on the date hereof (the “Report”), I, Richard H. Ross, Chief Executive Officer, hereby certify, for the purposes of
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in my capacity as an officer of
the Company that, to my knowledge:
|
1. |
The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of
1934; and |
|
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company. |
Date: |
August 24, 2015 |
/s/ Richard H. Ross |
|
|
|
Richard H. Ross |
|
|
|
Chief Executive Officer |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Trade Street Residential,
Inc. (the “Company”) on Form 10-Q/A for the period ended June 30, 2015, as filed with the Securities and Exchange Commission
on the date hereof (the “Report”), I, Randall C. Eberline, Chief Accounting Officer, hereby certify, for the purpose
of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in my capacity as an officer
of the Company that, to my knowledge:
|
1. |
The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of
1934; and |
|
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company. |
Date: |
August 24, 2015 |
/s/ Randall C. Eberline |
|
|
|
Randall C. Eberline |
|
|
|
Chief Accounting Officer and principal financial officer |
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