Item 2. Management’s Discussion and Analysis
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (the "Quarterly Report"), together with other statements and information publicly disseminated by us, contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends concerning matters that are not historical facts. Forward looking statements are generally identifiable by use of words such as "may," "will," "will likely result," "shall," "should," "could," "believe," "expect," "intend," "anticipate," "estimate," "project," "apparent," "experiencing," or similar expressions or variations thereof.
Forward-looking statements contained in this Quarterly Report are based on our beliefs, assumptions and expectations of our future performance taking into account the information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or within our control, and which could materially affect actual results, performance or achievements. Factors which may cause actual results to vary from our forward-looking statements include, but are not limited to:
• the impact of the COVID-19 pandemic and the governmental and non-governmental responses thereto;
• general economic and business conditions, including those currently affecting our nation’s economy and real estate markets;
• the availability of, and costs associated with, sources of capital and liquidity;
• accessibility of debt and equity capital markets;
• general and local real estate conditions, including any changes in the value of our real estate;
• changes in Federal, state and local governmental laws and regulations, including laws and regulations relating to taxes and real estate and related investments;
• the level and volatility of interest rates;
• our acquisition strategy, which may not produce the cash flows or income expected;
• the competitive environment in which we operate, including competition that could adversely affect our ability to acquire properties and/or limit our ability to lease apartments or increase or maintain rental income;
• a limited number of multi-family property acquisition opportunities acceptable to us;
• our multi-family properties are concentrated in the Southeastern United States and Texas, which makes us more susceptible to adverse developments in those markets;
• risks associated with our strategy of acquiring value-add multi-family properties, which involves greater risks than more conservative strategies;
• the condition of Fannie Mae or Freddie Mac, which could adversely impact us;
• our failure to comply with laws, including those requiring access to our properties by disabled persons, which could result in substantial costs;
• insufficient cash flows, which could limit our ability to make required payments on our debt obligations;
• our ability and the ability of our joint venture partners to maintain compliance with the covenants contained in our and our joint venture partners' debt facilities and debt instruments;
• impairment in the value of real estate we own;
• failure of property managers to properly manage properties;
• disagreements with, or misconduct by, joint venture partners;
• decreased rental rates or ancillary revenues, or increasing vacancy rates;
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• our ability to lease units in newly acquired or newly constructed multi-family properties;
• potential defaults on or non-renewal of leases by tenants;
• creditworthiness of tenants;
• our ability to successfully evaluate, finance, complete and integrate acquisitions, including the acquisitions of the interests of our joint venture partners in unconsolidated subsidiaries;
• development and acquisition risks, including rising or unanticipated costs and failure of such acquisitions and developments to perform in accordance with projections;
• the timing of acquisitions and dispositions;
• our ability to reinvest the net proceeds of dispositions into more, or as favorable, acquisition opportunities;
• potential natural disasters such as hurricanes, tornadoes and floods;
• board determinations as to timing and payment of dividends, if any, and our ability or willingness to pay future dividends;
• financing risks, including the risks that our cash flows from operations may be insufficient to meet required debt service obligations and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all;
• lack of or insufficient amounts of insurance to cover, among other things, losses from catastrophes;
• our ability to maintain our qualification as a REIT;
• possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us or a subsidiary owned by us or acquired by us;
• our dependence on information systems;
• risks associated with breaches of our or our joint venture partners' information technology systems;
• failure to comply with, or obtain waivers of, the provisions of, and covenants and coverage ratios in, our debt instruments;
• risks associated with the stock ownership restrictions of the Code for REITs and the stock ownership limit imposed by our charter;
• increases in real estate taxes at properties we acquire due to such acquisitions or other factors;
• the other factors described in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021 (the "Annual Report"), including those factors set forth under the sections of such reports, as applicable, entitled " Cautionary Statement Regarding Forward-Looking Statements," "Risk Factors," "Business," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" .
We caution you not to rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control, and which could materially affect actual results, performance or achievements. Except to the extent otherwise required by applicable law or regulation, we undertake no obligation to update forward-looking statements to reflect events or circumstances after the date of the filing of this Quarterly Report or to reflect the occurrence of unanticipated events.
Overview
We are an internally managed real estate investment trust, also known as a REIT, that is focused on the ownership, operation and, to a lesser extent, development of multi-family properties. These properties may be wholly owned or by unconsolidated joint ventures in which we generally contribute a significant portion of the equity. At March 31, 2022, we: (i) wholly-own eleven multi-family with an aggregate of 2,864 units and a carrying value of $326.3 million; (ii) have ownership interests, through unconsolidated entities, in 21 multi-family properties with 6,121 units and a carrying value of $103.9 million; and (iii) have a 17.45% interest in a 240-unit multi-family development property with a carrying value of $2.1 million
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(excluding $1.4 million held in escrow). The 33 properties are located in 11 states; most of the properties are located in the Southeast United States and Texas. See " -Off Balance Sheet Arrangements " for information regarding the contributions to, and our reliance on, the cash flow and liquidity provided by the properties owned by our unconsolidated subsidiaries.
Challenges and Uncertainties Presented by COVID-19
The pandemic did not have a direct material adverse effect on our financial condition and results of operations; however, there were some direct negative effects ( e.g., we were more conservative in raising rents, pursuing acquisitions and in implementing our value add program, all of which, if more aggressively pursued, may have allowed us to generate additional income). The impact of the pandemic on our business, financial condition, liquidity, results of operations and prospects will depend on future developments, which are highly uncertain and cannot be predicted with confidence.
Buyout of Interests in Joint Ventures
As disclosed in our Annual Report, our acquisition efforts in 2022 are focused on purchasing the remaining interests of our joint venture partners in joint ventures that own multifamily properties. We refer to such purchases as the “Partner Buyouts”. After a Partner Buyout is completed, such multifamily property will be wholly owned and the accounts and operations of such property will be included in our consolidated balance sheet and statements of operations, respectively, as of the date of completion of such purchase. We anticipate that our assets, liabilities, revenues and expenses will increase significantly as a result of these Partner Buyouts.
Due to the timing that contemplates that the sales of Retreat at Cinco Ranch and The Vive (the "Cinco/Vive Sales") described below ( "-Property Dispositions - Dispositions of Joint Venture Properties - Contracts to Dispose of Joint Venture Properties" ) will be completed before all the Partner Buyouts described below ( i.e. , the Partner Buyouts completed or to be completed after March 31, 2022) are completed, and after giving effect to the Shavano Sale (as described below), it is expected that there may be a slight decline in operating results in the quarter ending June 30, 2022, and that after the Cinco/Vive Sales and the Partner Buyouts described below are completed, such transactions will not have a material impact in the short-term on our net income, funds from operations or adjusted funds from operations. After giving effect to the Cinco/Vive Sales and the Partner Buyouts described below, our consolidated balance sheet will include an additional (i) $217.4 million of mortgage debt with a weighted average remaining term to maturity of 6.5 years and a weighted average interest rate of 4.24 % and (ii) $302.2 million of real estate assets.
Completed Purchases of the Remaining Interests of Joint Venture Partners
During the Three Months Ended March 31, 2022
On March 23, 2022, we completed the acquisition of the remaining 28.1% interest owned by our joint venture partners in the entity that owns Verandas at Alamo Ranch, a 288-unit multi-family property located in San Antonio, TX. The purchase price for the interest, which gives effect to the cost of purchasing the promote interest (as described under "- Contracts to Purchase the Remaining Interests of Joint Venture Partners ") of our joint venture partner, was $8.7 million. As a result, this property is wholly-owned and effective March 23, 2022, is included in our consolidated operations and accounts, including mortgage debt in principal amount of $27 million with an interest rate of 3.64% and maturing in December 2029. We anticipate that in the quarter ending June 30, 2022, this property will generate approximately $1.2 million of rental revenues, $579,000 of real estate operating expenses, $258,000 of interest expense and $518,000 of depreciation. For the quarter ended March 31, 2022, the average occupancy rate at this property was 94.7% and the average monthly rental rate was $1,206.
Subsequent to the Three Months Ended March 31, 2022
On April 7, 2022, we acquired the remaining 21.6% interest owned by our joint venture partners in the entity that owns Vanguard Heights, a 174-unit multi-family property located in Creve Couer, MO. The purchase price for the interest, which gives effect to the cost of purchasing the promote interest of our joint venture partner, was $4.8 million. As a result, this property is wholly-owned by us and effective April 7, 2022, is included in our consolidated operations and accounts, including mortgage debt of $29.7 million with an interest rate of 4.41% and maturing in July 2031. We anticipate that in the quarter ending June 30, 2022, this property will generate approximately $900,000 of rental revenues, $367,000 of real estate operating expenses, $337,000 of interest expense and $495,000 of depreciation. For the quarter ended March 31, 2022, the average occupancy rate at this property was 93.1% and the average monthly rental rate was $1,569.
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Contracts to Purchase the Remaining Interests of Joint Venture Partners in Nine Unconsolidated Ventures
From February 17, 2022 through April 6, 2022, we entered into agreements to acquire the remaining interests of our joint venture partners in the unconsolidated joint ventures that own the properties identified below. It is anticipated that these transactions, subject to the satisfaction of customary closing conditions, including the approval of the holders of the applicable mortgage debt, will be completed by August 1, 2022. Except as otherwise indicated, the mortgage debt reflected is currently on the property and after the completion of the applicable acquisition, will be included in our consolidated balance sheet (dollars in thousands):
Date of Agreement Property Name Location Units Remaining Interest to be Purchased Book Value of Property at 3/31/22 Purchase Price (1) Estimated Amount of Debt to be Included on our Consolidated Balance Sheet
February 2022 Jackson Square Tallahassee, FL 242 20 % $ 25,102 $ 6,220 $ 21,524
February 2022 Grove at River Place Macon, GA 240 20 % 12,829 7,485 11,481
February 2022 The Woodland Apartments Boerne, TX 120 20 % 11,394 3,550 7,935
March 2022 Brixworth at Bridge Street Huntsville, AL 208 20 % 11,844 10,851 18,500 (2)
April 2022 Abbotts Run Willmington, NC 264 20 % 37,552 8,560 23,160
April 2022 Civic Center I (3)
Southaven, MS 392 25 % 30,831 18,063 27,544
April 2022 Civic Center II (3)
Southaven, MS 384 25 % 32,725 17,694 30,288
April 2022 Magnolia Pointe at Madison Madison, AL 204 20 % 18,474 7,132 15,000
April 2022 Somerset at Trussville Birmingham, AL 328 20 % 40,300 9,785 32,250
Total 2,382 $ 221,051 $ 89,340 $ 187,682
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(1) The purchase (i) price gives effect to the purchase of the "promote interest" (as more fully described in the Annual Report) of our joint venture partners and
(ii) is subject to customary closing and similar adjustments.
(2) The current mortgage debt of $11,184 is to be refinanced with approximately $18,500 of new ten-year mortgage debt with an anticipated interest rate of
4.25% (the "New Mortgage Debt").
(3) The completion of the sale of each of Civic Center I and Civic Center II is conditioned upon the closing of one another. The purchase price reflected for
each represents an allocation of the total purchase price based on number of units.
To fund these purchases, we anticipate using our available cash, a portion of the proceeds from the Cinco/Vive Sales, a portion of the proceeds of the New Mortgage Debt, funds from our at-the-market equity offering program and, funds from our credit facility. After a purchase is completed, such property will be wholly-owned and the accounts ( i.e., the assets and liabilities), and operations of such property will be included directly, from the date of such purchase, in our consolidated balance sheets and consolidated statement of operations, respectively.
Property Dispositions
Dispositions of Joint Venture Properties
Completed Dispositions
On February 8, 2022, the unconsolidated joint venture which owned Verandas At Shavano, a 288-unit multi-family property in which we had a 65% interest, sold the property for $53.8 million and recognized a gain on the sale of this property of $23.7 million (the "Shavano Sale"). As a result of the sale, we recorded a gain of $13.0 million. The mortgage debt secured by this property and paid-off in connection with the sale was in principal amount of $25.1 million, had an interest rate of 3.61% and was scheduled to mature in May 2023. During 2021, this property contributed $526,000 of equity in earnings of unconsolidated joint ventures.
Contracts to Dispose of Joint Venture Properties
In April 2022, the unconsolidated joint venture that owns Retreat at Cinco Ranch, located in Katy, Texas, in which we hold a 75% equity interest, entered into an agreement to sell the property for $68.5 million. This property, which as of March 31, 2022, had mortgage debt of $30.2 million, with a remaining term to maturity of 3.8 years and an interest rate of 4.44%, contributed $336,000 of equity in loss of unconsolidated joint ventures in 2021. We anticipate that our share of the gain, after giving effect to our approximate $1.1 million share of the mortgage prepayment charge, will be approximately $16.4 million.
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In May 2022, the unconsolidated joint venture that owns The Vive, a 312-unit multi-family property located in Kannapolis, NC, in which we hold a 65% equity interest, entered into an agreement to sell the property for $92.0 million. This property, which as of March 31, 2022, had mortgage debt of $31.6 million, with a remaining term to maturity of 30 years and an interest rate of 3.52%, contributed $77,000 of equity in earnings of unconsolidated joint ventures in 2021. We anticipate that our share of the gain, after giving effect to our approximate $738,000 share of the mortgage prepayment charge, will be approximately $21.5 million.
We anticipate that the Cinco/Vive Sales will be completed, subject to the satisfaction of customary closing conditions, during the quarter ending June 30, 2022.
Sale of Vacant Land Parcel
On February 2, 2022, we completed the sale of a vacant land parcel located in Daytona, Florida for a sales price of $4.7 million, and, after closing costs, recognized a nominal gain. In 2020, we recognized an impairment charge of $3.6 million in connection with this property. At December 31, 2021, this property was classified as held-for-sale.
Other Activities During the Three Months Ended March 31, 2022
Investment in Multi-Family Development Project
On March 10, 2022, we purchased a 17.45% interest in Stono Oaks, a planned 240-unit ground-up multi-family development, located in Johns Island, SC. The purchase price for the interest was $3.5 million, including $1.4 million held in escrow. We anticipate that this project will be completed in the fourth quarter of 2023.
Debt Reduction
In addition to the debt pay-offs described in "- Completed Purchases of the Remaining Interests of Joint Venture Partner " in connection with property dispositions, we paid-off, one month prior to its maturity, mortgage debt of $14.6 million bearing an interest rate of 4.29% on the Avalon Apartments-Pensacola, FL (the "Avalon Debt").
Sale of Common Stock Pursuant to the ATM Program
We sold 136,279 shares pursuant to our ATM sales program at an average price of $22.61 per share. Net proceeds after commissions and fees was $3.0 million.
Results of Operations – Three months ended March 31, 2022 compared to three months ended March 31, 2021.
As used herein, the term "same store properties" refers to operating properties that were owned for the entirety of the periods presented. For the three months ended March 31, 2022 and 2021, there were seven same store properties in our consolidated portfolio.
Revenues
The following table compares our revenues for the periods indicated:
Three Months Ended March 31,
(Dollars in thousands): 2022 2021 Increase
(Decrease) %
Change
Rental and other revenue from real estate properties $ 11,430 $ 7,095 $ 4,335 61.1
Other income 4 4 — —
Total revenues $ 11,434 $ 7,099 $ 4,335 61.1
Rental and other revenue from real estate properties
The increase is due to the following changes:
• $4.4 million due to the Partner Buyouts at four properties( i.e., primarily Bells Bluff, Crestmont at Thornblade, Crossings of Bellevue in 2021 and, to a lesser extent, Verandas at Alamo Ranch in February 2022 (collectively, the “Consolidating Transactions”)); and
• $614,000 primarily due to an increase in average rental rates at same store properties.
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Offsetting the increase is a $739,000 decrease due to the sale of the Kendall Manor property in May 2021 (the "Kendall Sale").
Expenses
The following table compares our expenses for the periods indicated:
Three Months Ended March 31,
(Dollars in thousands) 2022 2021 Increase
(Decrease) % Change
Real estate operating expenses $ 4,753 $ 3,117 $ 1,636 52.5
Interest expense 2,021 1,660 361 21.7
General and administrative 3,633 3,114 519 16.7
Depreciation and amortization 3,606 1,537 2,069 134.6
Total expenses $ 14,013 $ 9,428 $ 4,585 48.6
Real estate operating expense.
The increase is due primarily to:
• the inclusion of $1.9 million relating to the Consolidating Transactions; and
• $224,000 at same store properties due to increases across most expense categories.
The increase was offset by a decline of $456,000 due to the Kendall Sale.
Interest expense.
The change is due to a $1.0 million increase from the inclusion of interest expense related to the Consolidating Transactions. This was offset by a $664,000 decrease due to the payoff of $31.9 million of mortgage debt in 2021 and, to a lesser extent, the payoff of the Avalon Debt in the current period. See Item 3 " Quantitative and Qualitative Disclosures About Market Risks " for information regarding the impact of changing interest rates on our floating rate junior subordinated notes.
General and administrative.
The increase is due primarily to a $436,000 increase in non-cash compensation expense including increased amortization of:
• $213,000 relating to the grant of performance and market based restricted stock units (the "RSUs") in June 2021;
• $130,000 with respect to restricted stock granted in June 2021; and
• $93,000 due to the restricted stock granted in January 2021 (as a result of the higher fair value of the shares granted in in 2021 in comparison to the restricted stock granted in 2016).
Depreciation and amortization
The increase is due primarily to the inclusion of $2.2 million of such expense from the Consolidating Transactions.
Unconsolidated Joint Ventures - Results of Operations
Equity in earnings (loss) of unconsolidated joint ventures.
The table below reflects the condensed income statements of our Unconsolidated Properties. In accordance with US generally accepted accounting principles, each of the line items in the chart below (other than equity in income (loss) of unconsolidated joint ventures) is presented as if these properties are wholly owned by us although our equity interests in these properties ranges from 17.45% to 80% (see note 8 of our consolidated financial statements) (dollars in thousands):
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Three Months Ended March 31,
2022 2021 Increase
(Decrease) % change
Rental and other revenues from unconsolidated joint ventures $ 25,231 $ 32,672 $ (7,441) (22.8) %
Real estate operating expense from unconsolidated joint ventures 11,169 15,703 (4,534) (28.9) %
Interest expense from unconsolidated joint ventures 6,026 8,522 (2,496) (29.3) %
Depreciation from unconsolidated joint ventures 6,636 10,385 (3,749) (36.1) %
Total expenses from unconsolidated joint ventures 23,831 34,610 (10,779) (31.1) %
Total revenues less total expenses from unconsolidated joint ventures 1,400 (1,938) 3,338 172.2 %
Other equity earnings 55 9 46 511.1 %
Impairment of assets from unconsolidated joint ventures — (2,323) 2,323 N/A
Insurance recoveries from unconsolidated joint ventures — 2,323 (2323) N/A
Gain on insurance recoveries 515 — 515 N/A
Loss on extinguishment of debt (30) — (30) N/A
Gain on sale of real estate 23,652 — 23,652 N/A
Net income (loss) $ 25,592 $ (1,929) $ 27,521 N/A
Equity in earnings (loss) of unconsolidated joint ventures and equity in earnings from sale of unconsolidated joint venture properties $ 14,191 $ (1,345) $ 15,536
Set forth below is an explanation of the most significant changes in the components of the equity in earnings (loss) of unconsolidated joint ventures. Same store properties at Unconsolidated Properties represent 27 properties that were owned for the entirety of the periods being compared and excludes four properties, three of which were sold and the fourth which is the subject of the Consolidating Transaction.
Rental and other revenues from unconsolidated joint ventures
The decrease is composed of :
• $4.5 million from the sale in 2021 of the properties by the unconsolidated joint ventures which owned The Avenue Apartments-Ocoee, FL and Parc at 980-Lawrenceville, GA (collectively, the "Avenue/Parc Sales");
• $3.4 million from the Consolidating Transactions;
• $1.4 million from the sale in 2021 of our interests in the unconsolidated joint ventures that owned Anatole Apartments-Daytona Beach, FL and Tower at Opop and Lofts at Opop-St. Louis, MO (collectively, the "Anatole/Opop Sales"); and
• $514,000 due to the Shavano Sale.
Offsetting the decrease was $2.4 million increase from same store sales, including $1.7 million from increased rental rates, $545,000 from increased occupancy, and $177,000 from increased ancillary fees.
Real estate operating expenses from unconsolidated joint ventures
The decrease is composed of:
• $1.9 million from the Avenue/Parc Sales;
• $1.7 million from the Consolidating Transactions;
• $843,000 from the Anatole/Opop Sales; and
• $239,000 from the Shavano Sale.
Offsetting this decrease was a $193,000 increase in such expenses at same store properties, with expenses generally increasing across most expense categories.
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Interest expense from unconsolidated joint ventures.
The decrease is due to the decrease in mortgage debt due to property sales and the Consolidated Transactions-in particular:
• $1.1 million from the Avenue/Parc Sales;
• $913,000 from the Consolidating Transactions; and
• $464,000 from the Anatole/Opop Sales.
Depreciation from unconsolidated joint ventures
The decrease is composed of:
• $1.4 million from the Avenue/Parc Sale;
• $1.4 million from the Consolidating Transactions;
• $511,000 from the Anatole/Opop Sales; and
• $314,000 from the Shavano Sale.
Impairment charges from unconsolidated joint ventures
During the three months ended March 31, 2021, we recognized $2.3 million of impairment charges at three properties located in Texas due to storm damage in 2021 (the "Texas Storm"); there were no comparable charges in the current period.
Insurance recoveries from unconsolidated joint ventures
During the three months ended March 31, 2021, we recognized $2.3 million of insurance recoveries related to the impairment charges resulting from the Texas Storm; there were no comparable recoveries in the current period.
Gain on insurance recoveries from unconsolidated joint ventures .
In the three months ended March 31, 2022, we recognized $515,000 in gains primarily due to the fact that the amounts we received on claims related to insurance recoveries from the Texas Storm exceeded the assets previously written-off.
Gain on sale of real estate from unconsolidated joint ventures
See "- Completed Dispositions" for information about the gain from the Shavano Sale. There was no comparable gain in the three months ended March 31, 2021.
Liquidity and Capital Resources
We require funds to pay operating expenses and debt service obligations, acquire properties (including the acquisition of interests of our joint venture partners) , make capital and other improvements, fund capital contributions, pay dividends and, to the extent we deem appropriate, reduce, other than in the ordinary course, our indebtedness over time. Generally, our primary sources of capital and liquidity are the operations of our multi-family properties (including distributions from the operations of our multi-family joint ventures and distributions from sale transactions), mortgage debt financings and re-financings, our share of the proceeds from the sale of properties, the sale of shares of our common stock pursuant to our at-the-market equity distribution program, borrowings from our credit facility and our available cash (including restricted cash). On March 31, 2022 and May 2, 2022, our cash and cash equivalents, were approximately $29.7 million and $21.5 million, respectively, and excludes funds held at our unconsolidated joint ventures.
We anticipate that from April 1, 2022 through 2024, our operating expenses, $104.5 million of mortgage amortization and interest expense, and $25.7 million of balloon payments (including $78.8 million and $10.8 million, respectively, from unconsolidated joint ventures) due with respect to mortgages maturing from 2022 to 2024, estimated cash dividend payments of at least $47.0 million (assuming (i) the current quarterly dividend rate of $0.23 per share and (ii) 18.6 million shares outstanding), will be funded from cash generated from operations (including distributions from unconsolidated joint ventures), sales of properties and, to the extent available, our credit facility. Our operating cash flow and available cash is insufficient to fully fund the $25.7 million of balloon payments, and if we are unable to refinance such debt, we may need to issue additional equity or dispose of properties, in each case on potentially unfavorable terms.
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See " – Contracts to Purchase the Remaining Interests of Joint Venture Partners in Nine Unconsolidated Ventures " for information regarding the source of funding to effectuate the Partner Buyouts of nine multi-family properties owned by unconsolidated joint ventures.
At March 31, 2022 , we had mortgage debt of $747.3 million (including $534.5 million of mortgage debt of our unconsolidated subsidiaries). The mortgage debt at our: (i) consolidated subsidiaries had a weighted average interest rate of 3.73% and a weighted average remaining term to maturity of approximately 10.2 years, and (ii) at our unconsolidated subsidiaries had a weighted average interest rate of 4.07% and a remaining term to maturity of approximately 7.6 years.
Capital improvements at (i) 13 multi-family properties will be funded by approximately $6.5 million of restricted cash available at March 31, 2022 and the cash flow from operations at such properties and (ii) other properties will be funded from the cash flow from operations of such properties.
Junior Subordinated Notes
As of March 31, 2022, $37.4 million (excluding deferred costs of $292,000) in principal amount of our junior subordinated notes is outstanding. These notes mature in April 2036, contain limited covenants (including covenants prohibiting us from paying dividends or repurchasing capital stock if there is an event of default (as defined therein) on these notes), are redeemable at our option and bear an interest rate, which resets and is payable quarterly, of three-month LIBOR plus 200 basis points. At March 31, 2022 and 2021, the interest rate on these notes was 2.30% and 2.21%, respectively.
Credit Facility
Our credit facility with VNB New York, LLC, an affiliate of Valley National Bank (collectively, "VNB"), as amended and restated, allows us to borrow, subject to compliance with borrowing base requirements and other conditions, up to $35 million, (i) for the acquisition of, and investment in, multi-family properties, (ii) to repay mortgage debt secured by multi-family properties and (iii) for Operating Expenses ( i.e. , working capital (including dividend payments) and operating expenses); provided, that not more than $15 million may be used for Operating Expenses. (The facility provides that it may be expanded to provide for up to $60 million of availability if another lender(s) is willing to provide an additional $25 million of availability). The credit facility is secured by cash accounts maintained by us at VNB (and we are required to maintain substantially all of our bank accounts at VNB), and the pledge of our interests in the entities that own the unencumbered multi-family properties used in calculating the borrowing base. The credit facility bears an annual interest rate, which resets daily, of 25 basis points over the prime rate, with a floor of 3.50%. There is an annual fee of 0.25% on the total amount committed by VNB and unused by us. The credit facility matures in November 2024. As of the date of this filing, no amounts are outstanding on the credit facility and $35 million is available to be borrowed thereunder.
The terms of the credit facility include certain restrictions and covenants which, among other things, limit the incurrence of liens, require that we maintain and include in the collateral securing the facility at least two unencumbered properties with an aggregate value(as calculated pursuant to the facility) of at least $50 million, and require compliance with financial ratios relating to, among other things, the minimum amount of debt service coverage with respect to the properties (and amounts drawn on the credit facility) used in calculating the borrowing base. Net proceeds received from the sale, financing or refinancing of wholly-owned properties are generally required to be used to repay amounts outstanding under the credit facility.
At March 31, 2022, we were in compliance in all material respects with the requirements of the facility.
Other Financing Sources and Arrangements
At March 31, 2022, we are joint venture partners in approximately 22 unconsolidated joint ventures which own 23 multi-family properties (including a development project) and that the distributions to us from these joint venture properties ($19.7 million (including $14.9 million from the sale of the property) in the quarter ended March 31, 2022) are a material source of our liquidity and cash flow. Further, we may be required to make significant capital contributions with respect to these properties. At March 31, 2022, these joint venture properties have a net equity carrying value of $109.4 million and are subject to net mortgage debt, which is not reflected on our consolidated balance sheet, of $534.5 million. Although BRT Apartments Corp. is not the obligor with respect to such mortgage debt, the loss of any of these properties due to mortgage foreclosure or similar proceedings would have a material adverse effect on our results of operations and financial condition. These joint venture arrangements have been, and we anticipate that they will continue to be, material to our liquidity and capital resource position. See note 8 to our consolidated financial statements.
Cash Distribution Policy
We have elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended, which we refer to as the “Code.” To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement
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that we distribute to our stockholders within the time frames prescribed by the Code at least 90% of our ordinary taxable income. Management currently intends to maintain our REIT status. As a REIT, we generally will not be subject to corporate Federal income tax on taxable income we distribute to stockholders in accordance with the Code. If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income taxes at regular corporate rates and may not be able to qualify as a REIT for four subsequent tax years. Even if we qualify for Federal taxation as a REIT, we are subject to certain state and local taxes on our income and to Federal income and excise taxes on undistributed taxable income, ( i.e ., taxable income not distributed in the amounts and in the time frames prescribed by the Code).
Our net operating loss at December 31, 2021 was approximately $35.7 million; therefore, we are not currently required by Code provisions relating to REITs to pay cash dividends to maintain our status as a REIT. Notwithstanding the foregoing, on April 7, 2022, we paid a quarterly cash dividend of $0.23 per share.
We carefully monitor our discretionary spending. Our largest recurring discretionary expenditure has been our quarterly dividend (which was $0.23 per share of common stock, or in the approximate amount of $4.3 million, for the most recent quarter). Each quarter, our board of directors evaluates the timing and amount of our dividend based on its assessment of, among other things, our short and long- term cash and liquidity requirements, prospects, debt maturities, projections of our REIT taxable income, net income, funds from operations, and adjusted funds from operations.
Application of Critical Accounting Estimates
A complete discussion of our critical accounting estimates is included in our Annual Report. There have been no significant changes in such estimates since December 31, 2021.
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Funds from Operations; Adjusted Funds from Operations; Net Operating Income
We disclose below funds from operations (“FFO”), adjusted funds from operations (“AFFO”) and net operating income ("NOI") because we believe that such metrics are a widely recognized and appropriate measure of the performance of an equity REIT.
We compute FFO in accordance with the “White Paper on Funds From Operations” issued by the National Association of Real Estate Investment Trusts (“NAREIT”) and NAREIT’s related guidance. FFO is defined in the White Paper as net income (calculated in accordance with GAAP), excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, gains and losses from change in control, impairment write-downs of certain real estate assets and investments in entities where the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis. In computing FFO, we do not add back to net income the amortization of costs in connection with our financing activities or depreciation of non-real estate assets. We compute AFFO by deducting from FFO our straight-line rent accruals, loss on extinguishment of debt, restricted stock and restricted stock unit expense, deferred mortgage costs and gain on insurance recovery. Since the NAREIT White Paper only provides guidelines for computing FFO, the computation of AFFO may vary from one REIT to another.
We believe that FFO and AFFO are useful and standard supplemental measures of the operating performance for equity REITs and are used frequently by securities analysts, investors and other interested parties in evaluating equity REITs, many of which present FFO and AFFO when reporting their operating results. FFO and AFFO are intended to exclude GAAP historical cost depreciation and amortization of real estate assets, which assumes that the carrying value of real estate assets diminishes predictably over time. In fact, real estate values have historically risen and fallen with market conditions. As a result, we believe that FFO and AFFO provide a performance measure that when compared year over year, should reflect the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs and other matters without the inclusion of depreciation and amortization, providing a perspective that may not be necessarily apparent from net income. We also consider FFO and AFFO to be useful to us in evaluating potential property acquisitions.
FFO and AFFO do not represent net income or cash flows from operations as defined by GAAP. FFO and AFFO should not be considered to be an alternative to net income as a reliable measure of our operating performance; nor should FFO and AFFO be considered an alternative to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity. FFO and AFFO do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization and capital improvements. FFO and AFFO do not represent cash flows from operating, investing or financing activities as defined by GAAP.
Management recognizes that there are limitations in the use of FFO and AFFO. In evaluating our performance, management is careful to examine GAAP measures such as net income and cash flows from operating, investing and financing activities.
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The tables below provides a reconciliation of net loss determined in accordance with GAAP to FFO and AFFO on a dollar and per share basis for each of the indicated periods (dollars in thousands, except per share amounts):
Three Months Ended March 31,
2022 2021
GAAP Net income (loss) attributable to common stockholders $ 11,508 $ (3,765)
Add: depreciation of properties 3,606 1,537
Add: our share of depreciation in unconsolidated joint venture properties 4,318 6,599
Add: our share of impairment charge in unconsolidated joint venture properties — 1,662
Deduct: our share of equity in earnings from sale of unconsolidated joint venture properties (12,961) —
Deduct: gain on sale of real estate and partnership interests (6) —
Adjustments for non-controlling interests (4) (4)
NAREIT Funds from operations attributable to common stockholders 6,461 6,029
Adjustments for: straight-line rent accruals 6 (10)
Add: our share of loss on extinguishment of debt from unconsolidated joint venture properties 19 —
Add: amortization of restricted stock and RSU expense 974 538
Add: amortization of deferred mortgage and debt costs 77 80
Add: our share of deferred mortgage costs from unconsolidated joint venture properties 93 148
Less: our share of insurance recovery — (1,662)
Less: our share of gain on insurance proceeds from unconsolidated joint venture properties (386) —
Adjustments for non-controlling interests (1) 2
Adjusted funds from operations attributable to common stockholders $ 7,243 $ 5,125
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Three Months Ended March 31,
2022 2021
Net income (loss) attributable to common stockholders $ 0.62 $ (0.22)
Add: depreciation of properties 0.20 0.09
Add: our share of depreciation in unconsolidated joint venture properties 0.23 0.38
Add: our share of impairment charge in unconsolidated joint venture properties — 0.10
Deduct: our share of equity in earnings from sale of unconsolidated joint venture properties (0.70) —
Deduct: gain on sale of real estate and partnership interests — —
Adjustment for non-controlling interests — —
NAREIT Funds from operations per diluted common share 0.35 0.35
Adjustments for: straight line rent accruals — —
Add: our share of loss on extinguishment of debt from unconsolidated joint venture properties — —
Add: amortization of restricted stock and RSU expense 0.05 0.04
Add: amortization of deferred mortgage and debt costs — —
Add: our share of deferred mortgage and debt costs from unconsolidated joint venture properties 0.01 0.01
Less: our share of insurance recovery from unconsolidated joint venture properties — (0.10)
Less: our share of gain on insurance proceeds from unconsolidated joint venture properties (0.02) —
Adjustments for non-controlling interests — —
Adjusted funds from operations per diluted common share $ 0.39 $ 0.30
Diluted shares outstanding for FFO and AFFO 18,570,639 17,319,222
FFO increased on an absolute basis for the three months ended March 31, 2022, from the corresponding 2021 period primarily due to the improved operating margins at consolidated and unconsolidated same store properties, the Consolidating Transactions and reduced interest expense. The increase was offset by the Kendall Sale, the Avenue/Parc Sales, the Anatole/Opop Sales, the inclusion in the three months ended March 31, 2021 of significant insurance recoveries and the increase, in the three months ended March 31, 2022 from the corresponding period in 2021, of non-cash amortization of equity award expense.
AFFO increased on an absolute and diluted per share basis for the three months ended March 31, 2022 from the corresponding period in 2021 primarily due to the factors impacting the improvement in FFO, other than the effects of the significant insurance recoveries in 2021 and the non-cash compensation expense related to equity awards in the three months ended March 31, 2022.
Diluted per share FFO and AFFO were impacted in the three months ended March 31, 2022 by a 1.25 million increase in the weighted average shares of common stock outstanding from the first quarter of 2021 through the current quarter, primarily due to stock issuances pursuant to our at-the -market equity offering and equity incentive programs.
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Net Operating Income, or NOI, is a non-GAAP measure of performance. NOI is used by our management and many investors to evaluate and compare the performance of our properties to other comparable properties, to determine trends at our properties and to determine the estimated fair value of our properties. The usefulness of NOI may be limited in that it does not take into account, among other things, general and administrative expense, interest expense, loss on extinguishment of debt, casualty losses, insurance recoveries and gains or losses as determined by GAAP. NOI is a property specific performance metric and does not measure our performance as a whole.
We compute NOI, by adjusting net income (loss) to (a) add back (1) depreciation expense, (2) general and administrative expenses, (3) interest expense, (4) loss on extinguishment of debt, (5) equity in loss of unconsolidated joint ventures, (6) provision for taxes, (7) the impact of non-controlling interests, and (b) deduct (1) other income, (2) gain on sale of real estate, and (3) gain on insurance recoveries related to casualty loss. Other REIT’s may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to other REIT’s. We believe NOI provides an operating perspective not immediately apparent from GAAP operating income or net income (loss). NOI is one of the measures we use to evaluate our performance because it (i) measures the core operations of property performance by excluding corporate level expenses and other items unrelated to property operating performance and (ii) captures trends in rental housing and property operating expenses. However, NOI should only be used as an alternative measure of our financial performance.
The following table provides a reconciliation of net income attributable to common stockholders as computed in accordance with GAAP to NOI of our consolidated properties for the periods presented (dollars in thousands):
Three Months Ended March 31,
2022 2021
GAAP Net income (loss) attributable to common stockholders $ 11,508 $ (3,765)
Less: Other Income (4) (4)
Add: Interest expense 2,021 1,660
General and administrative 3,633 3,114
Impairment charge — —
Depreciation 3,606 1,537
Provision for taxes 74 57
Less: Gain on sale of real estate (6) —
Equity in earnings from sale of unconsolidated joint venture properties (12,961) —
Add: Loss on extinguishment of debt — —
Adjust for: Equity in (earnings) loss of unconsolidated joint venture properties (1,230) 1,345
Add: Net income attributable to non-controlling interests 36 34
Net Operating Income $ 6,677 $ 3,978
Less: Non-same store Net Operating Income $ 2,841 $ 532
Same store Net Operating Income $ 3,836 $ 3,446
For the three months ended March 31, 2022, NOI increased $2.7 million from the corresponding period in 2021 primarily due to a $4.4 million increase in rental revenues (and in particular, the impact of the Consolidating Transactions) offset by a $1.9 million increase, primarily from the Consolidating Transactions, in real estate operating expenses. Same store NOI in the three months ended March 31, 2022, increased by $390,000 from the corresponding period in 2021, due to a $614,000 increase in rental revenues (and in particular, the increase in average rental rates) offset by a $224,000 increase in real estate operating expenses. See "-Results of Operations" for a discussion of these changes.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.