UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

 

OR

 

 

Commission file number 000-54674

STEADFAST INCOME REIT, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

(949) 852-0700

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filed, 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. (Check one):

 

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

As of May 9, 2014, there were 75,163,809 shares of the Registrant’s common stock issued and outstanding.

 

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STEADFAST INCOME REIT, INC.

INDEX

 

 

 

 

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STEADFAST INCOME REIT, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

 

See accompanying notes to consolidated financial statements.

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STEADFAST INCOME REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

STEADFAST INCOME REIT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2013

AND FOR THE  THREE MONTHS ENDED MARCH 31, 2014 (Unaudited)

 

 

 

 

See accompanying notes to consolidated financial statements.

 

STEADFAST INCOME REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

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See accompanying notes to consolidated financial statements.

 

 

1. Organization and Business

Steadfast Income REIT, Inc. (the “Company”) was formed on May 4, 2009, as a Maryland corporation that has elected to qualify as a real estate investment trust (“REIT”).  On June 12, 2009, the Company was initially capitalized pursuant to the sale of 22,223 shares of common stock to Steadfast REIT Investments, LLC (the “Sponsor”) at a purchase price of $9.00 per share for an aggregate purchase price of $200,007. On July 10, 2009, Steadfast Income Advisor, LLC (the “Advisor”), a Delaware limited liability company formed on May 1, 2009, invested $1,000 in the Company in exchange for 1,000 shares of convertible stock (the “Convertible Stock”) as described in Note 6.

Substantially all of the Company’s business is conducted through Steadfast Income REIT Operating Partnership, L.P., a Delaware limited partnership formed on July 6, 2009 (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The Company and Advisor entered into an Amended and Restated Limited Partnership Agreement of the Operating Partnership (the “Partnership Agreement”) on September 28, 2009.

As of March 31, 2014, the Company owned  65 multifamily properties comprising a total of  16,271 apartment homes and 30,125 square feet of rentable commercial space.

Public Offering

On July 19, 2010, the Company commenced its initial public offering pursuant to a registration statement on Form S-11 filed with the Securities and Exchange Commission (the “SEC”) to offer a maximum of 150,000,000 shares of common stock for sale to the public at an initial price of $10.00 per share (with discounts available for certain categories of purchasers) (the “Primary Offering”). The Company also registered up to 15,789,474 shares of common stock for sale pursuant to the Company’s distribution reinvestment plan (the “DRP,” and together with the Primary Offering, the “Public Offering ”) at an initial price of $9.50 per share. 

On July 12, 2012, the Company’s board of directors determined an estimated value per share of the Company’s common stock as of March 31, 2012 of $10.24. As a result of the determination of the estimated value per share of the Company’s common stock as of March 31, 2012, effective September 10, 2012, the offering price of the Company’s common stock to the public in the Primary Offering increased from the previous price of $10.00 per share to $10.24 per share.  Additionally, effective September 10, 2012, the price of shares of the Company’s common stock issued pursuant to the DRP increased from a price of $9.50 per share to a price of $9.73 per share, or 95% of the new Primary Offering price of $10.24 per share. 

The Company terminated its Primary Offering on December 20, 2013, but continues to offer shares of common stock pursuant to the DRP. Through December 20, 2013, the Company sold 73,608,337 shares of common stock in the Public Offering for gross proceeds of $745,389,748, including 1,588,289 shares of common stock issued pursuant to the DRP for gross offering proceeds of $15,397,232. 

The business of the Company is externally managed by the Advisor, pursuant to an Advisory Agreement by and among the Company, the Operating Partnership and the Advisor (as amended, the “Advisory Agreement”), which is subject to annual renewal by the Company’s board of directors.  The current term of the Advisory Agreement expires on May 4, 2015.  Subject to certain restrictions and limitations, the Advisor manages the Company’s day-to-day operations, manages the Company’s portfolio of properties and real estate-related assets, sources and presents investment opportunities to the Company’s board of directors and provides investment management services on the Company’s behalf. Steadfast Capital Markets Group, LLC (the “Dealer Manager”), an affiliate of the Company, served as the dealer manager for the Public Offering. The Dealer Manager was responsible for marketing the Company’s shares of common stock being offered pursuant to the Public Offering. The Advisor, along with the Dealer Manager, also provides offering services, marketing, investor relations and other administrative services on the Company’s behalf.

The Partnership Agreement provides that the Operating Partnership is operated in a manner that will enable the Company to (1) satisfy the requirements for being classified as a REIT for tax purposes, (2) avoid any federal income or excise tax liability and (3) ensure that the Operating Partnership will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), which classification could result in the Operating Partnership being taxed as a corporation, rather than as a partnership. In addition to the administrative and operating costs and expenses incurred by the Operating Partnership in acquiring and operating real properties, the Operating Partnership will pay all of the Company’s administrative costs and expenses, and such expenses will be treated as expenses of the Operating Partnership.

2. Summary of Significant Accounting Policies

There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended  December 31, 2013. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2014.

 

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company, the Operating Partnership and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. The financial statements of the Company’s subsidiaries are prepared using accounting policies consistent with those of the Company.

The accompanying unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments that are of a normal and recurring nature and necessary for a fair and consistent presentation of the results of such periods. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The unaudited consolidated financial statements herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Fair Value Measurements

Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other assets and liabilities at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:

When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and will classify such items in Level 1 or Level 2. In instances where the market is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and will establish a fair value by assigning weights to the various valuation sources.

The following describes the valuation methodologies used by the Company to measure fair value, including an indication of the level in the fair value hierarchy in which each asset or liability is generally classified.

Interest rate caps - These derivatives did not qualify as fair value hedges. Fair value was based on a model-driven valuation using the associated variable rate curve and an implied market volatility, both of which were observable at commonly quoted intervals for the full term of the caps. Therefore, the Company’s interest rate caps were classified within Level 2 of the fair value hierarchy and are included in deferred financing costs and other assets in the accompanying consolidated balance sheets.

The following table reflects the Company’s assets required to be measured at fair value on a recurring basis on the consolidated balance sheets:

 

 

 

 

Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.

Fair Value of Financial Instruments

The accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, rents and other receivables, accounts payable and accrued liabilities, due to affiliates and notes payable.

The Company considers the carrying value of cash and cash equivalents, restricted cash, rents and other receivables, accounts payable and accrued liabilities and the revolving line of credit to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization. The fair value of amounts due to affiliates is not determinable due to the related party nature of such amounts.

The fair value of the mortgage notes payable is estimated using a discounted cash flow analysis using borrowing rates available to the Company for debt instruments with similar terms and maturities. As of March 31, 2014 and December 31, 2013, the fair value of the mortgage notes payable was $1,021,079,209 and $965,681,419, respectively, compared to the carrying value of $1,036,131,050 and $987,329,800, respectively. The Company has determined that its mortgage notes payable are classified as Level 3 within the fair value hierarchy.

Distribution Policy

The Company has elected to be taxed as a REIT and to operate as a REIT beginning with its taxable year ending December 31, 2010. To maintain its qualification as a REIT, the Company intends to make distributions each taxable year equal to at least 90% of its REIT taxable income (which is determined without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). Distributions were based on daily record dates and calculated at a rate of $0.001964 per share per day. Each day during the period from January 1, 2014 through March 31, 2014 was a record date for distributions.

Distributions to stockholders are determined by the board of directors of the Company and are dependent upon a number of factors relating to the Company, including funds available for the payment of distributions, financial condition, the timing of property acquisitions, capital expenditure requirements and annual distribution requirements in order for the Company to qualify as a REIT under the Internal Revenue Code. During the three months ended March 31, 2014 and 2013, the Company declared distributions totaling $0.177 and $0.177 per share of common stock, respectively.

Per Share Data

Basic earnings (loss) per share attributable for all periods presented are computed by dividing net income (loss) attributable to controlling interest by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted earnings (loss) per share are computed based on the weighted average number of shares of the Company’s common stock and all potentially dilutive securities, if any. Distributions declared per common share assumes each share was issued and outstanding each day during the period. Nonvested shares of the Company’s restricted common stock give rise to potentially dilutive shares of the Company’s common stock but such shares were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during the period.

Segment Disclosure

The Company has determined that it has one reportable segment with activities related to investing in multifamily properties. The Company’s investments in real estate are in different geographic regions, and management evaluates operating performance on an individual asset level. However, as each of the Company’s assets has similar economic characteristics, tenants and products and services, its assets have been aggregated into one reportable segment.

Recently Issued Accounting Standards Updates

In April 2014, the FASB issued ASU No. 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 (“ASU No. 2014-08”). ASU No. 2014-08 limits discontinued operations reporting to disposals of components of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs: (a) the component of an entity or group of components of an entity meets the criteria to be classified as held for sale; (b) the component of an entity or group of components of an entity is disposed of by sale; and (c) the component of an entity or group of components of an entity is disposed of other than by sale. ASU No. 2014-08 also requires additional disclosures about discontinued operations. ASU No. 2014-08 is effective for reporting periods beginning after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company early adopted ASU No. 2014-08 for the reporting period beginning January 1, 2014. As a result of the adoption of ASU No. 2014-08, properties that are classified as held for sale in the ordinary course of business on or subsequent to January 1, 2014 would generally be included in continuing operations on the Company’s consolidated statements of operations. As there are no properties currently classified as held for sale, the adoption of ASU No. 2014-08 did not have an impact on the presentation of the Company’s consolidated financial statements.

3. Real Estate

As of March 31, 2014, the Company owned 65 multifamily properties, encompassing in the aggregate 16,271 apartment homes and 30,125 square feet of rentable commercial space. The total cost of the Company’s real estate portfolio was $1,566,221,535. As of March 31, 2014 and December 31, 2013,  the Company’s portfolio was approximately 93.6% and 92.4% occupied and the average monthly rent was $1,019 and $952, respectively.

First Quarter Acquisitions

Sycamore Terrace Apartments (Phase II)

On March 5, 2014, the Company acquired a fee simple interest in Watermark at Sycamore Terrace Phase II in Terre Haute, Indiana (the “Phase II Property”), through a wholly-owned subsidiary of the Operating Partnership, for a purchase price of $6,674,157, exclusive of closing costs. The Phase II Property contains 72 apartment homes consisting of 24 one-bedroom apartments, 36 two-bedroom apartments, and 12 three-bedroom apartments. The apartment homes range in size from 905 to 1,535 square feet and average 1,128 square feet. An acquisition fee of $134,706 was earned by the Advisor in connection with the acquisition of the Phase II Property.

On September 20, 2012, the Company acquired 178 apartment homes, commonly known as Sycamore Terrace Apartments, immediately adjacent to the Property (“Phase I”). On March 5, 2014, the Phase II Property, together with Phase I, will be commonly referred to as Sycamore Terrace Apartments.

Reserve at Creekside Village

On March 28, 2014, the Company acquired a fee simple interest in Reserve at Creekside Village in Chattanooga, Tennessee (the “Creekside Property”), through a wholly-owned subsidiary of the Operating Partnership, for a purchase price of $18,875,000, exclusive of closing costs. The Creekside Property consists of eight three-story residential buildings and contains 192 apartment homes consisting of 48 one-bedroom apartments, 96 two-bedroom apartments and 48 three-bedroom apartments. The apartment homes range in size from 867 to 1,342 square feet and average 1,102 square feet. An acquisition fee of $465,021 was earned by the Advisor in connection with the acquisition of the Creekside Property.

Mapleshade Park

On March 31, 2014, the Company acquired a fee simple interest in Mapleshade Park in Dallas, Texas (the “Mapleshade Property”), through a wholly-owned subsidiary of the Operating Partnership, for a purchase price of $23,325,000, exclusive of closing costs. The Mapleshade Property consists of 25 two-story residential buildings and contains 148 two-bedroom apartment homes. The apartment homes range in size from 1,101 to 1,305 square feet and average 1,236 square feet. An acquisition fee of $498,873  was earned by the Advisor in connection with the acquisition of the Mapleshade Property.

The purchase price for the Company’s acquisitions during the three months ended March 31, 2014 was allocated as follows as of the respective closing dates of each acquisition:

 

 

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As of March 31, 2014 and December 31, 2013, accumulated depreciation and amortization related to the Company’s consolidated real estate properties and related intangibles were as follows:

 

 

Depreciation and amortization expense was $20,205,351 and $8,723,557 for the three months ended March 31, 2014 and 2013, respectively.

Amortization of the Company’s tenant origination and absorption costs for the three months ended March 31, 2014 and 2013 was $6,301,018 and $3,324,704, respectively. Tenant origination and absorption costs had a weighted-average amortization period as of the date of acquisition of less than one year.

Amortization of the Company’s other intangible assets for the three months ended March 31, 2014 and 2013 was $38,292 and $5,891, respectively. Other intangible assets had a weighted-average amortization period as of the date of acquisition of 18.17 years.

The increase in rental income as a result of the accretion of the Company’s below-market lease intangible liabilities for the three months ended March 31, 2014 and 2013 was $163,237 and $258,326. The Company’s below-market lease intangible liabilities had a weighted-average accretion period as of the date of acquisition of less than one year.

The future amortization of the Company’s acquired other intangible assets as of March 31, 2014 and thereafter is as follows:

 

Operating Leases

As of March 31, 2014, the Company’s real estate portfolio comprised 16,271 residential apartment homes and was 96.0% leased by a diverse group of residents. For the three months ended March 31, 2014, the Company’s real estate portfolio earned approximately 99% and 1% of its rental income from residential tenants and commercial office tenants, respectively. For the three months ended March 31, 2013, the Company’s real estate portfolio earned approximately 99% and 1% of its rental income from residential tenants and commercial office tenants, respectively. The residential tenant lease terms consist of lease durations equal to 12 months or less. The commercial office tenant leases consist of lease durations varying from 1 to 5  years.

Some residential and commercial leases contain provisions to extend the lease agreements, options for early termination after paying a specified penalty and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit and/or a letter of credit for commercial tenants. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets and totaled $3,739,502 and $3,560,623 as of March 31, 2014 and December 31, 2013, respectively.

The future minimum rental receipts from the Company’s properties under non-cancelable operating leases attributable to commercial office tenants as of March 31, 2014 and thereafter is as follows:

 

 

 

As of March 31, 2014 and December 31, 2013, no tenant represented over 10% of the Company’s annualized base rent and there were no significant industry concentrations with respect to its commercial leases.

4. Deferred Financing Costs and Other Assets

As of March 31, 2014 and December 31, 2013, deferred financing costs and other assets, net of accumulated amortization, consisted of:

 

 

 

 

 

 

 

 

5. Debt

 

Mortgage Notes Payable

The following is a summary of mortgage notes payable secured by real property as of March 31, 2014 and December 31, 2013:

 

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Revolving Credit Facility

The Company has an unsecured revolving line of credit with PNC Bank, N.A. to borrow up to $20,000,000. On April 16, 2014, the Company amended the credit facility to extend the expiration date to May 23, 2014. Each advance under the facility is due within 180 days from the date of the advance, and all unpaid principal and interest is due and payable in full on May 23, 2014.

For each advance, the Company has the option to select the interest rate from the following options: (1) 2.0% plus the highest of (A) the Prime Rate (as defined in the credit agreement), (B) the sum of the Federal Funds Rate (as defined in the credit agreement) plus 0.50%, and (C) LIBOR plus 1.0% or (2) LIBOR plus 3.0%. For each advance wherein one of the LIBOR options is selected by the Company, the Company may select either the one-month LIBOR, three-month LIBOR or six-month LIBOR. As of March 31, 2014,  $15,000,000 was outstanding bearing interest at the one-month LIBOR plus 3.0%.

The following is a summary of the Company’s aggregate maturities as of March 31, 2014:

 

 

 

 

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The Company’s notes payable contain customary financial and non-financial debt covenants. As of March 31, 2014 and December 31, 2013, the Company was in compliance with all financial and non-financial debt covenants.

For the three months ended March 31, 2014 and 2013, the Company incurred interest expense of $9,924,021 and $4,302,013. Interest expense for the three months ended March 31, 2014 and 2013 includes amortization of deferred financing costs of $364,088 and $160,294, accretion of loan premiums of $308,699 and $155,112, and net unrealized losses from the change in fair value of interest rate caps of $1,189,874 and $64,617, respectively. Interest expense of $2,786,866 and $1,409,323 was payable as of March 31, 2014 and December 31, 2013, respectively, and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets.

Letter of Credit

In connection with the acquisition of the Windsor on the River Apartments, PNC Bank, National Association (the “Credit Provider”) issued a Letter of Credit to the Bond Trustee up to an aggregate of $23,789,727. The purpose of the Letter of Credit is to provide the Bond Trustee with funds for the payment of principal and interest on the Bonds and the purchase price of the Bonds that have been tendered pursuant to the tender provisions of the Indenture to the extent remarketing proceeds or other funds are not available for such purposes. The Letter of Credit will expire on January 25, 2017. Pursuant to a Reimbursement and Credit Agreement (the “Reimbursement Agreement”) by and between the Company, the Credit Provider and the Bond Trustee, the Company will reimburse the Credit Provider for all amounts paid by the Credit Provider to the Bond Trustee pursuant to a draw on the Letter of Credit on the day that the Credit Provider pays such amounts to the Bond Trustee. Interest on any amounts due under the Reimbursement Agreement will accrue from the date such amounts become due and payable until paid in full at a rate per annum equal to a fluctuating rate established by the Reimbursement Agreement plus 3.00%, subject to certain exceptions.

The Company paid a nonrefundable fee in connection with the origination of the Letter of Credit in the amount of $118,950. In addition, the Company will pay the Credit Provider an annual fee based upon a fixed percentage of the Letter of Credit Amount (the “Facility Fee”). The Facility Fee is: (1) for the period commencing on the closing date and ending on the day immediately preceding the first anniversary of the closing date (which occurred on January 26, 2013), 2.00% per annum; (2) for the period commencing on the first anniversary of the closing date and ending on the day immediately preceding the third anniversary of the closing date, 2.25% per annum; and (3) for the period commencing on the third anniversary of the closing date and thereafter, 2.50% per annum.

On March 26, 2013, the Reimbursement Agreement was amended to, among other things, modify certain financial covenants. In connection with the amendment, the Company agreed to deposit $50,000 each month into a principal reserve account beginning on March 26, 2013 and continuing on the first day of each month until the termination of the Reimbursement Agreement. As of March 31, 2014, the total balance of the principal reserve account was  $650,747  and is included in restricted cash in the accompanying consolidated balance sheets.

6. Stockholders’ Equity

General

Under the Company’s Second Articles of Amendment and Restatement (the “Charter”), the total number of shares of capital stock authorized for issuance is 1,100,000,000 shares, consisting of 999,999,000 shares of common stock with a par value of $0.01 per share, 1,000 shares of convertible stock with a par value of $0.01 per share and 100,000,000 shares designated as preferred stock with a par value of $0.01 per share.

Common Stock

The shares of the Company’s common stock entitle the holders to one vote per share on all matters upon which stockholders are entitled to vote, to receive dividends and other distributions as authorized by the Company’s board of directors in accordance with the Maryland General Corporation Law and to all rights of a stockholder pursuant to the Maryland General Corporation Law. The common stock has no preferences or preemptive, conversion or exchange rights.

During 2009, the Company issued 22,223 shares of common stock to the Sponsor for $200,007. As of March 31, 2014, the Company had issued 74,886,955 shares of common stock in a private offering and Public Offering for offering proceeds of $661,616,053, net of offering costs of $95,845,468, including 2,228,319 shares of common stock pursuant to the DRP, for total proceeds of $21,624,720. The offering costs primarily consist of selling commissions and dealer manager fees. Offering proceeds include $0 and $26,549,087 of amounts receivable from the Company’s transfer agent as of March 31, 2014 and December 31, 2013, respectively, which are included in rents and other receivables in the accompanying consolidated balance sheets.

During the year ended December 31, 2013, the Company granted 10,000 shares of restricted stock to its independent directors at a weighted average fair value of  $10.24 as compensation for services in connection with their initial election or re-election to the board of directors at the Company’s annual meeting. The shares of restricted common stock vest and become non-forfeitable in four equal annual installments beginning on the date of grant and ending on the third anniversary of the date of grant and will become fully vested and become non-forfeitable on the earlier to occur of (1) the termination of the independent director’s service as a director due to his or her death or disability, or (2) a change in control of the Company.

Included in general and administrative expenses is $22,176 and $21,126 for the three months ended March 31, 2014 and 2013, respectively, for compensation expense related to the issuance of restricted common stock. The weighted average remaining term of the restricted common stock is 0.92 years as of March 31, 2014.

Convertible Stock

The Company issued 1,000 shares of Convertible Stock to the Advisor for $1,000. The Convertible Stock will convert into shares of the Company’s common stock if and when: (A) the Company has made total distributions on the then outstanding shares of common stock equal to the original issue price of those shares plus an 8.0% cumulative, non-compounded, annual return on the original issue price of those shares, (B) subject to specified conditions, the Company lists the common stock for trading on a national securities exchange or (C) the Advisory Agreement is terminated or not renewed by the Company (other than for “cause” as defined in the Advisory Agreement). A “listing” will also be deemed to have occurred on the effective date of any merger of the Company in which the consideration received by the holders of the Company’s common stock is the securities of another issuer that are listed on a national securities exchange. Upon conversion, each share of Convertible Stock will convert into a number of shares of common stock equal to 1/1000 of the quotient of (A) 10% of the amount, if any, by which (1) the Company’s “enterprise value” (as defined in the Charter) plus the aggregate value of distributions paid to date on the outstanding shares of common stock exceeds (2) the aggregate purchase price paid by the stockholders for those shares plus an aggregate 8.0% cumulative, non-compounded, annual return on the original issue price of those shares, divided by (B) the Company’s enterprise value divided by the number of outstanding shares of common stock, in each case calculated as of the date of the conversion. In the event of a termination or non-renewal of the Advisory Agreement by the Company for cause, the Convertible Stock will be redeemed by the Company for $1.00.

Preferred Stock

The Charter also provides the Company’s board of directors with the authority to issue one or more classes or series of preferred stock, and prior to the issuance of such shares of preferred stock, the board of directors shall have the power from time to time to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights and privileges of such shares of preferred stock. The Company’s board of directors is authorized to amend the Charter, without the approval of the stockholders, to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue. As of March 31, 2014 and December 31, 2013, no shares of the Company’s preferred stock were issued and outstanding.

Distribution Reinvestment Plan

The Company’s board of directors has approved the DRP through which common stockholders may elect to reinvest an amount equal to the distributions declared on their shares of common stock in additional shares of the Company’s common stock in lieu of receiving cash distributions. The initial purchase price per share under the DRP was $9.50. Effective September 10, 2012, shares of the Company’s common stock are issued pursuant to the DRP at a price of $9.73 per share or 95% of the new offering price of $10.24 per share.  The Company’s board of directors may, in its sole discretion, from time to time, change this price based upon changes in the Company’s estimated value per share, and other factors that the Company’s board of directors deems relevant.

No sales commissions or dealer manager fees are payable on shares sold through the DRP. The Company’s board of directors may terminate the DRP at its discretion at any time upon ten days notice to the Company’s stockholders. Following any termination of the DRP, all subsequent distributions to stockholders will be made in cash.

Share Repurchase Plan and Redeemable Common Stock

The Company’s share repurchase plan may provide an opportunity for stockholders to have their shares of common stock repurchased by the Company, subject to certain restrictions and limitations. No shares can be repurchased under the share repurchase plan until after the first anniversary of the date of purchase of such shares; provided, however, that this holding period shall not apply to repurchases requested within two years after the death or disability of a stockholder.

The purchase price for shares repurchased under the Company’s share repurchase plan will be as follows:

 

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The purchase price per share for shares repurchased pursuant to the share repurchase plan will be further reduced by the aggregate amount of net proceeds per share, if any, distributed to the Company’s stockholders prior to the repurchase date as a result of the sale of one or more of the Company’s assets that constitutes a return of capital distribution as a result of such sales.

Repurchases of shares of the Company’s common stock will be made quarterly upon written request to the Company at least 15 days prior to the end of the applicable quarter. Repurchase requests will be honored approximately 30 days following the end of the applicable quarter (the “Repurchase Date”). Stockholders may withdraw their repurchase request at any time up to three business days prior to the repurchase date. During the three months ended March 31, 2014, the Company redeemed a total of 49,513 shares with a total redemption value of $474,161 and received requests for the redemption of 61,570 shares with a total redemption value of $614,762. During the three months ended March 31, 2013, the Company received requests for the redemption of 35,596 shares with a total redemption value of $350,901, all of which were redeemed during the year ended December 31, 2013.

As of March 31, 2014, the Company had 63,985 shares of outstanding and unfulfilled redemption requests and recorded $657,487 in accounts payable and accrued liabilities on the accompanying balance sheet related to these unfulfilled redemption requests. The Company redeemed 48,459 of the outstanding redemption requests as of December 31, 2013 totaling $464,161 on the January 31, 2014 redemption date and redeemed an additional 1,053 shares totaling $10,000 in February 2014.

The Company cannot guarantee that the funds set aside for the share repurchase plan will be sufficient to accommodate all repurchase requests made in any quarter. In the event that the Company does not have sufficient funds available to repurchase all of the shares of its common stock for which repurchase requests have been submitted in any quarter, priority will be given to redemption requests in the case of the death or disability of a stockholder. If the Company repurchases less than all of the shares subject to a repurchase request in any quarter, with respect to any shares which have not been repurchased, a stockholder may (1) withdraw the request for repurchase or (2) ask that the Company honor the request in a future quarter, if any, when such repurchases can be made pursuant to the limitations of the share repurchase plan and when sufficient funds are available. Such pending requests will be honored among all requests for redemptions in any given redemption period as follows: first, pro rata as to redemptions sought upon a stockholder’s death or disability; and, next, pro rata as to other redemption requests.

The Company is not obligated to repurchase shares of its common stock under the share repurchase plan. The Company presently intends to limit the number of shares to be repurchased in any calendar year to those that could be funded from the net proceeds from the sale of shares pursuant to the DRP, and in no event shall redemptions under the share repurchase plan exceed 5% of the weighted average number of shares of the Company’s common stock outstanding during the prior calendar year.  There is no fee in connection with a repurchase of shares of the Company’s common stock.

The aggregate amount of repurchases under the Company’s share repurchase plan is not expected to exceed the aggregate proceeds received from the sale of shares pursuant to the DRP. However, if this amount is not sufficient to fund repurchase requests, subject to the 5% limitation outlined above, the Company’s board of directors may, in its sole discretion, choose to use other sources of funds to repurchase shares of the Company’s common stock. Such sources of funds could include cash on hand, cash available from borrowings and cash from liquidations of securities investments as of the end of the applicable month, to the extent that such funds are not otherwise dedicated to a particular use, such as working capital, cash distributions to stockholders or purchases of real estate assets.

In addition, the Company’s board of directors may, in its sole discretion, amend, suspend, or terminate the share repurchase plan at any time upon 30 days’ notice to the Company’s stockholders if it determines that the funds available to fund the share repurchase plan are needed for other business or operational purposes or that amendment, suspension or termination of the share repurchase plan is in the best interest of the Company’s stockholders.  Therefore, stockholders may not have the opportunity to make a repurchase request prior to any potential termination of the Company’s share repurchase plan.

Pursuant to the share repurchase plan, for the three months ended March 31, 2014 and 2013, the Company reclassified $1,788,322 and $1,347,953, net of $474,161 and $272,960 of fulfilled redemption requests, respectively, from permanent equity to temporary equity, which is included as redeemable common stock on the accompanying consolidated balance sheets. The redeemable common stock balance at any given time will consist of (1) DRP proceeds from the prior year plus (2) DRP proceeds from the current year through the current period less (3) actual current year redemptions paid or pending redemption.

Distributions

The Company’s long-term policy is to pay distributions from cash flow from operations. However, the Company expects to have insufficient cash flow from operations available for distribution during its acquisition stage. In order to provide additional available funds to pay distributions, under certain circumstances the Company’s obligation to pay all fees due to the Advisor from the Company pursuant to the Advisory Agreement were deferred up to an aggregate amount of $5,000,000. As of March 31, 2014 and December 31, 2013,  $5,000,000 and $5,000,000, respectively, of fees had been deferred pursuant to the Advisory Agreement.

The Company is only obligated to pay the Advisor its deferred fees if and to the extent that cumulative Adjusted Funds From Operations (as defined in the Advisory Agreement) for the period beginning on the date of the commencement of the Company’s initial private offering through the date of any such payment exceed the lesser of (1) the cumulative amount of any distributions paid to stockholders as of the date of such payment or (2) distributions (including the value of shares issued pursuant to the DRP) equal to a 7.0% cumulative, non-compounded, annual return on invested capital for the period from the commencement of the Public Offering through the date of such payment. The Company’s obligation to pay the deferred fees will survive the termination of the Advisory Agreement and will continue to be subject to the repayment conditions above. The Company will not pay interest on the deferred fees if and when such fees are paid to the Advisor.

Distributions Declared

Distributions declared (1) accrue daily to stockholders of record as of the close of business on each day, (2) are payable in cumulative amounts on or before the third day of each calendar month with respect to the prior month and (3) are calculated at a rate of $0.001964 per share per day, which if paid each day over a 365-day period is equivalent to a 7.0% annualized distribution rate based on a purchase price of $10.24 per share of common stock. Prior to September 10, 2012, distributions were calculated at a rate of $0.001917 per share of common stock per day, which was equivalent to a 7.0% annualized distribution rate based on a purchase price of $10.00 per share of common stock. Stockholders may elect to receive cash distributions or purchase additional shares through the DRP.

Distributions declared for the three months ended March 31, 2014 and 2013 were $13,174,851 and $4,460,763, including $6,516,788 and $1,896,912, or 669,762 shares and 194,955 shares, respectively, of common stock attributable to the DRP.

As of March 31, 2014 and December 31, 2013,  $4,549,950 and $4,058,452 distributions declared were payable, which included $2,252,870 and $1,963,570 of distributions reinvested pursuant to the DRP, respectively.

Distributions Paid

For the three months ended March 31, 2014 and 2013, the Company paid cash distributions of $6,455,864 and $2,399,708, which related to distributions declared for each day in the period from December 1, 2013 through February 28, 2014 and December 1, 2012 through February 28, 2013, respectively. Additionally, for the three months ended March 31, 2014 and 2013,  640,030 and 181,719 shares of common stock were issued pursuant to the DRP for gross offering proceeds of $6,227,488 and $1,768,123, respectively. For the three months ended March 31, 2014 and 2013, the Company paid total distributions of $12,683,352 and $4,167,831, respectively.

 

7. Related Party Arrangements

The Company has entered into the Advisory Agreement with the Advisor and a Dealer Manager Agreement with the Dealer Manager with respect to the Public Offering. Pursuant to the Advisory Agreement and Dealer Manager Agreement, the Company is obligated to pay the Advisor and the Dealer Manager specified fees upon the provision of certain services related to the Public Offering, the investment of funds in real estate and real estate-related investments and the management of the Company’s investments and for other services (including, but not limited to, the disposition of investments). Subject to the limitations described below, the Company is also obligated to reimburse the Advisor and its affiliates for organization and offering costs incurred by the Advisor and its affiliates on behalf of the Company, and the Company is obligated to reimburse the Advisor and its affiliates for acquisition and origination expenses and certain operating expenses incurred on behalf of the Company or incurred in connection with providing services to the Company. As discussed in Note 6, in certain circumstances, the Company’s obligation to pay some or all of the fees due to the Advisor pursuant to the Advisory Agreement has been deferred up to an aggregate amount of $5,000,000.  

Amounts attributable to the Advisor and its affiliates incurred and paid for the three months ended March 31, 2014 and 2013 are as follows:

 

 

 

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Amounts attributable to the Advisor and its affiliates that are payable as of March 31, 2014 and December 31, 2013 are as follows:

 

 

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Organization and Offering Costs

Organization and offering costs (other than selling commissions and dealer manager fees) of the Company were initially paid by the Advisor or its affiliates on behalf of the Company. These organization and other offering costs include all expenses to be paid by the Company in connection with the Public Offering and the private offering, including legal, accounting, printing, mailing and filing fees, charges of the Company’s transfer agent, expenses of organizing the Company, data processing fees, advertising and sales literature costs, transfer agent costs, bona fide out-of-pocket due diligence costs and amounts to reimburse the Advisor or its affiliates for the salaries of its employees and other costs in connection with preparing supplemental sales materials and providing other administrative services in connection with the Public Offering and the private offering. Reimbursement of expenses paid to the Advisor did not exceed the actual expenses incurred by the Advisor. Organization costs included all expenses incurred by the Company in connection with the formation of the Company, including, but not limited to, legal fees and other costs to incorporate the Company.

Included in organization and offering costs are payments made to Crossroads Capital Advisors, LLC (“Crossroads”), an affiliate of the Sponsor, for certain specified services provided to the Company on behalf of the Advisor, including, without limitation, establishing operational and administrative processes; engaging and negotiating with vendors; providing recommendations and advice for the development of marketing materials and ongoing communications with investors; assisting in public relations activities and the administration of our distribution reinvestment plan and share redemption plan; and providing advice as to our real estate portfolio and property operations.

Pursuant to the Advisory Agreement, the Company is obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on behalf of the Company in connection with the Public Offering, provided that the Advisor is obligated to reimburse the Company to the extent selling commissions, dealer manager fees and organization and offering costs incurred by the Company in the Public Offering exceed 15% of gross offering proceeds raised in the completed Public Offering.

Organization costs are expensed as incurred. From inception through March 31, 2014, the Company incurred $100,738 of organizational costs on the Company’s behalf, of which $100,738 was reimbursed to the Advisor.  No organizational costs were incurred or recognized during the three months ended March 31, 2014 and 2013.  

Offering costs, including selling commissions and dealer manager fees, are deferred and charged to stockholders’ equity as such amounts are reimbursed to the Advisor, the Dealer Manager or their affiliates from gross offering proceeds. For the three months ended March 31, 2014 and 2013, the Company reimbursed the Advisor $0 and $7,278,011, respectively, of offering costs related to the Public Offering including $0 and $327,000 of amounts paid to Crossroads for certain offering services provided to the Company. 

The Company has reimbursed the Advisor $95,946,206 for organization and offering costs incurred from inception through March 31, 2014, including reimbursements of organization costs of $100,738, reimbursements of private offering costs of  $2,301,719 and reimbursements of Public Offering costs of $93,543,749. The Company accrued $0 and $3,105,246 for the reimbursement of offering costs in the financial statements as of March 31, 2014 and December 31, 2013, respectively.

Investment Management Fee

The Company pays the Advisor a monthly investment management fee equal to one-twelfth of 0.80% of (1) the cost of real properties and real estate-related assets acquired directly by the Company or (2) the Company’s allocable cost of each real property or real estate-related asset acquired through a joint venture. Such fee is calculated including acquisition fees, acquisition expenses and any debt attributable to such investments, or the Company’s proportionate share thereof in the case of investments made through joint ventures. The Company paid distributions in excess of the Company’s Adjusted Funds From Operations; therefore, $4,351,578 of investment management fees were deferred during the offering stage and remained deferred as of March 31, 2014.  

Acquisition Fees and Expenses

The Company pays the Advisor an acquisition fee equal to 2.0% of (1) the cost of investment, as defined, in connection with the acquisition or origination of any type of real property or real estate-related asset acquired directly by the Company or (2) the Company’s allocable portion of the purchase price in connection with the acquisition or origination of any type of real property or real estate-related asset acquired through a joint venture, including any acquisition and origination expenses and any debt attributable to such investments. During the three months ended March 31, 2014 and 2013, the Company incurred acquisition fees of $1,579,677 and $2,222,318, of which $989,747 and $1,932,660, respectively, was paid to the Advisor. Acquisition fees of $589,930 and $0 were due and payable and included in due to affiliates in the accompanying balance sheets at March 31, 2014 and December 31, 2013, respectively. The Company paid distributions in excess of the Company’s Adjusted Funds From Operations; therefore, $648,422 of acquisition fees were deferred during the offering stage and remain deferred as of March 31, 2014.  

In addition to acquisition fees, the Company reimburses the Advisor for amounts directly incurred by the Advisor or its affiliates, including personnel-related costs for acquisition due diligence, legal and non-recurring management services, and amounts the Advisor pays to third parties in connection with the selection, acquisition or development of a property or acquisition of real estate-related assets, whether or not the Company ultimately acquires the property or the real estate-related assets. For the three months ended March 31, 2014 and 2013, the Advisor incurred $209,204 and $1,671,768 of direct acquisition costs and the Company paid $407,709 and $446,720 of acquisition costs to third parties.

The Charter limits the Company’s ability to pay acquisition fees if the total of all acquisition fees and expenses relating to the purchase would exceed 6% of the contract purchase price. Under the Charter, a majority of the Company’s board of directors, including a majority of the independent directors, is required to approve any acquisition fees (or portion thereof) that would cause the total of all acquisition fees and expenses relating to an acquisition to exceed 6% of the contract purchase price. In connection with the purchase of securities, the acquisition fee may be paid to an affiliate of the Advisor that is registered as a FINRA member broker-dealer if applicable FINRA rules would prohibit the payment of the acquisition fee to a firm that is not a registered broker-dealer.

Property Management Fees and Expenses

The Company has entered into Property Management Agreements with Steadfast Management Company, Inc., an affiliate of the Sponsor (the “Property Manager”), in connection with the acquisition of each of the Company’s properties (other than EBT Lofts, Library Lofts and Stuart Hall which are managed by an unaffiliated third-party management company). The property management fee payable with respect to each property under the Property Management Agreements (each a “Property Management Agreement”) ranges from 2.5% to 3.5% of the annual gross revenue collected which is usual and customary for comparable property management services rendered to similar properties in similar geographic markets, as determined by the Advisor and approved by a majority of the Company’s board of directors, including a majority of the independent directors. The Property Manager also receives an oversight fee of 1% of gross revenues at certain of the properties at which it does not serve as a property manager. Generally, each Property Management Agreement has an initial one year term and will continue thereafter on a month-to-month basis unless either party gives a 60 day prior notice of its desire to terminate the Property Management Agreement, provided that the Company may terminate the Property Management Agreement upon an uncured breach of the Property Management Agreement upon 30 days prior written notice to the Property Manager. For the three months ended March 31, 2014 and 2013, the Company incurred $1,353,298 and $548,853, respectively, of property management fees, of which $1,291,118 and $516,451 was paid to the Property Manager. Property management fees totaling  $478,761 and $416,581 were payable to the Property Manager at March 31, 2014 and December 31, 2013, respectively.

In addition to the property management fee, the Property Management Agreements also specify certain other fees payable to the Property Manager for benefit administration and training services. For the three months ended March 31, 2014 and 2013, the Company incurred $396,553 and $158,359 of other fees, of which $399,338 and $136,721 was paid to the Property Manager. Other fees totaling $42,435 and $45,220 were payable to the Property Manager at March 31, 2014 and December 31, 2013, respectively.

In addition, the Company reimburses the Property Manager for the salaries and related benefits of on-site property management employees. For the three months ended March 31, 2014 and 2013, the Company incurred $4,091,180 and $1,456,994 of salaries and related benefits of on-site property management employees, of which $3,425,106 and $1,395,827 was paid to the Property Manager. Property management expenses totaling  $1,234,925 and $568,851 were payable to the Property Manager at March 31, 2014 and December 31, 2013, respectively.

Construction Management Fees

The Company has entered into Construction Management Agreements with Pacific Coast Land and Construction, Inc., an affiliate of the Sponsor (the “Construction Manager”), in connection with the planned renovation for certain of the Company's properties. The construction management fee payable with respect to each property under the Construction Management Agreements (each a “Construction Management Agreement”) ranges from 8.0% to 12.0% of the costs of the improvements for which the Construction Manager has oversight authority. Generally, each Construction Management Agreement has a term equal to the planned renovation timeline unless either party gives a 30 day prior notice of its desire to terminate the Construction Management Agreement. For  the three months ended March 31, 2014, the Company incurred $229,142 of construction management fees, of which $229,142 was paid to the Construction Manager. No construction management fees were incurred for the three months ended March 31, 2013. No construction management fees were payable to the Construction Manager at March 31, 2014 and December 31, 2013.

Other Operating Expense Reimbursement

In addition to the various fees paid to the Advisor, the Company is obligated to pay directly or reimburse all expenses incurred in providing services to the Company, including the Company’s allocable share of the Advisor’s overhead, such as rent, employee costs, utilities and information technology costs. The Company will not reimburse the Advisor for employee costs in connection with services for which the Advisor or its affiliates receive acquisition fees or disposition fees or for the salaries the Advisor pays to the Company’s executive officers.

The Charter limits the Company’s total operating expenses (as defined) during any four fiscal quarters to the greater of 2% of the Company’s average invested assets (as defined below) or 25% of the Company’s net income for the same period (the “2% /25% Limitation”). The Company may reimburse the Advisor, at the end of each fiscal quarter, for operating expenses incurred by the Advisor; provided, however, that the Company shall not reimburse the Advisor at the end of any fiscal quarter for operating expenses that exceed the 2%/25% Limitation unless the independent directors have determined that such excess expenses were justified based on unusual and non-recurring factors. The Advisor must reimburse the Company for the amount by which the Company’s operating expenses for the preceding four fiscal quarters then ended exceed the 2%/25% Limitation. For purposes of determining the 2%/25% Limitation amount, “Average invested assets” means the average monthly book value of the Company’s assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, bad debts or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by the Company that are in any way related to the Company’s operation, including the Company’s allocable share of Advisor overhead and investment management fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, listing and registration of shares of the Company’s common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain in the sale of the Company’s assets; (f) acquisition fees and acquisition expenses (including expenses relating to potential acquisitions that the Company does not close); (g) real estate commissions on the resale of investments; and (h) other expenses connected with the acquisition, disposition, management and ownership of investments (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of real property).

For the three months ended March 31, 2014 and 2013, the Advisor and its affiliates incurred $223,675 and $187,738 related to the allocable share of Advisor’s overhead expenses of $223,675 and $187,738, none of which were in excess of the 2%/25% Limitation and are included in the $1,333,874 and $710,822 of general and administrative expenses recognized by the Company.

Disposition Fee

If the Advisor or its affiliates provides a substantial amount of services, as determined by the Company’s independent directors, in connection with the sale of a property or real estate-related asset, the Company will pay the Advisor or its affiliates 1.5% of the sales price of each property or real estate-related asset sold. To the extent the disposition fee is paid upon the sale of any assets other than real property, it will be included as an operating expense for purposes of the 2%/25% Limitation. In connection with the sale of securities, the disposition fee may be paid to an affiliate of the Advisor that is registered as a FINRA member broker-dealer if applicable FINRA rules would prohibit the payment of the disposition fee to a firm that is not a registered broker-dealer. The Charter limits the maximum amount of disposition fees payable to the Advisor for the sale of any real property to the lesser of one-half of the brokerage commission paid or 3% of the contract sales price, but in no event shall the total real estate commissions paid, including any disposition fees payable to the Advisor, exceed 6% of the contract sales price. As of March 31, 2014, the Company had not incurred any disposition fees.

Selling Commissions and Dealer Manager Fees

Pursuant to the terms of the Dealer Manager Agreement, the Company paid the Dealer Manager up to 6.5% and 3.5% of the gross offering proceeds from the Primary Offering as selling commissions and dealer manager fees, respectively. A reduced sales commission and dealer manager fee was paid in connection with volume discounts and certain other categories of sales. No sales commission or dealer manager fee was paid with respect to shares of common stock issued pursuant to the DRP. The Dealer Manager reallowed 100% of sales commissions earned to participating broker-dealers. The Dealer Manager was also able to reallow to any participating broker-dealer a portion of the dealer manager fee that is attributable to that participating broker-dealer for certain marketing costs of that participating broker-dealer.  For the three months ended March 31, 2014 and 2013, the Company paid selling commissions of $0 and $3,065,168 and dealer manager fees of $0 and $1,698,582, respectively.

 

8. Incentive Award Plan and Independent Director Compensation

 

The Company has adopted an incentive plan (the “Incentive Award Plan”) that provides for the grant of equity awards to its employees, directors and consultants and those of the Company’s affiliates. The Incentive Award Plan authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards or cash-based awards. No awards have been granted under the Incentive Award Plan as of March 31, 2014 and December 31, 2013, except those awards granted to the independent directors as described below.

Under the Company’s independent directors’ compensation plan, which is a sub-plan of the Incentive Award Plan, each of the Company’s independent directors was entitled to receive 5,000 shares of restricted common stock in connection with the initial meeting of the Company’s full board of directors. The Company’s board of directors, and each of the independent directors, agreed to delay the initial grant of restricted stock until the Company raised $2,000,000 in gross offering proceeds in the Company’s private offering. In addition, on the date following an independent director’s re-election to the Company’s board of directors, he or she receives 2,500 shares of restricted common stock. One-fourth of the shares of restricted common stock generally vest and become non-forfeitable upon issuance and the remaining portion will vest in three equal annual installments beginning on the date of grant and ending on the third anniversary of the date of grant; provided, however, that the restricted stock will become fully vested and become non-forfeitable on the earlier to occur of (1) the termination of the independent director’s service as a director due to his or her death or disability, or (2) a change in control of the Company. The Company recorded stock-based compensation expense of $22,176 and $21,126 for the three months ended March 31, 2014 and 2013, respectively.

On November 15, 2012, the Company entered into a Stock Purchase Plan (the “Plan”) with Ella Shaw Neyland, the Company's President and a member of the Company's board of directors, whereby Ms. Neyland has agreed to invest $5,530 for 600 shares of common stock pursuant to the Public Offering on the first day of each fiscal quarter. The purchase of shares of the Company’s common stock by Ms. Neyland pursuant to the Plan commenced on January 1, 2013 and terminated on November 15, 2013. The shares were purchased pursuant to the Plan at a price of $9.216 per share, reflecting the elimination of selling commissions and the dealer manager fee in connection with such sales.

Economic Dependency

The Company is dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase, and disposition of real estate and real estate-related investments; management of the daily operations of the Company’s real estate and real estate-related investment portfolio; and other general and administrative responsibilities. In the event that these companies are unable to provide the respective services, the Company will be required to obtain such services from other sources.

Concentration of Credit Risk

The geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the Houston, Texas and Austin, Texas apartment markets.  Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, relocations of businesses, increased competition from other apartment communities, decrease in demand for apartments or any other changes, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.

Environmental

As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.

Legal Matters

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

The Company uses interest rate derivatives with the objective of managing exposure to interest rate movements thereby minimizing the effect of interest rate changes and the effect they could have on future cash flows. Interest rate caps are used to accomplish this objective. As of March 31, 2014, the Company had 23 interest rate caps with notional amounts totaling $518,879,000. The following table provides the terms of the Company’s interest rate derivative instruments that were in effect at March 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The interest rate caps are not designated, nor do they qualify as, cash flow hedges. Accordingly, the Company records any changes in the fair value of the interest rate caps as interest expense. The change in the fair value of the interest rate cap agreements for the three months ended March 31, 2014 resulted in an unrealized loss of $1,189,874, which is included in interest expense in the accompanying consolidated statements of operations.

The following table summarizes, on an unaudited basis, the consolidated pro forma results of operations of the Company for the three months ended March 31, 2014 and 2013. The Company acquired three properties during the three months ended March 31, 2014. These properties contributed $1,228,180 of revenues and $504,417 of net loss, including $857,879 of depreciation and amortization, to the Company’s results of operations from the date of acquisition to March 31, 2014. The following unaudited pro forma information for the three months ended March 31, 2014 and 2013 has been provided to give effect to the acquisitions of the properties as if they had occurred on January 1, 2013. This pro forma information does not purport to represent what the actual results of operations of the Company would have been had these acquisitions occurred on this date, nor does it purport to predict the results of operations for future periods.

 

 

 

 

The pro forma information reflects adjustments for actual revenues and expenses of the properties acquired during the three months ended March 31, 2014 for the respective period prior to acquisition by the Company. Net loss has been adjusted as follows: (1) interest expense has been adjusted to reflect the additional interest expense that would have been charged had the Company acquired the properties on January 1, 2013 under the same financing arrangements that existed as of the acquisition date; (2) depreciation and amortization have been adjusted based on the Company’s basis in the properties; and (3) transaction costs have been adjusted for the acquisition of the properties.

12. Subsequent Events

Distributions Paid

On April 1, 2014, the Company paid distributions of $4,549,950, which related to distributions declared for each day in the period from March 1, 2014 through March 31, 2014 and consisted of cash distributions paid in the amount of $2,297,080 and $2,252,870 in shares issued pursuant to the DRP.

On May 1, 2014, the Company paid distributions of $4,417,561which related to distributions declared for each day in the period from April 1, 2014 through April 30, 2014 and consisted of cash distributions paid in the amount of $2,228,083 and $2,189,478 in shares issued pursuant to the DRP.

Redemption

On April 30, 2014, the Company redeemed 38,416 shares of its common stock for a total redemption value of $381,757, or $9.88 per share, pursuant to the Company's share repurchase plan.

Distribution Reinvestment Plan

On January 3, 2014, the Company filed a Form S-3 with the SEC to offer up to 12,000,000 shares of common stock to existing shareholders pursuant to the DRP. From January 3, 2014 through May 9, 2014, the Company had sold 894,866 shares of its common stock pursuant to the DRP for gross offering proceeds of $8,707,048.

Refinancing of the Windsor on the River Apartments Loan

On May 9, 2014, SIR Windsor on the River, LLC (“SIR Windsor”) refinanced an existing loan (the “Acquisition Loan”) secured by a multifamily property located in Cedar Rapids, Iowa, commonly known as the Windsor on the River Apartments, with the proceeds of a loan in the aggregate principal amount of $23,500,000 from PNC Bank, National Association (“PNC”) pursuant to the requirements of the Fannie Mae DUS Supplemental Loan Program. The Windsor Loan is evidenced by a promissory note issued by SIR Windsor in favor of PNC in the aggregate principal amount of $23,500,000 and a Multifamily Loan and Security Agreement between SIR Windsor and PNC (the “Loan Agreement”).

The proceeds of the Windsor Loan were used by SIR Windsor to redeem the assumed obligations for tax-exempt bonds issued by the Iowa Finance Authority in the amount of $23,500,000.  

Interest on the outstanding principal balance of the Windsor Loan will accrue at a rate of 2.24% until July 1, 2014. The first date of each month thereafter, the interest rate will be calculated as the sum of the current London Inter-Bank Offered Rate (LIBOR) plus 2.09% (the “Interest Rate”). A payment of $43,905 will be due and payable on July 1, 2014. Thereafter, a monthly payment of interest as further described in the Loan Agreement will be due and payable on the first day of each month until June 1, 2015.  Commencing July 1, 2015 until June 1, 2024 (the “Maturity Date”), monthly payments of principal in the amount of $33,754 and interest, as further described in the Loan Agreement, will be due and payable . The entire outstanding principal balance of the Windsor Loan, plus any accrued and unpaid interest thereon, is due and payable in full on the Maturity Date. So long as any monthly payment or any other amount due under the Windsor Loan remains past due for thirty (30) days or more, interest will accrue on the unpaid principal balance of the Windsor Loan at a rate equal to the lesser of (1) the Interest Rate plus 4.0% or (2) the maximum interest rate which may be collected by PNC under applicable law. So long as any payment due under the Windsor Loan is not received by PNC within ten days after such payment is due, SIR Windsor will pay to PNC, immediately and without demand by PNC, a late charge equal to 5.0% of the amount of the payment due. Following the first year of the Windsor Loan, SIR Windsor may voluntarily prepay all, but not less than all, of the unpaid principal balance of the Windsor Loan and all accrued interest thereon and other sums due to PNC under the Windsor Loan on the last  business day of any calendar month during the term of the Windsor Loan, provided that SIR Windsor must provide PNC with at least thirty (30) days (if provided by U.S. Postal Service) or twenty (20) days (if provided by electronic transmission or overnight courier) and not more than sixty (60) days prior written notice of such prepayment. SIR Windsor must also pay a prepayment fee to PNC, calculated in accordance with the terms of the Loan Agreement, in connection with any voluntary prepayment of the Windsor Loan.