Resource Apartment REIT III, Inc. - FORM 10-Q

Attached files

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EX-32.2 - EX-32.2 - Resource Apartment REIT III, Inc.	ck0001652926-ex322_8.htm
EX-32.1 - EX-32.1 - Resource Apartment REIT III, Inc.	ck0001652926-ex321_7.htm
EX-31.2 - EX-31.2 - Resource Apartment REIT III, Inc.	ck0001652926-ex312_9.htm
EX-31.1 - EX-31.1 - Resource Apartment REIT III, Inc.	ck0001652926-ex311_6.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

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

For the transition period from __________ to __________

Commission file number 000-55923

RESOURCE APARTMENT REIT III, Inc.

(Exact name of registrant as specified in its charter)


Maryland		47-4608249
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1845 Walnut Street, 17th Floor, Philadelphia, PA, 19103
(Address of principal executive offices) (Zip code)

(215) 231-7050
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
n/a		n/a		n/a

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

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

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


Large accelerated filer	☐	Accelerated filer.	☐
Non-accelerated filer	☑	Smaller reporting company	☑
		Emerging growth company	☑

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☑

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

As of November 4, 2020, there were 625,848 outstanding shares of Class A common stock, 1,121,639 outstanding shares of Class T common stock, and 10,401,323 outstanding shares of Class I common stock of Resource Apartment REIT III, Inc.

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RESOURCE APARTMENT REIT III, INC.

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

		PAGE
PART I	FINANCIAL INFORMATION

ITEM 1.	Financial Statements

	Consolidated Balance Sheets – September 30, 2020 (unaudited) and December 31, 2019	4

	Consolidated Statements of Operations and Comprehensive Loss - For the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	5

	Consolidated Statements of Changes in Stockholders' Equity – For the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	7

	Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2020 and 2019 (unaudited)	9

	Notes to Consolidated Financial Statements – September 30, 2020 (unaudited)	10

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	48

ITEM 4.	Controls and Procedures	48

PART II	OTHER INFORMATION

ITEM 1.	Legal Proceedings	49

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

ITEM 6.	Exhibits	51

SIGNATURES		52

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Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as "anticipate," "believe," "could," "estimate," "expects," "intend," "may," "plan," "potential," "project," "should," "will" and "would" or the negative of these terms or other comparable terminology. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company’s control and which could materially affect the Company’s results of operations, financial condition, cash flows, performance or future achievements or events. Factors that could cause actual results to differ materially from these expectations include, but are not limited to, the risk that the proposed mergers (as discussed herein) will not be consummated within the expected time period or at all; the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; the inability to obtain stockholder approval of the merger or the failure to satisfy the other conditions to completion of the merger; risks related to disruption of management’s attention from the ongoing business operations due to the proposed merger. In addition, the potential adverse effect of the current pandemic of the novel coronavirus, or COVID-19, on the financial condition, results of operations, cash flows and performance of the Company, particularly its ability to collect rent, the personal financial condition of its tenants and their ability to pay rent, and the real estate market and the global economy and financial markets remains a risk to the Company. The extent to which COVID-19 impacts the Company and its tenants will depend on future developments, which cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, you should interpret many of the risks identified in our Annual Report on Form 10-K for the year ended December 31, 2019 as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Actual results may differ materially from those contemplated by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RESOURCE APARTMENT REIT III, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30, 2020			December 31, 2019
	(unaudited)
ASSETS
Investments:
Rental properties, net	$	189,237		$	196,483
Identified intangible assets, net		—			173
Total investments		189,237			196,656

Cash		22,696			28,430
Restricted cash		2,676			1,916
Tenant receivables, net		69			31
Prepaid expenses and other assets		750			594
Operating lease right-of-use assets		3			5
Total assets	$	215,431		$	227,632

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Mortgage notes payable, net	$	143,883		$	145,503
Accounts payable and accrued expenses		1,435			2,547
Accrued real estate taxes		1,903			601
Due to related parties		1,425			4,938
Tenant prepayments		138			194
Security deposits		442			382
Distributions payable		—			1,587
Operating lease liabilities		3			5
Total liabilities		149,229			155,757

Stockholders’ equity:
Preferred stock, par value $0.01: 10,000,000 shares authorized, none issued and outstanding		—			—
Convertible stock, par value $0.01: 50,000 shares authorized, none and 50,000 issued and outstanding, respectively		—			1
Class A common stock, par value $0.01: 25,000,000 shares authorized, 625,848 and 628,691 issued and outstanding, respectively		6			6
Class T common stock, par value $0.01: 25,000,000 shares authorized, 1,121,639 and 1,115,458 issued and outstanding, respectively		11			11
Class I common stock, par value $0.01: 75,000,000 shares authorized, 10,401,323 and 10,327,291 issued and outstanding, respectively		104			103
Additional paid-in capital		104,431			103,725
Accumulated other comprehensive loss		(18	)		(32	)
Accumulated deficit		(38,332	)		(31,939	)
Total stockholders’ equity		66,202			71,875
Total liabilities and stockholders’ equity	$	215,431		$	227,632

The accompanying notes are an integral part of these consolidated financial statements.

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RESOURCE APARTMENT REIT III, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Revenues:
Rental income	$	5,277		$	4,874		$	15,498		$	12,621
Total revenues		5,277			4,874			15,498			12,621

Expenses:
Rental operating - expenses		1,092			1,037			3,010			2,529
Rental operating - payroll		509			505			1,489			1,288
Rental operating - real estate taxes		662			742			2,097			1,818
Subtotal- rental operating		2,263			2,284			6,596			5,635
Property management fees		—			—			—			5
Management fees - related parties		803			780			2,376			1,985
Transaction costs		964			—			964			—
General and administrative		420			320			1,191			1,715
Loss on disposal of assets		21			66			223			284
Depreciation and amortization expense		2,232			2,594			6,827			7,047
Total expenses		6,703			6,044			18,177			16,671
Loss before net gains on dispositions		(1,426	)		(1,170	)		(2,679	)		(4,050	)
Net gain on disposition of property		—			—			530			—
Loss before other income (expense)		(1,426	)		(1,170	)		(2,149	)		(4,050	)

Other income (expense):
Interest income		13			53			49			206
Interest expense		(1,343	)		(1,642	)		(4,262	)		(4,302	)
Total other income (expense)		(1,330	)		(1,589	)		(4,213	)		(4,096	)
Net loss	$	(2,756	)	$	(2,759	)	$	(6,362	)	$	(8,146	)

Other comprehensive income:
Designated derivatives, fair value adjustments		1			4			14			4
Total other comprehensive income		1			4			14			4
Comprehensive loss	$	(2,755	)	$	(2,755	)	$	(6,348	)	$	(8,142	)

The accompanying notes are an integral part of these consolidated financial statements.

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RESOURCE APARTMENT REIT III, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS - (continued)

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Class A common stock:
Net loss attributable to Class A common stockholders	$	(142	)	$	(133	)	$	(330	)	$	(439	)
Net loss per Class A share, basic and diluted	$	(0.23	)	$	(0.21	)	$	(0.53	)	$	(0.69	)
Weighted average Class A common shares outstanding, basic and diluted		626			624			627			632

Class T common stock:
Net loss attributable to Class T common stockholders	$	(255	)	$	(265	)	$	(563	)	$	(852	)
Net loss per Class T share, basic and diluted	$	(0.23	)	$	(0.24	)	$	(0.50	)	$	(0.77	)
Weighted average Class T common shares outstanding, basic and diluted		1,122			1,102			1,121			1,111

Class R common stock:
Net loss attributable to Class R common stockholders	$	—		$	(2,229	)	$	—		$	(6,521	)
Net loss per Class R share, basic and diluted	$	—		$	(0.24	)	$	—		$	(0.74	)
Weighted average Class R common shares outstanding, basic and diluted		—			9,409			—			8,777

Class I common stock:
Net loss attributable to Class I common stockholders	$	(2,359	)	$	(132	)	$	(5,469	)	$	(334	)
Net loss per Class I share, basic and diluted	$	(0.23	)	$	(0.21	)	$	(0.53	)	$	(0.63	)
Weighted average Class I common shares outstanding, basic and diluted		10,401			625			10,387			531

The accompanying notes are an integral part of these consolidated financial statements.

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RESOURCE APARTMENT REIT III, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020

(in thousands)

(unaudited)

	Common Stock																			Convertible Stock
	Shares											Amount
	A Shares			T Shares			R Shares		I Shares			A Shares		T Shares		R Shares		I Shares		Shares			Amount			Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total
Balance, at July 1, 2020		626			1,122			—		10,401		$	6	$	11	$	—	$	104		50		$	1		$	104,430		$	(19	)	$	(35,576	)	$	68,957
Other comprehensive income		—			—			—		—			—		—		—		—		—			—			—			1			—			1
Net loss		—			—			—		—			—		—		—		—		—			—			—			—			(2,756	)		(2,756	)
Convertible stock redemption		—			—			—		—			—		—		—		—		(50	)		(1	)		1			—			—			—
Balance, at September 30, 2020		626			1,122			—		10,401		$	6	$	11	$	—	$	104		—		$	—		$	104,431		$	(18	)	$	(38,332	)	$	66,202


Balance, at January 1, 2020		629			1,115			—		10,327		$	6	$	11	$	—	$	103		50		$	1		$	103,725		$	(32	)	$	(31,939	)	$	71,875
True-up of prior year cash distributions declared		—			—			—		—			—		—		—		—		—			—			—			—			(31	)		(31	)
Common stock issued through distribution reinvestment plan		2			10			—		82			—		—		—		1		—			—			856			—			—			857
Other comprehensive income		—			—			—		—			—		—		—		—		—			—			—			14			—			14
Net loss		—			—			—		—			—		—		—		—		—			—			—			—			(6,362	)		(6,362	)
Common stock redemptions		(5	)		(3	)		—		(8	)		—		—		—		—		—			—			(151	)		—			—			(151	)
Convertible stock redemption		—			—			—		—			—		—		—		—		(50	)		(1	)		1			—			—			—
Balance, at September 30, 2020		626			1,122			—		10,401		$	6	$	11	$	—	$	104		—		$	—		$	104,431		$	(18	)	$	(38,332	)	$	66,202

The accompanying notes are an integral part of these consolidated financial statements.

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RESOURCE APARTMENT REIT III, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY- (continued)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019

(in thousands)

(unaudited)

	Common Stock																			Convertible Stock
	Shares											Amount
	A Shares			T Shares			R Shares			I Shares		A Shares		T Shares		R Shares		I Shares		Shares		Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total
Balance, at July 1, 2019		623			1,099			9,294			614	$	6	$	11	$	93	$	6		50	$	1	$	98,272		$	(40	)	$	(23,457	)	$	74,892
Issuance of common stock		—			—			232			12		—		—		2		—		—		—		2,369			—			—			2,371
Offering costs		—			—			—			—		—		—		—		—		—		—		1,299			—			—			1,299
Cash distributions declared		—			—			—			—		—		—		—		—		—		—		—			—			(1,377	)		(1,377	)
Common stock issued through distribution reinvestment plan		3			8			65			1		—		—		1		—		—		—		695			—			—			696
Other comprehensive income		—			—			—			—		—		—		—		—		—		—		—			4			—			4
Net loss		—			—			—			—		—		—		—		—		—		—		—			—			(2,759	)		(2,759	)
Common stock redemptions		—			(1	)		(31	)		—		—		—		—		—		—		—		(293	)		—						(293	)
Balance, at September 30, 2019		626			1,106			9,560			627	$	6	$	11	$	96	$	6		50	$	1	$	102,342		$	(36	)	$	(27,593	)	$	74,833


Balance, at January 1, 2019		634			1,111			7,182			330	$	6	$	11	$	72	$	3		50	$	1	$	77,896		$	(40	)	$	(15,459	)	$	62,490
Issuance of common stock		—			—			2,231			295		—		—		22		3		—		—		24,364			—			—			24,389
Offering costs		—			—			—			—		—		—		—		—		—		—		(1,175	)		—			—			(1,175	)
Cash distributions declared		—			—			—			—		—		—		—		—		—		—		—			—			(3,988	)		(3,988	)
Common stock issued through distribution reinvestment plan		9			24			178			2		—		—		2		—		—		—		1,938			—			—			1,940
Other comprehensive income		—			—			—			—		—		—		—		—		—		—		—			4			—			4
Net loss		—			—			—			—		—		—		—		—		—		—		—			—			(8,146	)		(8,146	)
Common stock redemptions		(17	)		(29	)		(31	)		—		—						—		—		—		(681	)		—			—			(681	)
Balance, at September 30, 2019		626			1,106			9,560			627	$	6	$	11	$	96	$	6		50	$	1	$	102,342		$	(36	)	$	(27,593	)	$	74,833

The accompanying notes are an integral part of these consolidated financial statements.

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RESOURCE APARTMENT REIT III, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2020			2019
Cash flows from operating activities:
Net loss	$	(6,362	)	$	(8,146	)
Adjustment to reconcile net loss to net cash (used in) provided by operating activities:
Loss on disposal of assets		223			284
Depreciation and amortization		6,827			7,047
Amortization of deferred financing costs		221			192
Net gain on disposition of property		(530	)		—
Realized loss on change in fair value of interest rate cap		20			6
Changes in operating assets and liabilities:
Tenant receivables, net		(41	)		(11	)
Due from related parties		—			13
Prepaid expenses and other assets		(154	)		(183	)
Due to related parties		(3,513	)		(823	)
Accounts payable and accrued expenses		1,377			2,220
Tenant prepayments		(56	)		70
Security deposits		73			16
Net cash (used in) provided by operating activities		(1,915	)		685

Cash flows from investing activities:
Proceeds from disposition of property, net of closing costs		1,340			—
Property acquisition		—			(17,514	)
Capital expenditures		(3,131	)		(3,163	)
Net cash used in investing activities		(1,791	)		(20,677	)

Cash flows from financing activities:
Net proceeds from issuance of common stock		—			23,888
Redemptions of common stock		(151	)		(682	)
Payments on borrowings		(350	)		(54	)
Payment of deferred financing costs		—			(641	)
Purchase of interest rate caps		(6	)		—
Distributions paid on common stock		(761	)		(1,721	)
Net cash (used in) provided by financing activities		(1,268	)		20,790

Net (decrease) increase in cash and restricted cash		(4,974	)		798
Cash and restricted cash at beginning of period		30,346			33,711
Cash and restricted cash at end of period	$	25,372		$	34,509

Reconciliation of cash and restricted cash
Cash	$	22,696		$	31,773
Restricted Cash		2,676			2,736
Cash and restricted cash at end of period	$	25,372		$	34,509

The accompanying notes are an integral part of these consolidated financial statements.

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RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(unaudited)

NOTE 1 - NATURE OF BUSINESS AND OPERATIONS

Resource Apartment REIT III, Inc. (the "Company") was organized in Maryland on July 15, 2015. The Company launched an initial public offering on April 28, 2016 pursuant to which it offered up to $1.1 billion of shares of its common stock, consisting of up to $1.0 billion of shares in its primary offering and up to $100.0 million of shares pursuant to its distribution reinvestment plan (the "DRIP"). The distribution reinvestment plan has been suspended since April 1, 2020 when the board of directors of the Company suspended the declaration of distributions.

Prior to the execution of the REIT III Merger Agreement (as defined below), on September 8, 2020, Resource Real Estate Opportunity REIT, Inc. ("REIT I"), a non-traded real estate investment trust ("REIT") sponsored by Resource Real Estate, LLC (“Resource Real Estate”), our initial sponsor, entered into a series of transactions to become self-managed (the “Self-Management Transaction”) and succeeded to the advisory, asset management and property management arrangements in place for the Company. Accordingly, the sponsor of the Company has changed from Resource Real Estate to Resource Real Estate Opportunity OP, LP, the operating partnership of REIT I, while the REIT III Merger (defined below) is pending.

Through July 2, 2017, the Company offered shares of Class A and Class T common stock in the primary and DRIP offering. As of July 3, 2017, the Company ceased offering shares of Class A and Class T common stock in its primary offering and commenced offering shares of Class R and Class I common stock in both the primary and DRIP offering.

The Company ceased offering shares in the primary offering on October 31, 2019 and ceased processing subscriptions in the offering on November 15, 2019. The Company continues to offer Class A, Class T and Class I shares pursuant to the DRIP.

As of September 30, 2020, the Company has raised aggregate gross primary offering proceeds of approximately $111.4 million from the sale of 601,207 Class A shares, 1,049,996 Class T shares, 9,356,067 Class R shares and 624,325 Class I shares of common stock.

On June 27, 2018, March 21, 2019, and March 19, 2020, the board of directors of the Company determined an estimated net asset value (“NAV”) per share of the common stock of $9.05, $9.12, and $9.01, respectively, based on the estimated market value of the portfolio of investments of the Company as of March 31, 2018, December 31, 2018, and December 31, 2019, respectively. Based on the estimated NAV per share, the board of directors established updated offering prices for shares of Class R and Class I common stock to be sold in the primary portion of the initial public offering by adding certain offering costs to the estimated NAV per share. Pursuant to the terms of the DRIP, following the establishment of an estimated NAV per share, shares of common stock are sold at the most recent estimated NAV per share.

The prices per share for each class of shares of the Company's common stock through September 30, 2020 were as follows:

	Class A		Class T		Class R		Class I
Primary Offering Price
Inception through July 2, 2017	$	10.00	$	9.47	n/a		n/a
July 3, 2017 through July 1, 2018	n/a		n/a		$	9.52	$	9.13
July 2, 2018 through March 24, 2019	n/a		n/a		$	9.68	$	9.28
March 25, 2019 through October 31, 2019	n/a		n/a		$	9.75	$	9.35

Offering Price under the DRIP
Inception through July 2, 2017	$	9.60	$	9.09	n/a		n/a
July 3, 2017 through July 1, 2018	$	9.60	$	9.09	$	9.14	$	8.90
July 2, 2018 through March 24, 2019 ⁽¹⁾	$	9.05	$	9.05	$	9.05	$	9.05
March 25, 2019 through March 20, 2020 ⁽¹⁾	$	9.12	$	9.12	$	9.12	$	9.12
March 21, 2020 through September 30, 2020 ⁽¹⁾	$	9.01	$	9.01	n/a		$	9.01

(1)	Shares of common stock pursuant to the DRIP are sold at the Company’s most recent estimated NAV per share.

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RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

Following the Self-Management Transaction, Resource REIT Advisor, LLC (the "Advisor") is indirectly owned by REIT I. Prior to September 8, 2020, the Advisor was an indirect wholly-owned subsidiary of Resource America, Inc. ("RAI"), and contributed $200,000 to the Company in exchange for 20,000 shares of Class A common stock on August 10, 2015. On June 29, 2016, RAI purchased 222,222 shares of Class A common stock for $2.0 million in the offering. On August 5, 2016, the Advisor exchanged 5,000 shares of common stock for 50,000 shares of convertible stock. On September 8, 2020, the Company redeemed all of the outstanding shares of convertible stock.

RAI is a wholly-owned subsidiary of C-III Capital Partners, LLC ("C-III"). Prior to September 8, 2020, C-III controlled the Advisor, Resource Securities LLC ("Resource Securities"), the Company's dealer manager, and Resource Apartment Manager III, LLC (the "Manager"), the Company's property manager. C-III also controlled all of the shares of the Company's common stock held by RAI and the Advisor.

The Company’s objective is to take advantage of the multifamily investing and lending platforms available to the Advisor to invest in apartment communities in order to provide the investor with growing cash flow and increasing asset values. The Company has acquired underperforming apartments which it will renovate and stabilize in order to increase rents.

The Company elected to be taxed as a REIT for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ending December 31, 2017. As such, to maintain its REIT qualification for U.S. federal income tax purposes, the Company is generally required to distribute at least 90% of its net income (excluding net capital gains) to its stockholders as well as comply with certain other requirements. Accordingly, the Company generally will not be subject to U.S. federal income taxes to the extent that it annually distributes all of its REIT taxable income to its stockholders. The Company also operates its business in a manner that will permit it to maintain its exemption from registration under the Investment Company Act of 1940, as amended.

The consolidated financial statements and the information and tables contained in the notes thereto are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"), pertaining to interim financial statements in Form 10-Q. However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. The consolidated balance sheet as of December 31, 2019 was derived from the audited consolidated financial statements as of and for the year ended, December 31, 2019. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for the nine months ended September 30, 2020 may not necessarily be indicative of the results of operations for the full year ending December 31, 2020.

Pending Merger with Resource Real Estate Opportunity REIT II, Inc.

On September 8, 2020, the Company entered into a merger agreement (as described herein) to be acquired by Resource Real Estate Opportunity REIT II, Inc. (“REIT II”). This merger is a stock-for-stock transaction whereby the Company will be merged into a wholly owned subsidiary of REIT II.

On September 8, 2020, the Company, REIT II, RRE Opportunity OP II, LP (“OP II”), Revolution III Merger Sub, LLC (“Merger Sub III”), a wholly owned subsidiary of REIT II, and Resource Apartment OP III, LP (“OP III”), the operating partnership of the Company, entered into an Agreement and Plan of Merger (the “REIT III Merger Agreement”).

Subject to the terms and conditions of the REIT III Merger Agreement, (i) REIT III will merge with and into Merger Sub III, with Merger Sub III surviving as a direct, wholly owned subsidiary of REIT II (the “REIT III Company Merger”) and (ii) OP III will merge with and into OP II (the “REIT III Partnership Merger” and, together with the REIT III Company Merger, the “REIT III Merger”), with OP II surviving the REIT III Partnership Merger. At such time, the separate existence of the Company and OP III shall cease.

At the effective time of the REIT III Company Merger, each issued and outstanding share of the Company’s common stock (or fraction thereof) will be converted into the right to receive 0.925862 shares of common stock of REIT II.

At the effective time of the REIT III Partnership Merger, each unit of partnership interests in OP III outstanding immediately prior to the effective time of the REIT III Partnership Merger will be retired and will cease to exist. In addition, for each share of common stock of REIT II issued in the REIT III Company Merger, a common partnership unit will be issued by OP II to REIT II.

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RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

The obligations of each party to consummate the REIT III Merger are subject to a number of conditions, including receipt of the approval of the REIT III Merger and of an amendment to the Company’s charter to delete certain provisions regarding roll-up transactions by the holders of a majority of the outstanding shares of the common stock of the Company.

During the nine months ended September 30, 2020, the Company expensed approximately $964,000 of professional fees in connection with the pending merger.

COVID-19 Pandemic

One of the most significant risks and uncertainties facing the Company and the real estate industry generally continues to be the effect of the ongoing public health crisis of the novel coronavirus disease (“COVID-19”) pandemic. The Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business, including how the pandemic is impacting its tenants. Through the nine months ended September 30, 2020, the Company has not incurred significant disruptions from the COVID-19 pandemic; however, a small percentage of its tenants have requested rent deferral as a result of the pandemic. The Company is evaluating each tenant rent relief request on an individual basis, considering a number of factors. Not all tenant requests will ultimately result in modified agreements, nor is the Company forgoing its contractual rights under its lease agreements. Executed short-term rent relief plans that are outstanding at September 30, 2020 are not significant in terms of either number of requests or dollar value.

The extent to which the COVID-19 pandemic impacts the Company’s operations and those of its tenants depends on future developments, which cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures. The Company is unable to predict the ultimate impact that the pandemic will have on its financial condition, results of operations and cash flows due to numerous uncertainties.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with GAAP.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as follows:

Subsidiaries	Number of Units		Property Location
Resource Apartment REIT III Holdings, LLC	N/A		N/A
Resource Apartment REIT III OP, LP	N/A		N/A
RRE Payne Place Holdings, LLC	N/A⁽¹⁾		N/A⁽¹⁾
RRE Bay Club Holdings, LLC		220	Jacksonville, FL
RRE Tramore Village Holdings, LLC		324	Austell, GA
RRE Matthews Reserve Holdings, LLC		212	Matthews, NC
RRE Kensington Holdings, LLC		204	Riverview, FL
RRE Wimbledon Oaks Holdings, LLC		248	Arlington, TX
RRE Summit Holdings, LLC		141	Alexandria, VA
		1,349

N/A - Not applicable

(1) Property was sold on March 5, 2020.

All intercompany accounts and transactions have been eliminated in consolidation.

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RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

Segment Reporting

The Company does not evaluate performance on a relationship-specific or transactional basis and does not distinguish its principal business or group its operations on a geographical basis for purposes of measuring performance. Accordingly, the Company believes it has a single operating segment for reporting purposes in accordance with GAAP.

Concentration of Risk

At September 30, 2020, the Company's real estate investments in Florida, Georgia, and Virginia represented 28%, 22%, and 19%, respectively, of the net book value of its rental property assets. Any adverse economic or real estate developments in these markets, such as the impact of the COVID-19 pandemic, business layoffs or downsizing, industry slowdowns, relocations of businesses, adverse weather events, changing demographics and other factors, or any decrease in demand for multifamily rentals resulting from the local business climate, could adversely affect the Company's operating results and its ability to make distributions to stockholders.

Use of Estimates

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

Adoption of New Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13 "Financial Instruments - Credit Losses", which requires measurement and recognition of expected credit losses for financial assets held. On January 1, 2020, the Company adopted ASU No. 2016-13 and the adoption had no impact on its consolidated financial statements and disclosures since the Company did not have instruments subject to this guidance at the adoption or at September 30, 2020.

In January 2017, FASB issued ASU No. 2017-04, "Intangibles- Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment", which alters the current goodwill impairment testing procedures. On January 1, 2020, the Company adopted ASU No. 2017-04 and the adoption did not have a significant impact on its consolidated financial statements due to the fact that the Company did not have any goodwill subject to this guidance at the adoption or at September 30, 2020.

In August 2018, FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”. This update removes, modifies and adds certain disclosure requirements in the FASB Accounting Standards Codification ("ASC") 820, “Fair Value Measurement”. On January 1, 2020, the Company adopted ASU No. 2018-13 and the adoption did not have a significant impact on its consolidated financial statements due to the fact that there were no required changes to the Company’s disclosures.

In November 2018, FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with ASC 842, Leases. On January 1, 2020, the Company adopted ASU No. 2018-19 and the adoption did not have a material effect on its consolidated financial statements and disclosures.

In March 2020, FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)”. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the nine months ended September 30, 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

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RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

On April 10, 2020, FASB issued a Staff Q&A to respond to some frequently asked questions about accounting for lease concessions related to the effects of the COVID-19 pandemic. Consequently, for concessions related to the effects of the COVID-19 pandemic, an entity will not have to analyze each lease to determine whether enforceable rights and obligations for concessions exist in the lease and can elect to apply or not apply the lease modification guidance to those leases. Entities may make the elections for any lessor-provided concessions related to the effects of the COVID-19 pandemic (e.g., deferrals of lease payments) as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. The Company has not elected to apply the lease modification guidance to our leases. To date, the impact of lease concessions granted has not had a material effect on the financial statements. The Company will continue to evaluate the impact of lease concessions and the appropriate accounting for those concessions.

Accounting Standards Issued But Not Yet Effective

In August 2020, FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. ASU 2020-06 addresses the complexity of guidance for certain financial (convertible) instruments with characteristics of liabilities and equity. ASU No. 2020-06 will be effective for the Company beginning January 1, 2022. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU 2020-06 to have a material effect on its consolidated financial statements and disclosures due to the fact that the Company did not have instruments subject to this guidance at September 30, 2020.

Real Estate Investments

The Company records acquired real estate at fair value on their respective acquisition dates. The Company considers the period of future benefit of an asset to determine its appropriate useful life and depreciates the asset using the straight line method. The Company anticipates the estimated useful lives of its assets by class as follows:

Buildings		27.5 years
Building improvements		5.0 to 27.5 years
Furniture, fixtures, and equipment		3.0 to 5.0 years
Tenant improvements		Shorter of lease term or expected useful life
Lease intangibles		Weighted average remaining term of related leases

Improvements and replacements in excess of $1,000 are capitalized when they have a useful life greater than or equal to one year. Construction management fees are capitalized along with the related asset. Costs of repairs and maintenance are expensed as incurred.

Impairment of Long Lived Assets

When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The review also considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors.

If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income. As of September 30, 2020, the Company evaluated whether the global economic disruption caused by the COVID-19 pandemic was an impairment indicator. The Company examined a number of factors and concluded that there was no indication that the carrying value of the Company’s investments in real estate might not be recoverable as of September 30, 2020. There were no impairment losses recorded on long lived assets during the three and nine months ended September 30, 2020 and 2019.

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RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

Allocation of Purchase Price of Acquired Assets

Acquisitions that do not meet the definition of a business under ASU No. 2017-01 are accounted for as asset acquisitions. In most cases, the Company believes acquisitions of real estate will no longer be considered a business combination as in most cases substantially all of the fair value is concentrated in a single identifiable asset or group of tangible assets that are physically attached to each other (land and building). However, if the Company determines that substantially all of the fair value of the gross assets acquired is not concentrated in either a single identifiable asset or in a group of similar identifiable assets, the Company will then perform an assessment to determine whether the set is a business by using the framework outlined in the ASU. If the Company determines that the acquired asset is not a business, the Company will allocate the cost of the acquisition including transaction costs to the assets acquired or liabilities assumed based on their related fair value.

Upon the acquisition of real properties, the Company allocates the purchase price to tangible assets, consisting of land, building, fixtures and improvements, and identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, other value of in-place leases and value of tenant relationships, based in each case on their fair values.

The Company records above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The Company amortizes any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases, which the Company expects will range from one month to one year.

The Company measures the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Management’s estimates of value are determined by independent appraisers (e.g., discounted cash flow analysis). Factors to be considered in the analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.

The Company also considers information obtained about each property as a result of its pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods. Management also estimates costs to execute similar leases including leasing commissions and legal and other related expenses to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.

The total amount of other intangible assets acquired is further allocated to in-place lease values and customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.

The Company amortizes the value of in-place leases to expense over the weighted average remaining term of the underlying leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event will the amortization periods for the intangible assets exceed the remaining depreciable life of the building.

The determination of the fair value of the assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the fair value of these assets and liabilities, which could impact the amount of the Company’s reported net income.

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RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

Revenue Recognition and Receivables

The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, where collection has been considered probable, on a straight-line basis over the term of the related lease. The future minimum rental payments to be received from noncancelable operating leases for residential rental properties are $12.2 million and approximately $178,000 for the 12 month periods ending September 30, 2021 and 2022, respectively, and none thereafter.

Revenue is primarily derived from the rental of residential housing units for which the Company receives minimum rents and utility reimbursements pursuant to underlying tenant lease agreements. The Company also receives other ancillary fees for administration of leases, late payments, amenities, and revenue sharing arrangements for cable income from contracts with cable providers at the Company's properties. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The Company records the utility reimbursement income and ancillary charges in the period when the performance obligation is completed, either at a point in time or on a monthly basis as the service is utilized.

The Company evaluates its portfolio of operating leases for collectability at both the onset of the underlying leases and on an ongoing basis. Tenant receivables include amounts for which collectability was assessed as probable in accordance with the guidance in ASC 842-30. For tenant receivables, which include base rents, straight-line rentals, expense reimbursements and other revenue or income, the Company also estimates a general allowance for uncollectible accounts under ASC 450-20. The Company determines the collectability of its receivables related to rental revenue by considering a number of factors, including the length of time receivables are past due, security deposits held, the Company’s previous loss history, the tenants’ current ability to pay their obligations to the Company, and the condition of the general economy and the industry as a whole. If collectability is not probable, the Company adjusts rental income for the amount of the uncollectible revenue. Due to the COVID-19 pandemic, some residents have experienced difficulty making rent payments and the Company’s receivables have increased compared to historical levels. This caused the Company to further evaluate collectability during the three months ended September 30, 2020. At September 30, 2020 and December 31, 2019, the Company recorded $57,203 and $3,927 of provision for bad debts, respectively, to appropriately reflect management’s estimate for uncollectible accounts. The provision for bad debts was recorded as a reduction to rental income in the Company’s consolidated statements of operations and comprehensive loss.

Income Taxes

The Company elected to be taxed as a REIT commencing with its taxable year ending December 31, 2017. As a REIT, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that it makes qualifying distributions to its stockholders, and provided it satisfies, on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it lost its REIT qualification. Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its stockholders.

The dividends paid deduction of a REIT for qualifying dividends to its stockholders is computed using the Company’s taxable income as opposed to net income reported on the consolidated financial statements. Taxable income, generally, differs from net income reported on the financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.

The Company may elect to treat certain of its subsidiaries as a taxable REIT subsidiary ("TRS"). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state and local corporate income taxes. At September 30, 2020 and December 31, 2019, the Company did not treat any of its subsidiaries as a TRS.

While a TRS may generate net income, a TRS can declare dividends to the Company which will be included in the Company’s taxable income and necessitate a distribution to its stockholders. Conversely, if the Company retains earnings at a TRS level, no distribution is required and the Company can increase book equity of the consolidated entity.

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RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

The Company is subject to examination by the U.S. Internal Revenue Service and by the taxing authorities in other states in which the Company has significant business operations. The Company is not currently undergoing any examinations by taxing authorities. The Company is not subject to IRS examination for the tax return years 2016 and prior.

Earnings Per Share

Basic earnings per share are computed by dividing net income (loss) attributable to common stockholders for each period by the weighted-average common shares outstanding during the period for each share class. Diluted net income (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted to common stock. Through September 8, 2020, none of the 50,000 shares of convertible stock (discussed in Note 10) were included in the diluted earnings per share calculations because the necessary conditions for conversion had not been satisfied. For the purposes of calculating earnings per share, all common shares and per share information in the financial statements have been retroactively adjusted for the effect of any stock dividends and stock splits. For the three and nine months ended September 30, 2020 and 2019, common shares potentially issuable to settle distributions payable are excluded from the calculation of diluted earnings per share calculations, as their inclusion would be anti-dilutive.

In accordance with ASC 260-10-45, "Earnings Per Share", the Company uses the two-class method to calculate earnings per share. Basic earnings per share is calculated based on dividends declared and the rights of common shares and participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends declared during the period. The undistributed earnings are allocated to all outstanding common shares based on their relative percentage of each class of shares to the total number of outstanding shares. The Company did not have any participating securities outstanding other than Class A common stock, Class T common stock, Class R common stock and Class I common stock during the periods presented (see Note 10).

Organization and Offering Costs

Organization and offering costs (other than selling commissions, dealer manager fees, and distribution and shareholder servicing fees) of the Company were initially paid by the Advisor on behalf of the Company.

Pursuant to the Advisory Agreement between the Company and the Advisor, the Company was obligated to reimburse the Advisor for organization and other offering costs paid by the Advisor on behalf of the Company, up to an amount equal to 4.0% of gross offering proceeds as of the termination of the initial public offering as the Company raised less than $500.0 million in the primary portion of the initial public offering.

The Advisory Agreement provides that the Company is not responsible for the repayment of any unreimbursed organization and offering expenses or operational expenses incurred by the Advisor on the Company’s behalf through March 31, 2018 until after the termination of the primary portion of the Company’s ongoing initial public offering. Additionally, such unreimbursed organization and offering expenses or operational expenses incurred or paid by the Advisor on the Company’s behalf through March 31, 2018 are required to be reimbursed ratably starting after the termination of the primary portion of the Company’s ongoing initial public offering through April 30, 2021 for organization and offering expenses and through April 30, 2020 for operating expenses. These payments began on November 1, 2019.

Organization costs, which included all expenses incurred by the Company in connection with its formation, including but not limited to legal fees and other costs to incorporate, were expensed as incurred. Prior to the Company breaking escrow, the Advisor incurred approximately $104,000 of formation and other operating expenses on the Company's behalf, which will not be reimbursed to the Advisor.

Outstanding Class T shares issued in the Company's primary offering were subject to an annual distribution and shareholder servicing fee in the amount of 1% of the estimated NAV of the share (1% of purchase price prior to June 29, 2018) for up to five years from the date on which such share is issued. Effective November 1, 2019, the Company ceased accruing the distribution and shareholder servicing fee on each Class T share as the Company had reached certain underwriting compensation limits.

Outstanding Class R shares issued in the Company's primary offering were also subject to an annual distribution and shareholder servicing fee in the amount of 1% of the estimated NAV of the share (1% of purchase price prior to June 29, 2018). Effective November 1, 2019, following the termination of the initial public offering, each of the outstanding Class R shares of common stock automatically converted into a Class I share of common stock pursuant to the terms of the Articles

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RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

Supplementary for the Class R shares and the Company ceased accruing the distribution and shareholder servicing fee with respect to Class R shares as the Company no longer had any Class R shares outstanding.

The Company initially recorded distribution and shareholder servicing fees as a reduction to additional paid-in capital and the related liability in an amount equal to the maximum fees payable in relation to the Class T and Class R shares on the date the shares were issued. The liability was relieved over time, as the fees were paid to the Dealer Manager. Upon termination of the offering, the fees were no longer payable as described above and the liability was adjusted accordingly.

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION

The following table presents the Company's supplemental cash flow information (in thousands):

	Nine Months Ended September 30,
	2020		2019
Non-cash operating, financing and investing activities:
Offering costs payable to related parties	$	—	$	(4,061	)
Distribution and shareholder servicing fee payable to related parties		—		(1,035	)
Cash distributions on common stock declared but not yet paid		—		1,364
Stock issued from distribution reinvestment plan		857		1,940
Escrow deposits funded directly by mortgage notes payable		—		350

Non-cash activity related to acquisitions:
Mortgage notes payable used to acquire real properties		—		45,640

Non-cash activity related to sales:
Mortgage notes payable settled directly with proceeds from sale of rental property		1,519		—

Cash paid during the period for:
Interest	$	4,111	$	3,972

NOTE 4 - RESTRICTED CASH

Restricted cash represents escrow deposits with lenders to be used to pay real estate taxes, insurance, and capital improvements. The following table presents a summary of the components of the Company's restricted cash (in thousands):

	September 30, 2020		December 31, 2019
Real estate taxes	$	2,114	$	979
Insurance		156		179
Capital improvements		406		758
Total	$	2,676	$	1,916

In addition, the Company designated unrestricted cash for capital expenditures of $6.8 million and $8.1 million at September 30, 2020 and December 31, 2019, respectively.

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RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

NOTE 5 - RENTAL PROPERTIES, NET

The following table presents the Company's investment in rental properties (in thousands):

	September 30, 2020			December 31, 2019
Land	$	29,800		$	31,220
Building and improvements		172,119			171,265
Furniture, fixtures, and equipment		4,654			4,014
Construction in progress		299			1,205
		206,872			207,704
Less: accumulated depreciation		(17,635	)		(11,221	)
Total rental property, net	$	189,237		$	196,483

Depreciation expense for the three and nine months ended September 30, 2020 was $2.2 million and $6.6 million respectively. Depreciation expense for the three and nine months ended September 30, 2019 was $2.1 million and $5.4 million, respectively.

Loss on disposal of assets: During the three and nine months ended September 30, 2020, the Company recorded losses on the disposal of assets of approximately $21,000 and $223,000, respectively. During the three and nine months ended September 30, 2019, the Company recorded losses on the disposal of assets of approximately $66,000 and $284,000, respectively. The Company’s losses on disposals were primarily due to the replacement of appliances at its rental properties in conjunction with unit upgrades.

NOTE 6 – DISPOSITION OF PROPERTY

The following table presents the Company’s disposition activity during the three and nine months ended September 30, 2020 (in thousands):

Net Gain on Disposition

Multifamily Community

Location

Sale Date

Contract Sales

Price

Three months ended September 30, 2020

Nine months ended September 30, 2020

Payne Place

Alexandria, Virginia

March 5, 2020

3,100

—

530

The following table presents the Company’s revenue and net income/(loss) attributable to the property sold, excluding gain on sale, during the three and nine months ended September 30, 2020 (in thousands):

	Revenue Attributable to Property Sold				Net Income/(Loss) Attributable to Property Sold
Multifamily Community	Three months ended September 30, 2020		Nine months ended September 30, 2020		Three months ended September 30, 2020			Nine months ended September 30, 2020
Payne Place	$	—	$	32	$	(1	)	$	1

NOTE 7 - IDENTIFIED INTANGIBLE ASSETS, NET

Identified intangible assets, net, consist of acquired in-place rental leases. The net carrying value of the leases at September 30, 2020 and December 31, 2019 was $0 and approximately $173,000, respectively, net of the accumulated amortization of $4.6 million and $4.4 million, respectively. At September 30, 2020, intangible assets were fully amortized.

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RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

Amortization for the three and nine months ended September 30, 2020 was $0 and approximately $173,000, respectively. Amortization for the three and nine months ended September 30, 2019 was approximately $542,000 and $1.7 million, respectively.

NOTE 8 - MORTGAGE NOTES PAYABLE

The following table presents a summary of the Company's mortgage notes payable, net (in thousands):

	September 30, 2020							December 31, 2019
Collateral	Outstanding Borrowings		Deferred Financing Costs, net			Carrying Value		Outstanding borrowings		Deferred Financing Costs, net			Carrying Value
Payne Place	$	—	$	—		$	—	$	1,525	$	(28	)	$	1,497
Bay Club		21,054		(172	)		20,882		21,398		(208	)		21,190
Tramore Village		32,625		(259	)		32,366		32,625		(304	)		32,321
Matthews Reserve		23,850		(231	)		23,619		23,850		(267	)		23,583
The Park at Kensington		21,760		(225	)		21,535		21,760		(260	)		21,500
Wimbledon Oaks		18,410		(206	)		18,204		18,410		(235	)		18,175
Summit		27,580		(303	)		27,277		27,580		(343	)		27,237
Total	$	145,279	$	(1,396	)	$	143,883	$	147,148	$	(1,645	)	$	145,503

The following table presents additional information about the Company's mortgage notes payable, net (in thousands, except percentages):

Collateral	Maturity Date	Annual Interest Rate				Average Monthly Debt Service		Average Monthly Escrow
Bay Club	8/1/2024		2.02	%	⁽¹⁾⁽⁴⁾	$	79	$	56
Tramore Village	4/1/2025		1.95	%	⁽²⁾⁽⁵⁾		82		59
Matthews Reserve	9/1/2025		4.47	%	⁽³⁾⁽⁵⁾		90		43
The Park at Kensington	10/1/2025		4.36	%	⁽³⁾⁽⁵⁾		80		53
Wimbledon Oaks	3/1/2026		4.33	%	⁽³⁾⁽⁵⁾		67		63
Summit	7/1/2026		3.84	%	⁽³⁾⁽⁵⁾		89		43

(1)	Variable rate based on one-month LIBOR of 0.15% (at September 30, 2020) plus 1.87%, with a maximum interest rate of 5.75%.

(2)	Variable rate based on one-month LIBOR of 0.15% (at September 30, 2020) plus 1.80%, with a maximum interest rate of 6.25%.

(3)	Fixed rate.

(4)	Monthly payment of principal and interest required.

(5)	Monthly interest-only payment currently required.

All of the mortgage notes are collateralized by a first mortgage lien on the assets of the respective property named in the table above. The amount outstanding on the mortgages may be prepaid in full during the entire term with a prepayment penalty for a portion of the term.

The following table presents the Company's annual principal payments on outstanding borrowings for each of the next five years ending September 30, and thereafter (in thousands):

2021	$	850
2022		2,261
2023		2,936
2024		21,934
2025		53,782
Thereafter		63,516
	$	145,279

(Back to Index)

RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

Deferred financing costs incurred to obtain financing are amortized over the term of the related debt. During the three and nine months ended September 30, 2020, amortization of deferred financing costs of approximately $74,000 and $221,000, respectively, was included in interest expense. During the three and nine months ended September 30, 2019, amortization of deferred financing costs of approximately $75,000 and $192,000, respectively, was included in interest expense. Accumulated amortization at September 30, 2020 and December 31, 2019 was approximately $631,000 and $415,000, respectively.

The following table presents the Company's estimated amortization of the existing deferred financing costs for the next five years ending September 30, and thereafter (in thousands):

2021	$	293
2022		291
2023		285
2024		273
2025		201
Thereafter		53
	$	1,396

NOTE 9 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Relationship with the Advisor

The Company is externally managed and advised by the Advisor. Prior to the Self-Management Transaction on September 8, 2020, the Advisor was an indirect wholly-owned subsidiary of RAI. After the Self-Management Transaction, the Advisor is an indirect wholly-owned subsidiary of Resource Real Estate Opportunity OP, LP, the operating partnership of REIT I.

Pursuant to the terms of the Advisory Agreement, the Advisor provides the Company with its management team, including its officers, along with appropriate support personnel. The Advisor will be reimbursed for the Company’s allocable share of costs for Advisor personnel, including allocable personnel salaries and benefits. Each of the Company’s officers is an employee of REIT I, our Sponsor following the Self-Management Transaction or one of its affiliates. The Company does not expect to have any employees. The Advisor is not obligated to dedicate any specific portion of its time or its employees' time to the Company’s business. The Advisor and any employees of the Sponsor or its affiliates acting on behalf of the Advisor, are at all times subject to the supervision and oversight of the Company’s board of directors and have only such functions and authority as the Company delegates to it. Effective April 28, 2020, the Company renewed the Advisory Agreement with the Advisor through April 27, 2021.

During the course of the offering, the Advisor provided offering-related services to the Company and advanced funds to the Company for both operating costs and organization and offering costs. These amounts were to be reimbursed to the Advisor from the proceeds from the offering, subject to the aforementioned limits on organization and offering expense reimbursements. As of September 30, 2020, the Company incurred a total of $9.2 million of organization and offering costs, of which the Advisor advanced $9.0 million on a cumulative basis on behalf of the Company. The Company paid the remaining amount of approximately $249,000 of these costs directly. The maximum liability of the Company was $4.4 million based on the limit on organization and offering expenses payable by the Company included in the Advisory Agreement, which was comprised of the $249,000 initially paid by the Company and $4.2 million of the advance from the Advisor. An adjustment was made during the year ended December 31, 2019 to relieve the Company from the remaining $4.8 million liability due to the Advisor. As of September 30, 2020, the Company has repaid $2.9 million to the Advisor for deferred organization and offering costs and $1.3 million of deferred organization and offering costs remain in related party payables.

The Advisory Agreement has a one -year term and can be renewed for an unlimited number of successive one -year terms upon the approval of the Conflicts Committee of the Company's board of directors. Under the Advisory Agreement, the Advisor will receive fees and will be reimbursed for its expenses as set forth below:

Acquisition fees. The Advisor earns an acquisition fee of 2.0% of the cost of investments acquired on behalf of the Company, plus any capital reserves allocated, or the amount funded by the Company to acquire or originate loans, including acquisition expenses and any debt attributable to such investments.

(Back to Index)

RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

Asset management fees. The Advisor earns a monthly asset management fee equal to 0.083% (one-twelfth of 1.0%) of the appraised asset value for all assets owned at the end of each month, without deduction for depreciation, bad debts or other non-cash reserves. The asset management fee is based only on the portion of the costs or value attributable to the Company’s investment in an asset if the Company does not own all of an asset and does not manage or control the asset.

Disposition fees. The Advisor earns a disposition fee in connection with the sale of a property equal to the lesser of one-half of the aggregate brokerage commission paid, or if none is paid, 2.0% of the contract sales price.

Debt financing fees. The Advisor will earn a debt financing fee equal to 0.5% of the amount available under any debt financing obtained.

Expense reimbursements. The Company paid directly or reimbursed the Advisor for all of the expenses paid or incurred by the Advisor or its affiliates on behalf of the Company or in connection with the services provided to the Company in relation to its public offering, including its distribution reinvestment plan offering. This includes all organization and offering costs of up to 4.0% of gross offering proceeds as the Company raised less than $500.0 million in the primary offering. Reimbursements also include expenses the Advisor incurs in connection with providing services to the Company, including the Company’s allocable share of costs for Advisor personnel and overhead, out-of-pocket expenses incurred in connection with the selection and acquisition of properties or other real estate related debt investments, whether or not the Company ultimately acquires the investment. However, the Company will not reimburse the Advisor or its affiliates for employee costs in connection with services for which the Advisor earns acquisition or disposition fees. Prior to the Company breaking escrow, the Advisor incurred approximately $104,000 of formation and other operating expenses the Company's behalf, which will not be reimbursed to the Advisor.

On April 13, 2018, the board of directors approved an amendment to the Advisory Agreement that provides that the Company is not responsible for the reimbursement of any unreimbursed organization and offering expenses or operational expenses incurred by the Advisor on the Company’s behalf through March 31, 2018 until after the termination of the primary portion of the Company’s ongoing initial public offering. Additionally, the amendment provides that such unreimbursed organization and offering expenses or operational expenses incurred or paid by the Advisor on the Company’s behalf through March 31, 2018 will be reimbursed ratably starting after the termination of the primary portion of the Company’s ongoing initial public offering through April 30, 2021 for organization and offering expenses and through April 30, 2020 for operating expenses. The payments commenced on November 1, 2019.

Relationship with the Manager

The Manager manages real estate properties and coordinates the leasing of, and manages construction activities related to, some of the Company’s real estate properties pursuant to the terms of the management agreement with the Manager. Prior to the Self-Management Transaction on September 8, 2020, the Manager was an indirect wholly-owned subsidiary of RAI. After the Self-Management Transaction, the Manager is an indirect wholly-owned subsidiary of Resource Real Estate Opportunity OP, LP.

Property management fees. The Manager earns a property management fee equal to 4.5% of actual gross cash receipts from the operations of real property investments that it manages and an oversight fee in the same amount on any real property investments that are managed by third parties. Property management fees are deducted directly from the property's operating account by the property manager. The Manager subcontracts operational management of the properties to an unaffiliated third party and pays for those services from its property management fee. Any property management fees paid to unaffiliated third party property managers in excess of 4.5% of actual gross receipts will be reimbursed to the Company by the Advisor.

Construction management fees. The Manager earns a construction management fee equal to 5.0% of actual aggregate costs to construct improvements to, or to repair, rehab, or reconstruct, a property.

Debt servicing fees. The Manager will earn a debt servicing fee equal to 2.75% of gross receipts from real estate-related debt investments.

Expense reimbursement. During the ordinary course of business, the Manager or other affiliates may pay certain shared operating expenses on behalf of the Company. The Company is obligated to reimburse the Manager or other affiliates for such shared operating expenses.

(Back to Index)

RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

Relationship with Resource Securities

Resource Securities, a former affiliate of the Advisor, served as the Company’s dealer manager and was responsible for marketing the Company’s shares during the primary public offering.

Dealer manager fee and selling commissions. Pursuant to the terms of the amended and restated dealer manager agreement with Resource Securities, the Company generally paid Resource Securities a selling commission of up to 3.0% of gross offering proceeds from the sale of Class R shares and a dealer manager fee of up to 3.5% of gross offering proceeds from the sale of Class R shares (but the aggregate of such fees shall not exceed 5.5% of gross offering proceeds). The Company generally paid Resource Securities a dealer manager fee of up to 1.5% of gross offering proceeds from the sale of the Class I shares. Resource Securities allowed all selling commissions earned and a portion of the dealer manager fee as a marketing fee to participating broker-dealers. No selling commissions or dealer manager fees were earned by Resource Securities in connection with sales under the distribution reinvestment plan. Additionally, the Company may reimburse Resource Securities for bona fide due diligence expenses.

Distribution and shareholder servicing fee. Resource Securities was paid an annual fee of 1.0% of the NAV (purchase price prior to June 29, 2018) per share of Class T common stock sold in the primary offering for up to five years from the date on which each share was issued. Resource Securities was also paid an annual fee of 1.0% of the NAV (purchase price prior to June 29, 2018) per share of Class R common stock sold in the primary offering subject to the terms of the Class R shares as included in the Articles Supplementary. Effective November 1, 2019, pursuant to the terms of the Class T and Class R shares, no further distribution and shareholder servicing fees were payable to Resource Securities so the Company ceased to accrue the distribution and shareholder servicing fee.

Relationship with RAI and C-III

Prior to the Self-Management Transaction on September 8, 2020, RAI and C-III were related parties of the Company.

Property loss policy. The Company participates (with other properties directly and indirectly managed by RAI and C-III) in a catastrophic insurance policy, which covers claims up to $250.0 million, after either a $25,000 or a $100,000 deductible per incident, depending on location and/or type of loss. Therefore, unforeseen or catastrophic losses in excess of the Company's insured limits could have a material adverse effect on the Company's financial condition and operating results. This policy will expire on March 1, 2021.

General liability loss policy. The Company (with other properties directly managed by RAI) has an insured and dedicated limit for the general liability of $1.0 million per occurrence. Total claims are limited to $2.0 million per premium year. In excess of these limits, the Company participates (with other properties directly or indirectly managed by RAI and C-III) in a $50.0 million per occurrence excess liability program. Therefore, the total insured limit per occurrence is $51.0 million for the general and excess liability program, after a $25,000 deductible per incident. This policy will expire on March 1, 2021.

Internal audit fees. Prior to the Self-Management Transaction, RAI performed internal audit services for the Company.

Directors and officers liability insurance. The Company participates in a liability insurance program for directors and officers coverage with REIT I and REIT II. Prior to the Self-Management Transaction, the Company participated in a liability insurance program for directors and officers coverage with other C-III managed entities and subsidiaries.

(Back to Index)

RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

The following table presents the Company's amounts payable to such related parties (in thousands):

	September 30, 2020		December 31, 2019
Advisor:
Organization and offering costs	$	1,346	$	3,076
Operating expense reimbursements (including prepaid expenses)		—		1,778
		1,346		4,854

Manager:
Property management fees		78		81
Operating expense reimbursements		1		3
		79		84

	$	1,425	$	4,938

The following table presents the Company's fees earned by and expenses incurred from such related parties (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2020		2019			2020		2019
Fees earned / expenses incurred:
Advisor:
Acquisition fees and acquisition related reimbursements ⁽¹⁾	$	—	$	—		$	—	$	1,456
Asset management fees^(2)(11)		567		554			1,688		1,428
Disposition fees ⁽¹⁰⁾		—		—			62		—
Debt financing fees⁽³⁾		—		—			—		230
Organization and offering costs ⁽⁴⁾		—		136			—		765
Operating expense reimbursement ⁽⁵⁾⁽⁹⁾		2		30			12		796

Manager:
Property management fees^(2)(12)	$	237	$	227		$	689	$	557
Construction management fees⁽¹⁾		—		42			165		156
Operating expense reimbursements ⁽⁶⁾		—		—			—		38

RAI:
Internal audit fee⁽⁵⁾	$	—	$	—		$	—	$	25

Resource Securities:
Selling commissions and dealer-manager fees⁽⁷⁾	$	—	$	126		$	—	$	1,224
Distribution and shareholder servicing fee⁽⁷⁾⁽⁸⁾		—		(1,530	)		—		(1,035	)

Other:
The Planning & Zoning Resource Company ⁽¹⁾	$	—	$	—		$	—	$	3

(Back to Index)

RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

(1)	Capitalized and included in Rental properties, net on the consolidated balance sheets.

(2)	Included in Management fees - related parties on the consolidated statements of operations and comprehensive loss.

(3)	Included in Mortgage notes payable on the consolidated balance sheets.

(4)	Organizational expenses were expensed when incurred and offering costs are included in Deferred offering costs until they are charged to Stockholders' equity on the consolidated balance sheets as proceeds are raised in the offering.

(5)	Included in General and administrative on the consolidated statements of operations and comprehensive loss and excludes third party costs that are advanced by the Advisor.

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

(7)	Included in Stockholders' equity on the consolidated balance sheets.

(8)	During the year ended December 31, 2019, there was an adjustment in conjunction with the termination of the primary offering; see Note 2.

(9)	During the year ended December 31, 2019, the Advisor suspended the allocation of rent and payroll costs to the Company.

(10)	Included in Net gain on disposition of property on the consolidated statements of operations and comprehensive loss.

(11)	After the Self-Management Transaction on September 8, 2020, approximately $139,000 of this balance was earned by Resource Real Estate Opportunity OP, LP.

(12)	After the Self-Management Transaction on September 8, 2020, approximately $60,000 of this balance was earned by Resource Real Estate Opportunity OP, LP.

(Back to Index)

RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

NOTE 10 - EARNINGS PER SHARE

The following table presents a reconciliation of basic and diluted earnings/(loss) per share for the periods presented as follows (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Net loss	$	(2,756	)	$	(2,759	)	$	(6,362	)	$	(8,146	)
Less: Class A common stock cash distributions declared		—			86			—			255
Less: Class T common stock cash distributions declared		—			123			27			368
Less: Class R common stock cash distributions declared		—			1,079			—			3,115
Less: Class I common stock cash distributions declared		—			88			4			249
Undistributed net loss attributable to common stockholders	$	(2,756	)	$	(4,135	)	$	(6,393	)	$	(12,133	)

Class A common stock:
Undistributed net loss attributable to Class A common stockholders	$	(142	)	$	(219	)	$	(330	)	$	(694	)
Class A common stock cash distributions declared		—			86			—			255
Net loss attributable to Class A common stockholders	$	(142	)	$	(133	)	$	(330	)	$	(439	)
Net loss per Class A common share, basic and diluted	$	(0.23	)	$	(0.21	)	$	(0.53	)	$	(0.69	)
Weighted-average number of Class A common shares outstanding, basic and diluted ⁽¹⁾		626			624			627			632

Class T common stock:
Undistributed net loss attributable to Class T common stockholders	$	(255	)	$	(388	)	$	(590	)	$	(1,220	)
Class T common stock cash distributions declared		—			123			27			368
Net loss attributable to Class T common stockholders	$	(255	)	$	(265	)	$	(563	)	$	(852	)
Net loss per Class T common share, basic and diluted	$	(0.23	)	$	(0.24	)	$	(0.50	)	$	(0.77	)
Weighted-average number of Class T common shares outstanding, basic and diluted		1,122			1,102			1,121			1,111

Class R common stock:
Undistributed net loss attributable to Class R common stockholders	$	—		$	(3,308	)	$	—		$	(9,636	)
Class R common stock cash distributions declared		—			1,079			—			3,115
Net loss attributable to Class R common stockholders	$	—		$	(2,229	)	$	—		$	(6,521	)
Net loss per Class R common share, basic and diluted	$	—		$	(0.24	)	$	—		$	(0.74	)
Weighted-average number of Class R common shares outstanding, basic and diluted		—			9,409			—			8,777

Class I common stock:
Undistributed net loss attributable to Class I common stockholders	$	(2,359	)	$	(220	)	$	(5,473	)	$	(583	)
Class I common stock cash distributions declared		—			88			4			249
Net loss attributable to Class I common stockholders	$	(2,359	)	$	(132	)	$	(5,469	)	$	(334	)
Net loss per Class I common share, basic and diluted	$	(0.23	)	$	(0.21	)	$	(0.53	)	$	(0.63	)
Weighted-average number of Class I common shares outstanding, basic and diluted		10,401			625			10,387			531

(1)Weighted-average number of shares excludes the convertible stock as they are not participating securities.

(Back to Index)

RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

NOTE 11 - EQUITY

Preferred Stock

The Company’s charter authorizes the Company to issue 10 million shares of its $0.01 par value preferred stock. As of both September 30, 2020 and December 31, 2019, no shares of preferred stock were issued or outstanding.

Convertible Stock

The Company’s charter authorized the Company to issue 50,000 shares of its $0.01 par value convertible stock. On August 5, 2016, the Company's board of directors approved the issuance of 50,000 convertible shares in exchange for 5,000 shares of Class A common stock. As of September 8, 2020, the Company had 50,000 shares of $0.01 par value convertible stock outstanding, which were owned by the Advisor. The convertible stock was to convert into shares of the Company’s Class A common stock upon the occurrence of (a) the Company having paid distributions to common stockholders that in the aggregate equal 100% of the price at which the Company originally sold the shares plus an amount sufficient to produce a 6% cumulative, non-compounded annual return on the shares at that price; or (b) if the Company listed its common stock on a national securities exchange or the Company consummated a merger pursuant to which consideration received by the stockholders is securities of another issuer that are listed on a national securities exchange.

Each of these two events was a "Triggering Event." Upon a Triggering Event, the Company's convertible stock was to be, unless its Advisory Agreement had been terminated or not renewed on account of a material breach by its Advisor, generally converted into a number of shares of common stock equal to 1/50,000 of the quotient of:

(A)

15% of the amount, if any, by which

(1)

the value of the Company as of the date of the event triggering the conversion plus the total distributions paid to its stockholders through such date on the then-outstanding shares of its common stock exceeds

(2)

the sum of the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares as of the date of the event triggering the conversion, divided by

(B)

the value of the Company divided by the number of outstanding shares of common stock, in each case, as of the date of the event triggering the conversion.

On September 8, 2020, the Company redeemed all of its issued and outstanding convertible shares pursuant to that certain stock redemption agreement with the Advisor of even date therewith.

Common Stock

The Company’s charter authorizes the issuance of 1 billion shares of common stock with a par value of $0.01 per share, of which, the Company has allocated 750 million shares as Class R common stock; 75 million shares as Class I common stock; 25 million shares as Class A common stock; and 25 million shares as Class T common stock. 125 million shares of common stock remain undesignated. As of July 3, 2017, the Company ceased offering shares of Class A and Class T common stock and commenced the offering of Class R and Class I common stock in its primary offering. The Company ceased offering Class R and Class I shares in the primary offering on October 31, 2019 and ceased processing subscriptions in the offering on November 15, 2019. The Company continues to offer shares of Class A, Class T, and Class I common stock pursuant to the DRIP.

On November 1, 2019, each Class R share of common stock of the Company automatically converted into a Class I share of common stock of the Company pursuant to the terms of the Articles Supplementary for the Class R shares. The Class R shares converted into Class I shares on a one-for-one basis, because the most recently approved estimated net asset value per share approved by its board of directors ($9.12 as of March 21, 2019) was the same for all classes of common stock. Stockholders who received Class I shares upon the conversion will no longer be subject to the class-specific expenses associated with Class R shares. As of November 1, 2019, the Company no longer has any shares of Class R common stock outstanding.

At September 30, 2020, shares of the Company's $0.01 par value Class A, Class T, Class R, and Class I common stock

(Back to Index)

RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

have been issued as follows (dollars in thousands):

	Class A					Class T					Class R					Class I
	Shares Issued			Gross Proceeds		Shares Issued			Gross Proceeds		Shares Issued			Gross Proceeds		Shares Issued			Gross Proceeds
Shared issued through primary offering ⁽¹⁾		586,207		$	5,601		1,049,996		$	9,943		9,356,068		$	89,917		624,325		$	5,760
Shares issued through stock dividends		12,860			—		15,495			—		—			—		—			—
Shares issued through distribution reinvestment plan		34,179			318		91,763			834		356,453			3,244		115,513			1,050
Shares issued in conjunction with the Advisor's initial investment, net of 5,000 share conversion ⁽²⁾		15,000			200		—			—		—			—		—			—
Total		648,246		$	6,119		1,157,254		$	10,777		9,712,521		$	93,161		739,838		$	6,810
Shares redeemed and retired		(22,398	)				(35,615	)				(32,122	)				(18,914	)
Class R share conversion ⁽³⁾		—					—					(9,680,399	)				9,680,399
Total shares issued and outstanding at September 30, 2020		625,848					1,121,639					—					10,401,323

(1)

Includes 222,222 of Class A shares issued to RAI.

(2)

As part of the Self-Management Transaction, these shares were transferred by the Advisor.

(3)

On November 1, 2019, all outstanding Class R shares converted to Class I shares.

Share Redemption Program

During the nine months ended September 30, 2020, the Company redeemed shares of its outstanding Class A, Class T, and Class I common stock, as follows:

	Class A				Class T				Class I
Period	Total Number of Shares Redeemed		Average Price Paid per Share		Total Number of Shares Redeemed		Average Price Paid per Share		Total Number of Shares Redeemed		Average Price Paid per Share
January 2020		—		—		—		—		—		—
February 2020		—		—		—		—		—		—
March 2020		5,484	$	8.89		3,587	$	8.89		2,416	$	8.44
April 2020		—		—		—		—		—		—
May 2020		—		—		—		—		—		—
June 2020		—		—		—		—		5,499	$	9.01
July 2020		—		—		—		—		—		—
August 2020		—		—		—		—		—		—
September 2020		—		—		—		—		—		—
		5,484				3,587				7,915

The Company will not redeem in excess of 5% of the weighted-average number of shares of common stock outstanding during the 12-month period immediately prior to the effective date of redemption. The Company's board of directors will determine at least quarterly whether it has sufficient excess cash to repurchase shares. Generally, the cash available for redemptions will be limited to proceeds from the Company's distribution reinvestment plan plus, if the Company has positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous year.

(Back to Index)

RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

The Company's board of directors, in its sole discretion, may suspend, terminate or amend the Company's share redemption program without stockholder approval upon 30 days' notice if it determines that such suspension, termination or amendment is in the Company's best interest. The Company's board may also reduce the number of shares purchased under the share redemption program if it determines the funds otherwise available to fund the Company's share redemption program are needed for other purposes.

These limitations apply to all redemptions, including redemptions sought upon a stockholder's death, qualifying disability or confinement to a long-term care facility (collectively, “special redemptions”).

On March 27, 2020, the board of directors of the Company suspended the share redemption program with exceptions for special redemptions. The suspension was effective as of April 29, 2020. On September 8, 2020, in connection with the execution of the REIT III Merger Agreement, the board of directors of the Company approved the full suspension of the share redemption program. The share redemption program suspension was effective immediately. On October 22, 2020, the board of directors of the Company reinstated the share redemption program solely for special redemptions, effective as of November 22, 2020.

While the share redemption program is partially suspended, both pending and new redemption requests for redemptions submitted other than in connection with a special redemption will not be honored or retained, but will be cancelled with the ability to resubmit if the share redemption program is fully resumed.

There were no redemption requests processed during the three months ended September 30, 2020, as a result of the suspension on September 8, 2020.

Distributions

During the year ended December 31, 2019, the Company’s board of directors declared cash distributions on the outstanding shares of all classes of its common stock based on daily record dates for the period from December 31, 2019 through March 30, 2020 which were paid on January 31, 2020, February 28, 2020, and March 31, 2020.

The distributions were calculated based on the stockholders of record each day during the period at a rate of $0.001469178 per share per day.

Distributions were generally paid to stockholders on the last business day of the month for which the distribution has accrued. Distributions reinvested pursuant to the distribution reinvestment plan are reinvested in shares of the same class as the shares on which distributions are made.

The Company announced on March 30, 2020 that it was suspending distributions as of April 1, 2020 in order to preserve cash and offset any impact to the Company’s liquidity that may occur as a result of the COVID-19 pandemic on its operations. There were no distributions declared during the nine months ended September 30, 2020.

The following table presents information regarding the Company's distributions paid to stockholders during the nine months ended September 30, 2020 (in thousands):

	Nine Months Ended September 30, 2020
	Class A		Class T		Class R		Class I		Total
True-up of prior year cash distributions declared	$	—	$	27	$	—	$	4	$	31

Distributions reinvested in shares of common stock paid	$	24	$	89	$	—	$	744	$	857
Cash distributions paid		60		61		—		640		761
Total distributions paid	$	84	$	150	$	—	$	1,384	$	1,618

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RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

NOTE 12 - FAIR VALUE MEASURES AND DISCLOSURES

In analyzing the fair value of its financial investments accounted for on a fair value basis, the Company follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The fair value of cash, restricted cash, tenant receivables and accounts payable, approximate their carrying value due to their short nature. The hierarchy followed defines three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.

The fair value of rental properties is usually estimated based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities. The Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, and identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases and the value of tenant relationships, based in each case on their fair values.

Derivatives are reported at fair value in the consolidated balance sheets and are valued by a third party pricing agent using an income approach with models that use, as their primary inputs, readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit and volatility factors. (Level 2).

The following table presents information about the Company's assets measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

Level 1

Level 2

Level 3

Total

September 30, 2020

Assets:

Interest rate caps

—

December 31, 2019

Assets:

Interest rate caps

—

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RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

The carrying and fair values of the Company’s mortgage notes payable-outstanding borrowings, which were not carried at fair value on the consolidated balance sheets at September 30, 2020 and December 31, 2019 were as follows (in thousands):

September 30, 2020

December 31, 2019

Carrying

Amount

Fair

Value

Carrying

Amount

Fair

Value

Mortgage notes payable- outstanding borrowings

145,279

149,490

147,148

144,902

The carrying amount of the mortgage notes payable presented above is the outstanding borrowings excluding premium or discount and deferred finance costs, net. At September 30, 2020, the fair value of mortgage notes payable was estimated using a discounted cash flow model and rates available to the Company for debt with similar terms and remaining maturity.

NOTE 13 - DERIVATIVES AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

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

As a condition to certain of the Company’s financing facilities, from time to time the Company may be required to enter into certain derivative transactions as may be required by the lender. These transactions would generally be in line with the Company’s own risk management objectives and also serve to protect the lender.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company entered into two interest rate caps that were designated as cash flow hedges. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended September 30, 2020, such derivatives were used to hedge the variable cash flows, indexed to USD-LIBOR, associated with existing variable-rate loan agreements. The ineffective portion of the change in fair value of the derivatives will be recognized directly in earnings. During the three and nine months ended September 30, 2020, the Company recorded $6,550 and $19,727, respectively, of hedge ineffectiveness in earnings. During the three and nine months ended September 30, 2019, the Company recorded $3,231 and $6,194, respectively, of hedge ineffectiveness in earnings.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. At September 30, 2020, the Company estimates that an additional $13,634 will be reclassified as an increase to interest expense over the next 12 months.

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RESOURCE APARTMENT REIT III, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

SEPTEMBER 30, 2020

(unaudited)

The following table presents the Company's outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk at September 30, 2020 and December 31, 2019 (dollars in thousands):

Interest Rate

Derivative

Number of

Instruments

Notional

Amount

Maturity Dates

September 30, 2020

Interest rate caps

53,722

April 1, 2021 and August 1, 2022

December 31, 2019

Interest rate caps

54,145

August 1, 2020 and April 1, 2021

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The following table presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets at September 30, 2020 and December 31, 2019 (in thousands):

Asset Derivatives

Liability Derivatives

September 30, 2020

December 31, 2019

September 30, 2020

December 31, 2019

Balance Sheet

Fair Value

Balance

Sheet

Fair Value

Balance

Sheet

Fair Value

Balance

Sheet

Fair Value

Prepaid expenses and other assets

$ —

Prepaid expenses

and other assets

$ —

—

$ —

—

$ —

NOTE 14 - OPERATING EXPENSE LIMITATION

Under its charter, the Company must limit its total operating expenses to the greater of 2% of its average invested assets or 25% of its net income for the four most recently completed fiscal quarters, unless the Conflicts Committee of the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors.

Operating expenses for the four fiscal quarters ended September 30, 2020 exceeded the charter imposed limitation; however, the conflicts committee of the Company's board of directors determined that the relationship of the Company's operating expenses to its average invested assets was justified for these periods given the non-recurring expenses incurred during the three months ended September 30, 2020 in connection with the proposed merger with REIT II.

NOTE 15 - SUBSEQUENT EVENTS

The Company has evaluated subsequent events and determined that no events have occurred which would require an adjustment to or additional disclosure in the consolidated financial statements, other than elsewhere in the financial statements.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (unaudited)

The following discussion and analysis should be read in conjunction with the accompanying financial statements of Resource Apartment REIT III, Inc. and the notes thereto. See also "Cautionary Note Regarding Forward-Looking Statements" preceding Part I, as well as the notes to our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations provided in our Annual Report on Form 10-K for the year ended December 31, 2019. As used herein, the terms "we," "our" and "us" refer to Resource Apartment REIT III, Inc., a Maryland corporation, and, as required by context, Resource Apartment REIT III OP, LP, a Delaware limited partnership, and to their subsidiaries.

Overview

Resource Apartment REIT III, Inc. is a Maryland corporation that intends to take advantage of its sponsor's multifamily investing and lending platforms to invest in apartment communities in order to provide stockholders with growing cash flow and increasing asset values. We have acquired underperforming apartments which we will renovate and stabilize in order to increase rents. Our primary public offering stage terminated as of October 31, 2019 having raised substantially less than the maximum offering amount. Therefore, we do not expect to be able to invest in as diverse a portfolio of properties as we otherwise would. We may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego a good investment because it does not precisely fit our expected portfolio composition. Thus, to the extent that Resource REIT Advisor, LLC (our "Advisor") presents us with attractive investment opportunities that allow us to meet the real estate investment trust ("REIT") requirements under the Internal Revenue Code of 1986, as amended, our portfolio composition may vary from what we initially expect.

Pending Merger with Resource Real Estate Opportunity REIT II, Inc.

On September 8, 2020, we entered into a merger agreement (as described herein) to be acquired by Resource Real Estate Opportunity REIT II, Inc. (“REIT II”). This merger is a stock-for-stock transaction whereby we will be merged into a wholly owned subsidiary of REIT II.

REIT II Merger

On September 8, 2020, we, REIT II, RRE Opportunity OP II, LP, the REIT II operating partnership (“OP II”), Revolution III Merger Sub, LLC (“Merger Sub III”), a wholly owned subsidiary of REIT II, and Resource Apartment OP III, LP (“OP III”),our operating partnership, entered into an Agreement and Plan of Merger (the “REIT III Merger Agreement”).

Subject to the terms and conditions of the REIT III Merger Agreement, (i) we will merge with and into Merger Sub III, with Merger Sub III surviving as a direct, wholly owned subsidiary of REIT II (the “REIT III Company Merger”) and (ii) OP III will merge with and into OP II (the “REIT III Partnership Merger” and, together with the REIT III Company Merger, the “REIT III Merger”), with OP II surviving the REIT III Partnership Merger. At such time, the separate existence of us and OP III shall cease.

At the effective time of the REIT III Company Merger, each issued and outstanding share of our common stock (or fraction thereof) will be converted into the right to receive 0.925862 shares of common stock of REIT II.

The obligations of each party to consummate the REIT III Merger are subject to a number of conditions, including receipt of the approval of the REIT III Merger and of an amendment to the our charter to delete certain provisions regarding roll-up transactions by the holders of a majority of our outstanding shares of common stock.

COVID-19 Pandemic and Portfolio Outlook

Since initially being reported in December 2019, COVID-19 has spread around the world, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The COVID-19 pandemic has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the pandemic continues to evolve and many countries, including the United States, have reacted with various containment and mitigation efforts including quarantines, mandated business and school closures and travel restrictions. As a

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result, the COVID-19 pandemic is negatively impacting almost every industry, including the real estate industry, directly or indirectly. The fluidity of the COVID-19 pandemic continues to preclude any prediction as to the ultimate adverse impact the pandemic may have on our business, financial condition, results of operations and cash flows.

Many of our tenants have suffered difficulties with their personal financial situations as a result of job loss or reduced income and, depending upon the duration of the measures put in place to mitigate or contain the spread of the virus and the corresponding economic slowdown, some of our tenants have or will seek rent deferrals or become unable to pay their rent. During the three months ended September 30, 2020, we had received July, August and September rent payments equal to approximately 96.8%, 96.0%, and 95.5%, respectively, of the billed rental income for the period as compared to pre-COVID-19 March 2020 collections of 98.3%. As of October 31, 2020, our October collections are 95.8% of the billed rental income for the period.

In addition, we have approved short-term rent relief requests, most often in the form of rent deferral requests, or requests for further discussion. Executed short-term rent relief plans that are outstanding at September 30, 2020 are not significant in terms of either number of requests or dollar value. Not all tenant requests will ultimately result in modified agreements, nor are we forgoing our contractual rights under our lease agreements. Collections and rent relief requests to-date may not be indicative of collections or requests in any future period. As of September 30, 2020, tenant receivables have increased by approximately $33,000 from March 31, 2020. In addition, we have modified our provision for bad debts estimate to include a partial provision for tenant receivables less than 90 days past due, which contributed to an increase in the provision for bad debts of approximately $56,000 from March 31, 2020. In particular, many of our tenants may be the recipients of unemployment benefits or other economic stimulus under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which will have aided in the payment of rent due. The extent to which these benefits will be available going forward is uncertain. To the extent our tenants do not have access to additional federal or state relief to mitigate the impact of the COVID-19 pandemic on their personal finances our ability to collect rent and our operations would be adversely affected.

The impact of the COVID-19 pandemic on our rental revenue for the remainder of 2020 and thereafter cannot however, be determined at present. In addition, we expect the economic disruptions caused by the COVID-19 pandemic will cause elevated credit losses and impede our ability to increase rental rates or lease vacant units, in particular if our current tenants default on their leases and vacate. We continue to waive late fees, halt evictions where applicable federal, state or local restrictions are in effect, and offer a payment deferral plan to residents who have been adversely financially impacted by the COVID-19 pandemic. To help mitigate the impact on our operating results of the COVID-19 pandemic, we have initiated various operational cost saving initiatives across our portfolio. In addition, we have taken measures to preserve cash and offset any impact to our liquidity that may occur as a result of the COVID-19 pandemic. These measures included the suspension of distributions as of April 1, 2020 as well as the partial suspension of our share redemption program effective April 29, 2020. Additionally, most of our value-add rehabilitation projects are being deferred temporarily.

The COVID-19 pandemic or a future pandemic, epidemic or outbreak of infectious disease affecting states or regions in which we operate and our multifamily tenants reside and work could have material adverse effects on our business, financial condition, results of operations and cash flows due to, among other factors: reduced economic activity, general economic decline or recession, which may result in job loss or bankruptcy for residents at our properties and may cause our residents to be unable to make rent payments to us timely, or at all, or to otherwise seek modifications of lease obligations; health or other government authorities requiring the closure of offices or other businesses or instituting quarantines of personnel as the result of, or in order to avoid, exposure to a contagious disease; disruption in supply and delivery chains; a general decline in business activity and demand for real estate; difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions, which may affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis; and the potential negative impact on the health of personnel of our Advisor, particularly if a significant number of our Advisor’s employees are impacted, which would result in a deterioration in our ability to ensure business continuity and maintain our properties during a disruption.

The extent to which the COVID-19 pandemic or any other pandemic, epidemic or disease impacts our operations and those of our tenants remain uncertain and cannot be predicted with confidence and will depend on the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. However, notwithstanding the challenging economic circumstances created by the COVID-19 pandemic, we believe our focus on multifamily assets makes us better positioned relative to other classes of real estate to withstand many of the adverse impacts of the COVID-19 pandemic as housing is a basic need, rather than a discretionary expense. In addition, as noted above, we have taken several steps to offset any disruptions in rent that may occur as a result of the COVIC-19 pandemic. Further, we have no debt maturing until August 2024 with an

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aggregate portfolio leverage of 67%. Nevertheless, the COVID-19 pandemic (or a future pandemic, epidemic or disease) presents material uncertainty and risk with respect to our business, financial condition, results of operations and cash flows.

Results of Operations

We were formed on July 15, 2015. We commenced active real estate operations on August 19, 2016 with the acquisition of our first multifamily property. Since our inception, we have acquired interests in seven multifamily properties. At September 30, 2020, we owned six multifamily properties.

Through September 30, 2020, the COVID-19 pandemic has not significantly impacted our operating results. We expect, however, that as the impact of COVID-19 continues to be felt, the COVID-19 outbreak may adversely affect our business, financial condition, results of operations and cash flows going forward, including but not limited to, rental revenues and leasing activity, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous factors, many of which are outside of our control, as discussed above.

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

The following table sets forth the results of our operations:

	Three Months Ended September 30,
	2020			2019
Revenues:
Rental income	$	5,277		$	4,874
Total revenues		5,277			4,874

Expenses:
Rental operating - expenses		1,092			1,037
Rental operating - payroll		509			505
Rental operating - real estate taxes		662			742
Subtotal- rental operating		2,263			2,284
Management fees - related parties		803			780
General and administrative		420			320
Transaction costs		964			—
Loss on disposal of assets		21			66
Depreciation and amortization expense		2,232			2,594
Total expenses		6,703			6,044
Loss before other income (expense)		(1,426	)		(1,170	)

Other income (expense):
Interest income		13			53
Interest expense		(1,343	)		(1,642	)
Total other income (expense)		(1,330	)		(1,589	)
Net loss	$	(2,756	)	$	(2,759	)

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The following table presents the results of operations separated into three categories: the results of operations of the four properties that we owned for the entirety of both periods presented, properties purchased or sold during either of the periods presented and company level activity for the three months ended September 30, 2020 and 2019 (in thousands):

	Three Months Ended September 30, 2020												Three Months Ended September 30, 2019
	Properties owned both periods			Properties purchased/sold during either period			Company level activity			Total			Properties owned both periods			Properties purchased/sold during either period			Company level activity			Total
Revenues:
Rental income	$	5,277		$	—		$	—		$	5,277		$	4,822		$	52		$	—		$	4,874
Total revenues		5,277			—			—			5,277			4,822			52			—			4,874

Expenses:
Rental operating -expenses		1,091			1			—			1,092			1,030			7			—			1,037
Rental operating - payroll		509			—			—			509			504			1			—			505
Rental operating - real estate taxes		662			—			—			662			735			7			—			742
Subtotal- rental operating		2,262			1			—			2,263			2,269			15			—			2,284
Management fees - related parties		236			—			567			803			224			2			554			780
Transaction costs		—			—			964			964			—			—			—			—
General and administrative ⁽¹⁾		178			—			242			420			148			7			165			320
Loss on disposal of assets		21			—			—			21			66			—			—			66
Depreciation and amortization expense		2,232			—			—			2,232			2,582			12			—			2,594
Total expenses		4,929			1			1,773			6,703			5,289			36			719			6,044
Income/(loss) before other income (expense)		348			(1	)		(1,773	)		(1,426	)		(467	)		16			(719	)		(1,170	)

Other income (expense):
Interest income		1			—			12			13			6			—			47			53
Interest expense		(1,343	)		—			—			(1,343	)		(1,630	)		(12	)		—			(1,642	)
Total other income (expense)		(1,342	)		—			12			(1,330	)		(1,624	)		(12	)		47			(1,589	)
Net (loss)/income	$	(994	)	$	(1	)	$	(1,761	)	$	(2,756	)	$	(2,091	)	$	4		$	(672	)	$	(2,759	)

(1)Includes approximately $11,000 in COVID-19 related expenses for three months ended September 30, 2020.

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Total revenues

Total revenues for the three months ended September 30, 2020 increased by $400,000 as compared to the three months ended September 30, 2019 primarily due to increases across the portfolio due to lower vacancies due to halting evictions where applicable federal, state or local restrictions were in effect due to COVID-19 and the implementation of our investment strategy to increase monthly rental income after renovating and stabilizing operations.

Transaction costs

During the three months ended September 30, 2020, we expensed approximately $964,000 of professional fees in connection with the pending merger with REIT II.

General and administrative

General and administrative expense for the three months ended September 30, 2020 increased by approximately $100,000 as compared to the three months ended September 30, 2019 due to increase in professional fees.

Depreciation and amortization

Depreciation and amortization expense is comprised of the depreciation on our rental properties and amortization of intangible assets related to in-place leases which are amortized over a period of approximately six to eight months after acquisition.

Depreciation expense for the three months ended September 30, 2020 increased by approximately $180,000 as compared to the three months ended September 30, 2019 primarily due to an increase in capital expenditures across the entire portfolio through September 30, 2020.

Amortization expense for the three months ended September 30, 2020 decreased by approximately $542,000 as compared to the three months ended September 30, 2019 due to in-place leases being fully amortized at September 30, 2020.

Interest expense

Interest expense for the three months ended September 30, 2020 decreased by approximately $299,000 as compared to the three months ended September 30, 2019 due to lower interest rates during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

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Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

	Nine Months Ended September 30,
	2020			2019
Revenues:
Rental income	$	15,498		$	12,621
Total revenues		15,498			12,621

Expenses:
Rental operating - expenses		3,010			2,529
Rental operating - payroll		1,489			1,288
Rental operating - real estate taxes		2,097			1,818
Subtotal- rental operating		6,596			5,635
Property management fees		—			5
Management fees - related parties		2,376			1,985
Transaction costs		964			—
General and administrative		1,191			1,715
Loss on disposal of assets		223			284
Depreciation and amortization expense		6,827			7,047
Total expenses		18,177			16,671
Loss before net gains on dispositions		(2,679	)		(4,050	)
Net gain on disposition of property		530			—
Loss before other income (expense)		(2,149	)		(4,050	)

Other income (expense):
Interest income		49			206
Interest expense		(4,262	)		(4,302	)
Total other income (expense)		(4,213	)		(4,096	)
Net loss	$	(6,362	)	$	(8,146	)

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The following table presents the results of operations separated into three categories: the results of operations of the four properties that we owned for the entirety of both periods presented, properties purchased or sold during either of the periods presented and company level activity for the nine months ended September 30, 2020 and 2019 (in thousands):

	Nine Months Ended September 30, 2020											Nine Months Ended September 30, 2019
	Properties owned both periods			Properties purchased/sold during either period		Company level activity			Total			Properties owned both periods			Properties purchased/sold during either period			Company level activity			Total
Revenues:
Rental income	$	10,505		$	4,993	$	—		$	15,498		$	9,714		$	2,907		$	—		$	12,621
Total revenues		10,505			4,993		—			15,498			9,714			2,907			—			12,621

Expenses:
Rental operating -expenses		1,902			1,108		—			3,010			1,878			651			—			2,529
Rental operating - payroll		1,000			489		—			1,489			981			307			—			1,288
Rental operating - real estate taxes		1,243			854		—			2,097			1,248			570			—			1,818
Subtotal- rental operating		4,145			2,451		—			6,596			4,107			1,528			—			5,635
Property management fees		—			—		—			—			—			5			—			5
Management fees - related parties		688			—		1,688			2,376			437			120			1,428			1,985
Transaction costs		—			—		964			964			—			—			—			—
General and administrative ⁽¹⁾		83			400		708			1,191			256			75			1,384			1,715
Loss on disposal of assets		146			77		—			223			234			50			—			284
Depreciation and amortization expense		6,652			175		—			6,827			5,054			1,993			—			7,047
Total expenses		11,714			3,103		3,360			18,177			10,088			3,771			2,812			16,671
Loss before net gains on dispositions		(1,209	)		1,890		(3,360	)		(2,679	)		(374	)		(864	)		(2,812	)		(4,050	)
Net gain on disposition of property		—			530		—			530			—			—			—			—
(Loss)/income before other income (expense)		(1,209	)		2,420		(3,360	)		(2,149	)		(374	)		(864	)		(2,812	)		(4,050	)

Other income (expense):
Interest income		8			1		40			49			5			2			199			206
Interest expense		(4,339	)		77		—			(4,262	)		(3,422	)		(880	)		—			(4,302	)
Total other income (expense)		(4,331	)		78		40			(4,213	)		(3,417	)		(878	)		199			(4,096	)
Net (loss)/income		(5,540	)		2,498		(3,320	)		(6,362	)		(3,791	)		(1,742	)		(2,613	)		(8,146	)

(1)

Includes approximately $24,000 in COVID-19 related expenses for nine months ended September 30, 2020.

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Total revenues

Total revenues for the nine months ended September 30, 2020 increased by $2.8 million as compared to the nine months ended September 30, 2019 primarily due to the purchase of Summit Apartments on June 24, 2019. Revenue for this property was approximately $2.4 million for the nine months ended September 30, 2020 as compared to approximately $833,000 for the nine months ended September 30, 2019. In addition, the increase also reflects the implementation of our investment strategy to increase monthly rental income after renovating and stabilizing operations.

Rental operating - expenses, payroll, and real estate taxes

Rental operating - expenses, payroll, and real estate taxes for the nine months ended September 30, 2020 increased by approximately $961,000 as compared to the nine months ended September 30, 2019 primarily due to the purchase of Summit Apartments on June 24, 2019. Rental operating expenses for this property were approximately $1.1 million for the nine months ended September 30, 2020 as compared to approximately $357,000 for the nine months ended September 30, 2019.

Management fees - related parties

Management fees - related parties expense for the nine months ended September 30, 2020 increased by approximately $391,000 as compared to the nine months ended September 30, 2019 due to an increase in asset management fees due to the purchase of Summit during the nine months ended September 30, 2019.

Transaction costs

During the nine months ended September 30, 2020, we expensed approximately $964,000 of professional fees in connection with the pending merger with REIT II.

General and administrative

General and administrative expense for the nine months ended September 30, 2020 decreased by approximately $524,000 as compared to the nine months ended September 30, 2019 due to a decrease in allocated expenses effective July 1, 2019.

Depreciation and amortization

Depreciation expense for the nine months ended September 30, 2020 increased by approximately $1.2 million as compared to the nine months ended September 30, 2019 primarily due to the purchase of Summit Apartments on June 24, 2019. Depreciation expense for this property was approximately $890,000 for the nine months ended September 30, 2020 as compared to approximately $277,000 for the nine months ended September 30, 2019. In addition, an increase in capital expenditures led to higher depreciation expense across the entire portfolio for the nine months ended September 30, 2020.

Amortization expense for the nine months ended September 30, 2020 decreased by approximately $1.4 million as compared to the nine months ended September 30, 2019 due to in-place leases being fully amortized at September 30, 2020.

Interest income

Interest income for the nine months ended September 30, 2020 decreased by approximately $157,000 as compared to the nine months ended September 30, 2019 due to lower interest rates during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, as well as a decrease in the cash balances held by us from October 1, 2019 to September 30, 2020.

Interest expense

Interest expense for the nine months ended September 30, 2020 decreased by approximately $40,000 as compared to the nine months ended September 30, 2019 due to lower interest rates during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

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Liquidity and Capital Resources

On April 28, 2016, our Registration Statement on Form S-11 (File No. 333-207740), covering a public offering of up to $1.1 billion of shares of our common stock, consisting of up to $1.0 billion of shares in our primary offering and up to $100.0 million of shares pursuant to our distribution reinvestment plan ("DRIP") was declared effective under the Securities Act of 1933, as amended (the “Securities Act”). Purchases under our DRIP have been suspended as of April 1, 2020 when our board of directors determined to suspend distributions in order to offset any disruptions in rents that may occur as a result of the impact of COVID-19 on our operations.

Through July 2, 2017, we offered shares of Class A and Class T common stock. As of July 3, 2017, we ceased offering shares of Class A and Class T common stock in our primary offering and commenced offering shares of Class R and Class I common stock.

The primary portion of our initial public offering closed on October 31, 2019, having raised aggregate primary offering proceeds of $111.4 million from the sale of 601,207 Class A shares, 1,049,996 Class T shares, 9,356,067 Class R shares and 624,325 Class I shares of common stock. We are continuing to offer Class A, Class T, and Class I shares pursuant to the DRIP.

We anticipate deriving the capital required to conduct our operations from our operating income, the proceeds of our DRIP offering, from secured or unsecured financings from banks or other lenders and from proceeds from the sale of assets. At September 30, 2020, we have purchased seven properties using both offering proceeds and debt financing and have sold one property.

Our primary public offering stage terminated as of October 31, 2019 having raised substantially less than the maximum offering amount. Therefore, we have made fewer investments resulting in less diversification in terms of the type, number and size of investments we make and the value of an investment in us will fluctuate with the performance of the specific assets we have acquired. Further, we will have certain fixed operating expenses, including certain expenses as a publicly registered REIT. Our fixed operating expenses as a percentage of gross income will reduce our net income and could limit our ability to make distributions.

We intend to make reserve allocations as necessary to aid our objective of preserving capital for our investors by supporting the maintenance and viability of properties we acquire in the future. If reserves and any other available income become insufficient to cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties, debt investments or other assets we may hold. We cannot assure you that we will be able to access additional funds when we need them or upon acceptable terms. In addition, our ability to derive the capital needed to conduct our operations may be adversely affected by the impact of the COVID-19 pandemic as discussed above.

Capital Expenditures

We expect capital expenditures to be reduced in future periods as we have temporarily suspended certain capital improvement projects at our properties in order to preserve cash and offset any impact to our liquidity that may occur as a result of the COVID-19 pandemic on our operations. During the nine months ended September 30, 2020, we deployed capital expenditures as follows (in thousands):

Multifamily Community	Capital deployed during nine months ended September 30, 2020		Remaining capital budgeted
Payne Place	$	—	$	—
Bay Club		248		487
Tramore Village		649		962
Matthews		416		1,286
Kensington		294		1,120
Wimbledon Oaks		909		710
Summit		615		2,263
	$	3,131

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Gross offering proceeds

At September 30, 2020, shares of our $0.01 par value Class A, Class T, Class R, and Class I common stock have been issued as follows (dollars in thousands):

	Class A					Class T					Class R					Class I
	Shares Issued			Gross Proceeds		Shares Issued			Gross Proceeds		Shares Issued			Gross Proceeds		Shares Issued			Gross Proceeds
Shared issued through primary offering ⁽¹⁾		586,207		$	5,601		1,049,996		$	9,943		9,356,068		$	89,917		624,325		$	5,760
Shares issued through stock dividends		12,860			—		15,495			—		—			—		—			—
Shares issued through distribution reinvestment plan		34,179			318		91,763			834		356,453			3,244		115,513			1,050
Shares issued in conjunction with the Advisor's initial investment, net of 5,000 share conversion ⁽²⁾		15,000			200		—			—		—			—		—			—
Total		648,246		$	6,119		1,157,254		$	10,777		9,712,521		$	93,161		739,838		$	6,810
Shares redeemed and retired		(22,398	)				(35,615	)				(32,122	)				(18,914	)
Class R share conversion ⁽³⁾		—					—					(9,680,399	)				9,680,399
Total shares issued and outstanding at September 30, 2020		625,848					1,121,639					—					10,401,323

(1)Includes 222,222 of Class A shares issued to RAI.

(2)As part of the Self-Management Transaction, these shares were transferred by the Advisor.

(3)On November 1, 2019, all outstanding Class R shares converted to Class I shares.

Debt

The following table presents a summary of our mortgage notes payable, net (in thousands):

	September 30, 2020							December 31, 2019
Collateral	Outstanding Borrowings		Deferred Financing Costs, net			Carrying Value		Outstanding borrowings		Deferred Financing Costs, net			Carrying Value
Payne Place	$	—	$	—		$	—	$	1,525	$	(28	)	$	1,497
Bay Club		21,054		(172	)		20,882		21,398		(208	)		21,190
Tramore Village		32,625		(259	)		32,366		32,625		(304	)		32,321
Matthews Reserve		23,850		(231	)		23,619		23,850		(267	)		23,583
The Park at Kensington		21,760		(225	)		21,535		21,760		(260	)		21,500
Wimbledon Oaks		18,410		(206	)		18,204		18,410		(235	)		18,175
Summit		27,580		(303	)		27,277		27,580		(343	)		27,237
Total	$	145,279	$	(1,396	)	$	143,883	$	147,148	$	(1,645	)	$	145,503

For maturity dates, related interest rates, monthly debt service, and monthly escrow payments, see Note 8 of the notes to our consolidated financial statements.

As of September 30, 2020, the weighted average interest rate of all our outstanding indebtedness was 3.39%.

Although there is no limit on the amount we can borrow to acquire a single real estate investment, we may not leverage our assets with debt financing such that our borrowings are in excess of 300% of our net assets unless a majority of our independent directors find substantial justification for borrowing a greater amount. Examples of such a substantial justification include, without limitation, obtaining funds for the following: (i) to repay existing obligations, (ii) to pay sufficient distributions to maintain REIT status, or (iii) to buy an asset where an exceptional acquisition opportunity presents itself and the terms of the debt agreement and the nature of the asset are such that the debt does not increase the risk that we would become unable to meet our financial obligations as they became due. On a total portfolio basis, however, based on current lending market conditions, we expect to leverage our assets in an amount equal to 65% to 75% of the cost of our assets.

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We have financed the acquisition costs of real estate investments by causing our subsidiaries to borrow directly from third-party financial institutions or other commercial lenders. Each property acquired by a subsidiary serves as collateral for the debt incurred by such subsidiary and is nonrecourse to us. Additionally, we may obtain corporate-level financing through a line of credit from third-party financial institutions or other commercial lenders and our assets would serve as collateral for this type of debt incurred to acquire real estate investments.

Central banks and regulators in a number of major jurisdictions (including both the U.S. and the U.K.) have convened working groups to find, and implement the transition to, suitable replacements for Interbank Offered Rates (“IBORs”), including London Interbank Offered Rate (“LIBOR”). The Financial Conduct Authority of the U.K., which regulates LIBOR, has announced it will not compel panel banks to contribute to LIBOR after 2021.

We have exposure to IBORs through floating rate mortgage debt with maturity dates beyond 2021 for which the interest rates are tied to LIBOR. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. Any changes in benchmark interest rates could increase our cost of capital, which could impact our results of operations, cash flows, and the market value of our real estate investments.

Organization and Offering Costs

We incurred organization and offering costs in pursuit of our capital raise. Our organization and offering costs (other than selling commissions, the dealer manager fees and distribution and shareholder servicing fees) were initially being paid by the Advisor on our behalf. Organization costs included all expenses that we incurred in connection with our formation, including but not limited to legal fees and other costs to incorporate.

Pursuant to the Advisory Agreement, we are obligated to reimburse the Advisor for organization and offering costs paid by the Advisor on our behalf, up to an amount equal to 4.0% of gross offering proceeds as of the termination of this offering as we raised less than $500.0 million in the primary offering. These organization and offering expenses included all actual expenses (other than selling commissions, the dealer manager fee and the distribution and shareholder servicing fee), including reimbursements to our Advisor for the portion of named executive officer salaries allocable to activities related to this offering, to be incurred on our behalf and paid by us in connection with the offering.

Our Advisory Agreement provides that we were not responsible for the repayment of any unreimbursed organization and offering expenses or operational expenses incurred by our Advisor on our behalf through March 31, 2018 until after the termination of the primary portion of our ongoing initial public offering. Additionally, the Advisory Agreement provides that such unreimbursed organization and offering expenses or operational expenses incurred or paid by our Advisor on our behalf through March 31, 2018 are required to be reimbursed ratably starting after the termination of the primary portion of our ongoing initial public offering through April 30, 2021 for organization and offering expenses and through April 30, 2020 for operating expenses. These payments began on November 1, 2019.

As of September 30, 2020, we have incurred $9.2 million for public offering costs consisting of accounting, advertising, allocated payroll, due diligence, marketing, legal and similar costs. Initially, we had paid approximately $249,000 of these costs directly and our Advisor advanced $9.0 million on our behalf.

Of this total, we have charged $4.4 million to equity, which represents the portion of deferred offering costs allocated to each share of common stock sold in the public offering and is the maximum liability for organization and offering costs, based on the 4.0% limit described above. Due to the maximum liability of $4.4 million, we are responsible for the $249,000 initially paid by us and $4.2 million of the advance from our Advisor. An adjustment was made during the year ended December 31, 2019, to relieve us from the remaining $4.8 million liability due to our Advisor. As of September 30, 2020, we have reimbursed $2.9 million to our Advisor for deferred organization and offering expenses.

Organization costs, which include all expenses incurred by us in connection with our formation, including but not limited to legal fees and other costs to incorporate, were expensed as incurred.

Outstanding Class T shares issued in our primary offering were subject to an annual distribution and shareholder servicing fee in the amount of 1% of the estimated NAV of the share (1% of purchase price prior to June 29, 2018) for up to five years from the date on which such share is issued. Effective November 1, 2019, in connection with the termination of our initial public primary offering, we ceased accruing the distribution and shareholder servicing fee on each Class T share as we had reached certain underwriting compensation limits.

Outstanding Class R shares issued in our primary offering were also subject to an annual distribution and shareholder servicing fee in the amount of 1% of the estimated NAV of the share (1% of purchase price prior to June 29, 2018). Effective November 1, 2019, following the termination of our initial public primary offering, each of our Class R shares of common stock automatically converted into a Class I share of common stock pursuant to the terms of the Articles Supplementary for the Class

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R shares and we ceased accruing the distribution and shareholder servicing fee with respect to Class R shares as we no longer had any Class R shares outstanding.

We recorded the distribution and shareholder servicing fees as a reduction to additional paid-in capital and the related liability in an amount equal to the maximum fees payable in relation to the Class T and Class R shares on the date the shares are issued. The liability was relieved over time, as the fees were paid to the Dealer Manager, or as the fees are adjusted (if the fees were no longer payable pursuant to the conditions described above).

Asset Management Costs

We expect to use our operating income to make payments to our Advisor for the management of our assets and costs incurred by our Advisor in providing services to us.

Operating Expenses

At the end of each fiscal quarter, our Advisor must reimburse us the amount by which our aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of our average invested assets or 25% of our net income, unless the Conflicts Committee of our Board has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expenses for the four quarters ended September 30, 2020 exceeded the charter imposed limitation; however, the Conflicts Committee of our board of directors determined that the relationship of our operating expenses to its average invested assets was justified for these periods given the non-recurring expenses incurred during the three months ended September 30, 2020 in connection with the proposed merger with REIT II.

"Average invested assets" means the average monthly book value of our assets invested, directly or indirectly, in equity interests in 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 us, as determined under accounting principles generally accepted in the United States ("GAAP"), that are in any way related to our operation, including advisory fees, but excluding (i) 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, registration and stock exchange listing of our stock; (ii) interest payments; (iii) taxes; (iv) non-cash expenditures such as depreciation, amortization and bad debt reserves; (v) incentive fees paid in accordance with the NASAA Statement of Policy Regarding Real Estate Investment Trusts (the "NASAA REIT Guidelines"); (vi) acquisition fees and expenses (including expenses relating to potential investments that we do not close); (vii) real estate commissions on the sale of property; and (viii) other fees and expenses connected with the acquisition, disposition, management and ownership of real estate interests, loans or other property (such as the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property).

Distributions

For the nine months ended September 30, 2020, we paid aggregate distributions, as follows (in thousands):

	Nine Months Ended September 30, 2020
	Class A		Class T		Class R		Class I		Total
True-up of prior year cash distributions declared	$	—	$	27	$	—	$	4	$	31

Distributions reinvested in shares of common stock paid	$	24	$	89	$	—	$	744	$	857
Cash distributions paid		60		61		—		640		761
Total distributions paid	$	84	$	150	$	—	$	1,384	$	1,618

We announced on March 30, 2020 that we were suspending distributions as of April 1, 2020 in order to preserve cash and offset any impact to our liquidity that may occur as a result of the COVID-19 pandemic on our operations.

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Distributions paid and sources of distributions paid were as follows for the nine months ended September 30, 2020 (in thousands):

	Distributions Paid									Sources of Distributions Paid
										Property Dispositions	Offering Proceeds
2020	Cash		Distributions Reinvested (DRIP)		Total		Cash (Used in)/ Provided by Operating Activities			Amount Paid/ Percent of Total	Amount Paid / Percent of Total
First quarter	$	761	$	857	$	1,618	$	(1,861	)	$530 / 33%	$1,088 / 67%
Second quarter		—		—		—		(224	)	- / -	- / -
Third quarter		—		—		—		170		- / -	- / -
Total	$	761	$	857	$	1,618	$	(1,915	)

Cash distributions paid since inception were as follows (in thousands):

Fiscal Period Paid	Per Share ₍₁₎	Distributions Reinvested in Shares of Common Stock		Net Cash Distributions		Total Aggregate Distributions
12 months ended December 31, 2016	$0.000547945 per day	$	4	$	11		15
Seven months ended July 31, 2017	$0.000547945 per day		41		48		89
Five months ended December 31, 2017	$0.001434521 per day		248		228		476
Six months ended June 30, 2018	$0.001434521 per day		606		496		1,102
Six months ended December 31, 2018	$0.001458630 per day		923		781		1,704
Three months ended March 31, 2019	$0.001458630 per day		577		493		1,070
Nine months ended December 31, 2019	$0.001469178 per day		2,189		1,964		4,153
Nine months ended September 30, 2020	$0.001469178 per day		857		761		1,618
		$	5,445	$	4,782	$	10,227

(1)Distributions for Class T and Class R shareholders were reduced for the distribution and shareholder servicing fee through October 31, 2019.

Our net loss attributable to common stockholders for the nine months ended September 30, 2020 was $6.4 million and net cash used in operating activities was $1.9 million. Our cumulative cash distributions and net loss attributable to common stockholders from inception through September 30, 2020 are $10.2 million and $27.8 million, respectively. We have funded our cumulative distributions, which include net cash distributions and distributions reinvested by stockholders, with cash flows from operating activities, proceeds from our public offering, proceeds from debt financing and proceeds from property dispositions. To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have fewer funds available for investment in commercial real estate and real estate-related debt, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.

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Funds from Operations and Modified Funds from Operations

Funds from operations, or FFO, is a non-GAAP financial performance measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts to be net income (loss), computed in accordance with GAAP excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property (including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and noncontrolling interests. We believe that FFO is helpful to our investors and our management as a measure of operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, is helpful for our investors in understanding our performance. Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses.

Since FFO was promulgated, GAAP has adopted several new accounting pronouncements, such that management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, we use modified funds from operations, or MFFO, as defined by the Investment Program Association, or IPA. MFFO excludes from FFO the following items:

(1)

straight-line rent amounts, both income and expense;

(2)

amortization of above- or below-market intangible lease assets and liabilities;

(3)

amortization of discounts and premiums on debt investments;

(4)

impairment charges;

(5)

gains or losses from the early extinguishment of debt;

(6)

gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivatives holdings except where the trading of such instruments is a fundamental attribute of our operations;

(7)

gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting, including interest rate and foreign exchange derivatives;

(8)

gains or losses related to consolidation from, or deconsolidation to, equity accounting;

(9)

gains or losses related to contingent purchase price adjustments; and

(10)

adjustments related to the above items for unconsolidated entities in the application of equity accounting.

As explained below, management’s evaluation of our operating performance excludes the items considered in the calculation based on the following economic considerations. Many of the adjustments in arriving at MFFO are not applicable to us. Nevertheless, we explain below the reasons for each of the adjustments made in arriving at our MFFO definition:

•

Adjustments for straight-line rents and amortization of discounts and premiums on debt investments. In the proper application of GAAP, rental receipts and discounts and premiums on debt investments are allocated to periods using various systematic methodologies. This application will result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance.

•

Adjustments for amortization of above or below market intangible lease assets. Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes predictably over time and that these charges be recognized currently in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the performance of the real estate.

•

Impairment charges, gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting and gains or losses related to contingent purchase price adjustments. Each of these items relates to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding which may not be directly attributable to current operating performance. As these gains or losses relate to underlying long-term assets and liabilities, management believes

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MFFO provides useful supplemental information by focusing on the changes in our core operating fundamentals rather than changes that may reflect anticipated gains or losses. In particular, because GAAP impairment charges are not allowed to be reversed if the underlying fair values improve or because the timing of impairment charges may lag the onset of certain operating consequences, we believe MFFO provides useful supplemental information related to current consequences, benefits and sustainability related to rental rate, occupancy and other core operating fundamentals.

•

Adjustment for gains or losses related to early extinguishment of hedges, debt, consolidation or deconsolidation and contingent purchase price. Similar to extraordinary items excluded from FFO, these adjustments are not related to continuing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.

By providing MFFO, we believe we are presenting useful information that also assists investors and analysts in the assessment of the sustainability of our operating performance after our acquisition stage is completed. We also believe that MFFO is a recognized measure of sustainable operating performance by the real estate industry. MFFO is useful in comparing the sustainability of our operating performance after our acquisition stage is completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities or as affected by other MFFO adjustments.

A core element of our investment strategy and operations is the acquisition of distressed and value-add properties and the rehabilitation and renovation of such properties in an effort to create additional value in such properties. As part of our operations, we intend to realize gains from such value-add efforts through the strategic disposition of such properties after we have added value through the execution of our business plan. As we do not intend to hold any of our properties for a specific amount of time, we intend to take advantage of opportunities to realize gains from our value-add efforts on a regular basis during the course of our operations as such opportunities become available, in all events subject to the rules regarding "prohibited transactions" of real estate investment trusts of the Internal Revenue Code. Therefore, we also use adjusted funds from operations attributable to common stockholders, or AFFO, in addition to FFO and MFFO when evaluating our operations. We calculate AFFO by adding/subtracting gains/losses realized on sales of our properties from MFFO. We believe that AFFO presents useful information that assists investors and analysts in the assessment of our operating performance as it is reflective of the impact that regular, strategic property dispositions have on our continuing operations.

Neither FFO, MFFO nor AFFO should be considered as an alternative to net loss attributable to common stockholders, nor is an indication of our liquidity, nor are any of these measures indicative of funds available to fund our cash needs, including our ability to fund distributions. Accordingly, FFO, MFFO and AFFO should be reviewed in connection with other GAAP measurements. Our FFO, MFFO and AFFO as presented may not be comparable to amounts calculated by other REITs. Further, during the current period of uncertainty and business disruptions as a result of the outbreak of COVID-19, FFO, MFFO and AFFO are much more limited measures of assessing our operating performance. See “—Management’s Discussion and Analysis of Financial Condition and Results of Operations -- COVID-19 Pandemic and Portfolio Outlook” for a discussion of the impact of the outbreak of COVID-19 on our business.

The following section presents our calculation of FFO, MFFO and AFFO, in addition to providing additional information related to our operations (in thousands):

	For the three months ended September 30,						For the nine months ended September 30,
	2020			2019			2020			2019
Net loss - GAAP	$	(2,756	)	$	(2,759	)	$	(6,362	)	$	(8,146	)
Net gain on disposition of property		—			—			(530	)		—
Depreciation expense		2,232			2,052			6,654			5,397
FFO attributable to common stockholders		(524	)		(707	)		(238	)		(2,749	)
Adjustments for straight-line rents		5			—			2			11
Amortization of intangible lease assets		—			542			173			1,650
MFFO attributable to common stockholders		(519	)		(165	)		(63	)		(1,088	)
Net gain on disposition of property		—			—			530			—
AFFO attributable to common stockholders	$	(519	)	$	(165	)	$	467		$	(1,088	)

Basic and diluted net loss per common share - GAAP	$	(0.23	)	$	(0.23	)	$	(0.52	)	$	(0.74	)
FFO per share	$	(0.04	)	$	(0.06	)	$	(0.02	)	$	(0.25	)
MFFO per share	$	(0.04	)	$	(0.01	)	$	(0.01	)	$	(0.10	)
AFFO per share	$	(0.04	)	$	(0.01	)	$	0.04		$	(0.10	)
Weighted average shares outstanding ⁽¹⁾		12,149			11,760			12,135			11,051

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(1)None of the shares of convertible stock are included in the diluted earnings per share calculations because the necessary conditions for conversion have not been satisfied as of both September 30, 2020 and 2019.

Critical Accounting Policies

For a discussion of our critical accounting policies and estimates, see the discussion in our Annual Report on Form 10-K for the year ended December 31, 2019 under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies."

Subsequent Events

We have evaluated subsequent events and determined that no events have occurred which would require an adjustment to or additional disclosure in the consolidated financial statements, other than elsewhere in the financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative disclosures about market risk have been omitted as permitted under rules applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our principal executive officer and principal financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective as of September 30, 2020.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may become party to legal proceedings, which arise in the ordinary course of our business. We are not currently involved in any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

All securities sold by us during the nine months ended September 30, 2020 were sold in an offering registered under the Securities Act of 1933.

Share Redemption Program

Our common stock is currently not listed on a national securities exchange and we will not seek to list our common stock unless and until such time as our Board determines that the listing of our common stock would be in the best interests of our stockholders. In order to provide stockholders with the benefit of some interim liquidity, our Board has adopted a share repurchase program that enables our stockholders to sell their shares back to us after they have held them for at least one year, subject to significant conditions and limitations. The terms of our share repurchase program are more flexible in cases involving the death or disability of a stockholder.

We may reject any request for repurchase of shares. Repurchases of shares of our common stock, when requested, generally will be made quarterly. We limit the number of shares repurchased during any calendar year to 5.0% of the weighted-average number of shares of common stock outstanding during the 12-month period immediately prior to the effective date of redemption. In addition, we are only authorized to repurchase shares using proceeds from our DRIP plus 1.0% of the operating cash flow from the previous fiscal year (to the extent positive). Due to these limitations, we cannot guarantee that we will be able to accommodate all repurchase requests.

A stockholder must have beneficially held the shares for at least one year prior to offering them for sale to us through our share repurchase program, unless the shares are being repurchased in connection with a stockholder’s death, qualifying disability, or certain other involuntary exigent circumstances, in which our Board reserves the right, in its sole discretion, at any time and from time to time, to waive the one-year holding period requirement.

Shares repurchased in connection with a stockholder’s death, qualifying disability, or confinement to a long-term care facility (“special redemptions”) are repurchased at a price per share equal to 100% of the current NAV.

Shares repurchased in connection with a stockholder’s other involuntary exigent circumstances, such as bankruptcy or a mandatory distribution requirement under a stockholder’s IRA, within one year from the purchase date, will be repurchased at a price per share equal to the price per share we would pay had the stockholder held the shares for one year from the purchase date, and at all other times in accordance with the terms described below.

Shares received as a stock dividend are redeemed at the redemption price applicable to that stockholder’s initial share purchase anniversary.

Unless the shares of our common stock were repurchased in connection with a special redemption, the purchase price for shares repurchased under our share repurchase program were as set forth below as of September 30, 2020:

Share Purchase Anniversary	Redemption Price
Less than 1 year	No repurchase allowed
1 year	$	8.33
2 years	$	8.56
3 years	$	8.78
4 years	$	9.01

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During the nine months ended September 30, 2020, we redeemed shares of our Class A, Class T and Class I common stock as follows:

	Class A				Class T				Class I
Period	Total Number of Shares Redeemed		Average Price Paid per Share		Total Number of Shares Redeemed		Average Price Paid per Share		Total Number of Shares Redeemed		Average Price Paid per Share
January 2020		—		—		—		—		—		—
February 2020		—		—		—		—		—		—
March 2020		5,484	$	8.89		3,587	$	8.89		2,416	$	8.44
April 2020		—		—		—		—		—		—
May 2020		—		—		—		—		—		—
June 2020		—		—		—		—		5,499	$	9.01
July 2020		—		—		—		—		—		—
August 2020		—		—		—		—		—		—
September 2020		—		—		—		—		—		—
		5,484				3,587				7,915

On March 27, 2020, our board of directors suspended the share redemption program with exceptions for special redemptions. The suspension was effective as of April 29, 2020. On September 8, 2020, in connection with the execution of the REIT III Merger Agreement, our board of directors approved the full suspension of the share redemption program effective immediately and resumed it on October 22, 2020 to be effective as of November 22, 2020 with respect to special redemptions. While the share redemption program is partially suspended, both pending and new redemption requests for redemptions submitted other than in connection with special redemptions not be honored or retained, but will be cancelled with the ability to resubmit if the share redemption program is fully resumed.

There were no redemption requests processed during the three months ended September 30, 2020, as a result of the suspension on September 8, 2020.

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ITEM 6. EXHIBITS

Exhibit No.		Description

2.1		Agreement and Plan of Merger by and among Resource Real Estate Opportunity REIT II, Inc., RRE Opportunity OP II, LP, Revolution III Merger Sub LLC, Resource Apartment REIT III, Inc. and Resource Apartment OP III, LP, dated September 8, 2020 (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed September 11, 2020)

3.1		Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11 (No. 333-207740) filed April 11, 2016)

3.2		Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-11 (No. 333-207740) filed November 2, 2015)

3.3		Articles of Amendment (incorporated by reference to Exhibit 3.3 to Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-207740) filed June 28, 2017)

3.4		Articles Supplementary for the Class R shares of common stock (incorporated by reference to Exhibit 3.4 to Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-207740) filed June 28, 2017)

3.5		Articles Supplementary for the Class I shares of common stock (incorporated by reference to Exhibit 3.5 to Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-207740) filed June 28, 2017)

4.1		Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-11 (No. 333-207740) filed November 2, 2015)

4.2		Second Amended and Restated Distribution Reinvestment Plan (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed June 29, 2018)

10.1		Stock Redemption Agreement by and between the Resource Apartment REIT III, Inc. and Resource REIT Advisor, LLC, dated September 8, 2020 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed September 11, 2020)

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

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

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

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

99.1		Second Amended and Restated Share Redemption Program (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed July 24, 2018)

101.1		Interactive Data Files

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SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	RESOURCE APARTMENT REIT III, INC.

November 10, 2020		By:	/s/ Alan F. Feldman
			Alan F. Feldman
			Chief Executive Officer, President and Director
			(Principal Executive Officer)

November 10, 2020		By:	/s/ Thomas C. Elliott
			Thomas C. Elliott
			Chief Financial Officer, Executive Vice President and Treasurer
			(Principal Financial Officer)

November 10, 2020		By:	/s/ Steven R. Saltzman
			Steven R. Saltzman
			Chief Accounting Officer and Vice President
			(Principal Accounting Officer)

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Attached files

Resource Apartment REIT III, Inc. Reports

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