Item 1.
Business
Organization
Bluerock Residential Growth REIT, Inc. (“we,” “us,” or the “Company”) was incorporated on July 25, 2008 under the laws of the state of Maryland.
We have elected to be treated, and currently qualify, as a real estate investment trust (or “REIT”) for federal income tax purposes. As a REIT, we generally are not subject to corporate-level income taxes. To maintain our REIT status, we are required, among other requirements, to distribute annually at least 90% of our “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to our stockholders. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates. We were incorporated to raise capital and acquire a diverse portfolio of residential real estate assets.
Unless otherwise indicated or the context requires otherwise, all references to “the Company,” “we,” “us” and “our” mean Bluerock Residential Growth REIT, Inc., a Maryland corporation, together with its consolidated subsidiaries, including, without limitation, Bluerock Residential Holdings, L.P., a Delaware limited partnership of which we are the sole general partner, which we refer to as our Operating Partnership. We refer to Bluerock Real Estate, L.L.C., a Delaware limited liability company, and its affiliate, Bluerock Real Estate Holdings, LLC, together as Bluerock or BRE, and we refer to our former external manager, BRG Manager, LLC, a Delaware limited liability company, as our former Manager. Both Bluerock and our former Manager are affiliated with the Company. References to our shares of Class A common stock on a “fully diluted basis” includes all outstanding shares of our Class A common stock, shares of our Class C common stock, units of limited partnership interest in our Operating Partnership, or OP Units, and long-term incentive plan units in our Operating Partnership, or LTIP Units, whether vested or unvested.
On October 31, 2017, we became an internally-managed REIT as a result of the completion of the management internalization transactions (the “Internalization”), and we are no longer externally managed by our former Manager. The owners of the former Manager are referred to as the Contributors.
Substantially all our business is conducted through our Operating Partnership.
The principal executive offices of our Company and the former Manager are located at 1345 Avenue of the Americas, 32nd Floor, New York, New York 10105. Our telephone number is (212) 843-1601.
Investments in Real Estate
As of December 31, 2019, we owned interests in fifty-three real estate properties, consisting of thirty-five consolidated operating properties and eighteen properties held through preferred equity and mezzanine loan investments. Of the property interests held through preferred equity and mezzanine loan investments, five are under development, four are in lease-up and nine properties are stabilized. The fifty-three properties contain an aggregate of 15,627 units, comprised of 11,746 consolidated operating units and 3,881 units through preferred equity and mezzanine loan investments. As of December 31, 2019, our consolidated operating properties were approximately 94.0% occupied. For more information regarding our investments, see “Item 2. Properties”.
Business and Growth Strategies
Our principal business objective is to generate attractive risk-adjusted investment returns by assembling a high-quality portfolio of apartment properties located in demographically attractive growth markets and by implementing our investment strategies and our “Live/Work/Play Initiatives” to achieve sustainable long-term growth in both our core funds from operations and net asset value.
Invest in Institutional-Quality Apartment Properties. We acquire institutional-quality apartment properties where we believe we can create long-term value for our stockholders utilizing the following investment strategies.
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Value-Add. We invest in well-located institutional-quality apartment properties with strong and stable cash flows in demographically attractive knowledge economy growth markets where we believe there exists significant potential for medium-term capital appreciation through renovation or redevelopment, to reposition the asset and drive future rental growth.
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Opportunistic. We invest in properties available at opportunistic prices (i.e., at prices we believe are below those available in an otherwise efficient market) that exhibit some characteristics of distress, such as operational inefficiencies, significant deferred capital maintenance or broken capital structures providing an opportunity for a substantial portion of total return attributable to appreciation in value.
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Invest-to-Own. We selectively invest in development of Class A properties in target markets where we believe we can capture significant development premiums upon completion. We generally use a mezzanine loan or convertible preferred equity structure which provides income during the development stage and/or the ability to capture development premiums at completion by exercising our conversion rights to take ownership.
Invest in Class A Apartment Properties. We intend to continue to acquire primarily Class A apartment properties targeting the high disposable income renter by choice, where we believe we can create long-term value growth for our stockholders.
Focus on Growth Markets. We intend to continue to focus on demographically attractive growth markets, which we define as markets with strong employment drivers in industries creating high disposable income jobs over the long term. Employment growth is highly correlated with apartment demand; therefore, we believe that selecting markets with job growth significantly above the national average will provide high potential for increased rental demand leading to revenue growth and attractive risk-adjusted returns.
Implement our Value Creation Strategies. We intend to continue to focus on creating value at our properties utilizing our Value-Add, Opportunistic and Invest-to-Own investment strategies in order to maximize our return on investment. We work with each member of our network to evaluate property needs along with value-creation opportunities and create an asset-specific business plan to best position or reposition each property to drive rental growth and asset values. We then provide an aggressive asset management presence to manage our network partner and ensure execution of the plan, with the goal of driving rental growth and values.
Implement our Live/Work/Play Initiatives. We intend to continue to implement our amenities and attributes to transform the apartment community from a purely functional product (i.e., as solely a place to live), to a lifestyle product (i.e., as a place to live, interact, and socialize). Our Live/Work/Play initiatives are property specific, and generally consist of attributes that go beyond traditional features, including highly amenitized common areas, cosmetic and architectural improvements, technology, music and other community-oriented activities to appeal to our residents’ desire for a “sense of community” by creating places to gather, socialize and interact in an amenity-rich environment. We believe this creates an enhanced perception of value among residents, allowing for premium rental rates and improved resident retention.
Diversify Across Markets, Strategies and Investment Size. We will seek to grow our high-quality portfolio of apartment properties diversified by geography and by investment strategy and by size (typically ranging from $50 to $100 million), in order to manage concentration risk, while driving both current income and capital appreciation throughout the portfolio. Our network enables us to diversify across multiple markets and multiple strategies efficiently, without the logistical burden and time delay of building operating infrastructure in multiple markets and across multiple investment strategies.
Selectively Harvest and Redeploy Capital. On an opportunistic basis and subject to compliance with certain REIT restrictions, we intend to sell properties in cases where we have successfully executed our value creation plans and where we believe the investment has limited additional upside relative to other opportunities, in order to harvest profits and to reinvest proceeds to maximize stockholder value.
Summary of Investments and Dispositions
The following table presents a summary of our investments during the years ended December 31, 2019, 2018 and 2017:
(1)
Increased ownership in December 2017 from 91.8% to 100.0%.
(2)
The Company’s investment in the property is through a preferred equity investment with an unaffiliated third party.
(3)
The property is a development project.
*
The development is in the planning phase; project specifications are in process.
The following table presents a summary of our dispositions during the years ended December 31, 2019, 2018 and 2017:
(1)
Represents sale of the Company’s 35.3% joint venture interest in MDA Apartments.
(2)
Sale of undeveloped parcel of land.
(3)
Preferred equity investment.
Distribution Policy
We intend to continue to qualify as a REIT for federal income tax purposes. The Code generally requires that a REIT annually distribute at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain, and imposes tax on any taxable income retained by a REIT, including capital gains.
To satisfy the requirements for qualification as a REIT and generally not be subject to federal income and excise tax, we intend to continue to make regular distributions of all or substantially all of our REIT taxable income, determined without regard to dividends paid, to our stockholders out of assets legally available for such purposes. All future distributions will be determined at the sole discretion of our Board of Directors (the “Board”) on a quarterly basis. When determining the amount of future distributions, we expect that our Board will consider, among other factors, (i) the amount of cash generated from our operating activities, (ii) our expectations of future operating cash flows, (iii) our determination of near-term cash needs for acquisitions of new properties, development investments, general property capital improvements and debt repayments, (iv) our ability to continue to access additional sources of capital, (v) the requirements of Maryland law, (vi) the amount required to be distributed to maintain our status as a REIT and to reduce any income and excise taxes that we otherwise would be required to pay and (vii) any limitations on our distributions contained in our credit or other agreements.
Holders of shares of 8.250% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share (the “Series A Preferred Stock”), will be entitled to receive cumulative cash dividends on the Series A Preferred Stock when, as and if authorized by our Board and declared by us from the end of the most recent dividend period for which dividends on the Series A Preferred Stock have been paid, payable quarterly in arrears on each January 5th, April 5th, July 5th and October 5th of each year, commencing on January 5, 2016, to holders of record on each December 25th, March 25th, June 25th and September 25th, respectively. From the date of original issue to, but not including, October 21, 2022, we will pay dividends on the Series A Preferred Stock at the rate of 8.250% per annum of the $25.00 liquidation preference per share (equivalent to the fixed annual amount of  $2.0625 per share). Commencing October 21, 2022, we will pay cumulative cash dividends on the Series A Preferred Stock at an annual dividend rate of the initial rate increased by 2.0%
of the liquidation preference per annum, which will increase by an additional 2.0% of the liquidation preference per annum on each subsequent anniversary thereafter, subject to a maximum annual dividend rate of 14.0%.
Holders of shares of Series B Redeemable Preferred Stock, $0.01 par value per share (the “Series B Preferred Stock”), are entitled to receive, when and as authorized by our Board and declared by us out of legally available funds, cumulative cash dividends on each share of Series B Preferred Stock at an annual rate of six percent (6%) of the initial stated value of  $1,000 per share (the “Stated Value”). Dividends on each share of Series B Preferred Stock will begin accruing on, and will be cumulative from, the date of issuance or the end of the most recent dividend period for which dividends on the Series B Preferred Stock have been paid, payable monthly in arrears on the 5th day of each month to holders of record on the 25th day of the prior month; provided, however, that any such dividend may vary among holders of Series B Preferred Stock and may be prorated with respect to any shares of Series B Preferred Stock that were outstanding less than the total number of days in the dividend period immediately preceding the applicable dividend payment date, with the amount of any such prorated dividend being computed on the basis of the actual number of days in such dividend period during which such shares of Series B Preferred Stock were outstanding.
Holders of shares of 7.625% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share (the “Series C Preferred Stock”), will be entitled to receive cumulative cash dividends on the Series C Preferred Stock when, as and if authorized by our Board and declared by us from and including the date of original issue or the end of the most recent dividend period for which dividends on the Series C Preferred Stock have been paid, payable quarterly in arrears on each January 5th, April 5th, July 5th and October 5th of each year, commencing on October 5, 2016, to holders of record on each December 25th, March 25th, June 25th and September 25th, respectively. From the date of original issuance to, but not including, July 19, 2023, we will pay dividends on the Series C Preferred Stock at the rate of 7.625% per annum of the $25.00 liquidation preference per share (equivalent to the fixed annual amount of  $1.90625 per share). Commencing July 19, 2023, we will pay cumulative cash dividends on the Series C Preferred Stock at an annual dividend rate of the initial rate increased by 2.0% of the liquidation preference per annum, which will increase by an additional 2.0% of the liquidation preference per annum on each subsequent anniversary thereafter, subject to a maximum annual dividend rate of 14.0%.
Holders of shares of 7.125% Series D Cumulative Preferred Stock, $0.01 par value per share (the “Series D Preferred Stock”), will be entitled to receive cumulative cash dividends on the Series D Preferred Stock when, as and if authorized by our Board and declared by us from and including the date of original issue or the end of the most recent dividend period for which dividends on the Series D Preferred Stock have been paid, payable quarterly in arrears on each January 5th, April 5th, July 5th and October 5th of each year, commencing on January 5, 2017, to holders of record on each December 25th, March 25th, June 25th and September 25th, respectively. From the date of original issue, we will pay dividends on the Series D Preferred Stock at the rate of 7.1250% per annum of the $25.00 liquidation preference per share (equivalent to the fixed annual amount of  $1.78125 per share).
Holders of shares of Series T Redeemable Preferred Stock, $0.01 par value per share (the “Series T Preferred Stock”), are entitled to receive, when and as authorized by our Board and declared by us out of legally available funds, the following:
(i) Cumulative cash dividends on each share of Series T Preferred Stock at an annual rate of six and 15/100 percent (6.15%) of the $25.00 liquidation preference per share (equivalent to the fixed annual amount of  $1.5375 per share). Cash dividends on each share of Series T Preferred Stock will begin accruing on, and will be cumulative from, the date of issuance or the end of the most recent dividend period for which cash dividends on the Series T Preferred Stock have been paid, payable monthly in arrears on the 5th day of each month to holders of record on the 25th day of the prior month; provided, however, that any such cash dividend may vary among holders of Series T Preferred Stock and may be prorated with respect to any shares of Series T Preferred Stock that were outstanding less than the total number of days in the cash dividend period immediately preceding the applicable cash dividend payment date, with the amount of any such prorated dividend being computed on the basis of the actual number of days in such cash dividend period during which such shares of Series T Preferred Stock were outstanding; and
(ii) Annual stock dividends on each share of Series T Preferred Stock, payable in shares of Series T Preferred Stock, each at an annual rate of 0.2% of the $25.00 liquidation preference per share, for each of the first five (5) years from and including the later of   (i) the year 2020 or (ii) the year of original issuance of each such share of Series T Preferred Stock, payable annually in arrears on the 29th day of December to eligible holders of record on the 24th day of December of each such year.
Holders of shares of Class A common stock, $0.01 par value per share (the “Class A common stock”), and Class C common stock $0.01 par value per share (the “Class C common stock”), will be entitled to receive cash dividends when, as and if authorized by our Board and declared by us. The common share dividend is paid on a quarterly basis, currently at an annual dividend rate of  $0.65 per common share. The Board considered a number of factors in setting the current common stock dividend rate, including but not limited to achieving a sustainable dividend covered by core funds from operation (“CFFO”), multifamily and small cap peer dividend rates and payout ratios, providing financial flexibility for the Company, and achieving an appropriate balance between the retention of capital to invest and grow net asset value and the importance of current distributions.
We cannot assure you that we will generate sufficient cash flows to make distributions to our stockholders, or that we will be able to sustain those distributions. If our operations do not generate sufficient cash flow to allow us to satisfy the REIT distribution requirements, we may be required to fund distributions from working capital, offering proceeds, borrow funds, sell assets, make a taxable distribution of our equity or debt securities, or reduce such distributions. Our distribution policy enables us to review the alternative funding sources available to us from time to time. Our actual results of operations will be affected by a number of factors, including the revenues we receive from our properties, our operating expenses, interest expense, the ability of our tenants to meet their obligations and unanticipated expenditures. For more information regarding risk factors that could materially adversely affect our actual results of operations, please see “Item 1A
Item 1A.
Risk Factors
Risks Related to our Business and Properties
We face numerous risks associated with the real estate industry that could adversely affect our results of operations through decreased revenues or increased costs.
As a real estate company, we are subject to various changes in real estate conditions, and any negative trends in such real estate conditions may adversely affect our results of operations through decreased revenues or increased costs. These conditions include:
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changes in national, regional and local economic conditions, which may be negatively impacted by concerns about inflation, deflation, government deficits, high unemployment rates, decreased consumer confidence and liquidity concerns, particularly in markets in which we have a high concentration of properties;
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fluctuations and relative increases in interest rates, which could adversely affect our ability to obtain financing on favorable terms or at all;
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the inability of residents and tenants to pay rent;
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the existence and quality of the competition, such as the attractiveness of our properties as compared to our competitors’ properties based on considerations such as convenience of location, rental rates, amenities and safety record;
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increased operating costs, including increased real property taxes, maintenance, insurance and utilities costs;
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weather conditions that may increase or decrease energy costs and other weather-related expenses;
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oversupply of apartments, commercial space or single-family housing or a reduction in demand for real estate in the markets in which our properties are located;
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a favorable interest rate environment that may result in a significant number of potential residents of our apartment communities deciding to purchase homes instead of renting;
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changes in, or increased costs of compliance with, laws and/or governmental regulations, including those governing usage, zoning, the environment and taxes; and
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rent control or stabilization laws, or other laws regulating rental housing, which could prevent us from raising rents to offset increases in operating costs.
Moreover, other factors may adversely affect our results of operations, including potential liability under environmental and other laws and other unforeseen events, many of which are discussed elsewhere in the following risk factors. Any or all of these factors could materially adversely affect our results of operations through decreased revenues or increased costs.
Our current portfolio consists of interests in fifty-three apartment communities, comprised of thirty-five consolidated operating properties and eighteen properties held through preferred equity and mezzanine loan investments, located primarily in markets in the Southern United States. Any adverse developments in local economic conditions or the demand for apartment units in these markets may negatively impact our results of operations.
Our current portfolio of properties consists primarily of apartment communities and development communities geographically concentrated in the Southern United States, and our portfolio going forward may consist primarily of the same. For the year ended December 31, 2019, properties in Florida, Texas, Georgia, and North Carolina comprised 35%, 26%, 11%, and 10%, respectively, of our total rental revenue. As such, we are currently susceptible to local economic conditions and the supply of and demand for apartment units in these markets. If there is a downturn in the economy or an oversupply of or decrease in demand for apartment units in these markets, our business could be materially adversely affected to a greater extent than if we owned a real estate portfolio that was more diversified in terms of both geography and industry focus.
We may not be successful in identifying and consummating suitable investment opportunities.
Our investment strategy requires us to identify suitable investment opportunities compatible with our investment criteria. We may not be successful in identifying suitable opportunities that meet our criteria or in consummating investments, including those identified as part of our investment pipeline, on satisfactory terms or at all. Our ability to make investments on favorable terms may be constrained by several factors including, but not limited to, competition from other investors with significant capital, including other publicly-traded REITs and institutional investment funds, which may significantly increase investment costs; and/or the inability to finance an investment on favorable terms or at all. The failure to identify or consummate investments on satisfactory terms, or at all, may impede our growth and negatively affect our cash available for distribution to our stockholders.
Adverse economic conditions may negatively affect our results of operations and, as a result, our ability to make distributions to our stockholders or to realize appreciation in the value of our properties.
Our operating results may be adversely affected by market and economic challenges, which may negatively affect our returns and profitability and, as a result, our ability to make distributions to our stockholders or to realize appreciation in the value of our properties. These market and economic challenges include, but are not limited to, the following:
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any future downturn in the U.S. economy and the related reduction in spending, reduced home prices and high unemployment could result in tenant defaults under leases, vacancies at our apartment communities and concessions or reduced rental rates under new leases due to reduced demand;
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the rate of household formation or population growth in our target markets or a continued or exacerbated economic slow-down experienced by the local economies where our properties are located or by the real estate industry generally may result in changes in supply of or demand for apartment units in our target markets; and
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the failure of the real estate market to attract the same level of capital investment in the future that it attracts at the time of our purchases or a reduction in the number of companies seeking to acquire properties may result in the value of our investments not appreciating or decreasing significantly below the amount we pay for these investments.
The length and severity of any economic slow-down or downturn cannot be predicted. Our operations and, as a result, our ability to make distributions to our stockholders and/or our ability to realize appreciation in the value of our properties could be materially and adversely affected to the extent that an economic slow-down or downturn is prolonged or becomes severe.
Our revenues are significantly influenced by demand for apartment properties generally, and a decrease in such demand will likely have a greater adverse effect on our revenues than if we owned a more diversified real estate portfolio.
Our current portfolio is focused predominately on apartment properties, and we expect that our portfolio going forward will focus predominately on the same. As a result, we are subject to risks inherent in investments in a single industry, and a decrease in the demand for apartment properties would likely have a greater adverse effect on our rental revenues than if we owned a more diversified real estate portfolio. Resident demand at apartment properties was adversely affected by the most recent U.S. recession, including the reduction in spending, reduced home prices and high unemployment, together with the price volatility, dislocations and liquidity disruptions in the debt and equity markets, as well as the rate of household formation or population growth in our markets, changes in interest rates or changes in supply of, or demand for, similar or competing apartment properties in an area. If economic recovery slows or stalls, these conditions could persist and we could experience downward pressure on occupancy and market rents at our apartment properties, which could cause a decrease in our rental revenue. Any such decrease could impair our ability to satisfy our substantial debt service obligations or make distributions to our stockholders.
The properties in our investment pipeline are subject to contingencies that could delay or prevent acquisition or investment in those properties.
At any given time, we are generally in discussions regarding a number of apartment properties for acquisition or investment, which we refer to as our investment pipeline. However, we may not have completed
our diligence process on these properties or development projects or have definitive investment or purchase and sale agreements, as applicable, and several other conditions may be required to be met in order for us to complete these acquisitions or developments, including approval by our investment committee or Board. If we are planning to use proceeds of an offering of our securities to fund these acquisitions or investments and are unable to complete the acquisition of the interests or investment in any of these properties or experience significant delays in executing any such acquisition or investment, we will have issued securities in an offering without realizing a corresponding current or future increase in earnings and cash flow from acquiring those interests or developing those properties, and may incur expenses in connection with our attempts in consummating such acquisition or investment, which could have a material adverse impact on our financial condition and results of operations. In addition, to the extent the uses of proceeds from an offering are designated for the acquisition of or investment in these properties, we will have no specific designated use for the net proceeds from the offering allocated to the purchase or development and investors will be unable to evaluate in advance the manner in which we will invest, or the economic merits of the properties we may ultimately acquire or develop with such proceeds.
Our expenses may remain constant or increase, even if our revenues decrease, causing our results of operations to be adversely affected.
Costs associated with our business, such as mortgage payments, real estate taxes, insurance premiums and maintenance costs, are relatively inflexible and generally do not decrease, and may increase, when a property is not fully occupied, rental rates decrease, a tenant fails to pay rent or other circumstances cause a reduction in property revenues. As a result, if revenues drop, we may not be able to reduce our expenses accordingly, which would adversely affect our financial condition and results of operations.
We compete with numerous other parties or entities for real estate assets and tenants and may not compete successfully.
We compete with numerous other persons or entities engaged in real estate investment activities, many of which have greater resources than we do. Some of these investors may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Our competitors may be willing to offer space at rates below our rates, causing us to lose existing or potential tenants.
Competition from other apartment properties for tenants could reduce our profitability and the return on your investment.
The apartment property industry is highly competitive. Our competitors may be willing to offer space at rates below our rates, causing us to lose existing or potential tenants. This competition could reduce occupancy levels and revenues at our apartment properties, which would adversely affect our results of operations. We expect to face competition for tenants from many sources. We will face competition from other apartment communities both in the immediate vicinity and in the larger geographic market where our apartment communities will be located. If overbuilding of apartment properties occurs at our properties it will increase the number of apartment units available and may decrease occupancy and apartment rental rates at our properties.
Increased competition and increased affordability of single-family homes could limit our ability to retain residents, lease apartment units or increase or maintain rents.
Any apartment properties we may acquire will most likely compete with numerous housing alternatives in attracting residents, including single-family homes, as well as owner-occupied single and multifamily homes available to rent. Competitive housing in a particular area and the increasing affordability of owner occupied single and multifamily homes available to rent or buy caused by declining mortgage interest rates and government programs to promote home ownership could adversely affect our ability to retain our residents, lease apartment units and increase or maintain rental rates.
Increased construction of similar properties that compete with our properties in any particular location could adversely affect the operating results of our properties and our cash available for distribution to our stockholders.
We may acquire properties in locations which experience increases in construction of properties that compete with our properties. This increased competition and construction could:
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make it more difficult for us to find tenants to lease units in our apartment properties;
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force us to lower our rental prices in order to lease units in our apartment properties; and/or
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substantially reduce our revenues and cash available for distribution to our stockholders.
Our investments will be dependent on tenants for revenue, and lease terminations could reduce our revenues from rents, resulting in the decline in the value of your investment.
The underlying value of our properties and the ability to make distributions to you depend upon the ability of the tenants of our properties to generate enough income to pay their rents in a timely manner, and the success of our investments depends upon the occupancy levels, rental income and operating expenses of our properties and our Company. Tenants’ inability to timely pay their rents may be impacted by employment and other constraints on their personal finances, including debts, purchases and other factors. These and other changes beyond our control may adversely affect our tenants’ ability to make lease payments. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur costs in protecting our investment and re-leasing our property. We may be unable to re-lease the property for the rent previously received. We may be unable to sell a property with low occupancy without incurring a loss. These events and others could cause us to reduce the amount of distributions we make to stockholders and may also cause the value of your investment to decline.
Our operating results and distributable cash flow depend on our ability to generate revenue from leasing our properties to tenants on terms favorable to us.
Our operating results depend, in large part, on revenues derived from leasing space in our properties. We are subject to the credit risk of our tenants, and to the extent our tenants default on their leases or fail to make rental payments we may suffer a decrease in our revenue. In addition, if a tenant does not pay its rent, we may not be able to enforce our rights as landlord without delays and we may incur substantial legal costs. We are also subject to the risk that we will not be able to lease space in our value-added or opportunistic properties or that, upon the expiration of leases for space located in our properties, leases may not be renewed, the space may not be re-leased or the terms of renewal or re-leasing (including the cost of required renovations or concessions to customers) may be less favorable to us than current lease terms. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in decreased distributions to our stockholders. In addition, the resale value of the property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property. Further, costs associated with real estate investment, such as real estate taxes and maintenance costs, generally are not reduced when circumstances cause a reduction in revenue. These events would cause a significant decrease in revenues and could cause us to reduce the amount of distributions to our stockholders.
Short-term apartment leases expose us to the effects of declining market rent, which could adversely impact our ability to make cash distributions to our stockholders.
We expect that substantially all of our apartment leases will be for a term of one year or less. Because these leases generally permit the residents to leave at the end of the lease term without penalty, our rental revenues may be impacted by declines in market rents more quickly than if our leases were for longer terms.
Costs incurred in complying with governmental laws and regulations may reduce our net income and the cash available for distributions.
Our company and the properties we own and expect to own are subject to various federal, state and local laws and regulations relating to environmental protection and human health and safety. Federal laws such as the National Environmental Policy Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Solid Waste Disposal Act as amended by the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning and Community Right to Know Act and the Hazard Communication Act and their resolutions and corresponding state and local counterparts govern such matters as wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials and the remediation of contamination associated with disposals. The properties we own and acquire must comply with the Americans with
Disabilities Act of 1990 which generally requires that certain types of buildings and services be made accessible and available to people with disabilities. Additionally, we must comply with the Fair Housing Amendments Act of 1988, which requires that apartment properties first occupied after March 13, 1991 be accessible to handicapped residents and visitors. These laws may require us to make modifications to our properties. Some of these laws and regulations impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were illegal. Compliance with these laws and any new or more stringent laws or regulations may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. In addition, there are various federal, state and local fire, health, life-safety and similar regulations with which we may be required to comply, and which may subject us to liability in the form of fines or damages for noncompliance.
Our properties may be affected by our tenants’ activities or actions, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties. The presence of hazardous substances, or the failure to properly remediate these substances, may make it difficult or impossible to sell or rent such property. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions and may reduce the value of your investment.
As the owner of real property, we could become subject to liability for asbestos-containing building materials in the buildings on our properties.
Some of our properties may contain asbestos-containing materials. Environmental laws typically require that owners or operators of buildings with asbestos-containing building materials properly manage and maintain these materials, adequately inform or train those who may come in contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators for failure to comply with these requirements. In addition, third parties may be entitled to seek recovery from owners or operators for personal injury associated with exposure to asbestos-containing building materials.
In addition, many insurance carriers are excluding asbestos-related claims from standard policies, pricing asbestos endorsements at prohibitively high rates or adding significant restrictions to this coverage. Because of our difficulty in obtaining specialized coverage at rates that correspond to the perceived level of risk, we may not obtain insurance for asbestos-related claims. We will continue to evaluate the availability and cost of additional insurance coverage from the insurance market. If we purchase insurance for asbestos, the cost could have a negative impact on our results of operations.
Costs associated with addressing indoor air quality issues, moisture infiltration and resulting mold remediation may be costly.
As a general matter, concern about indoor exposure to mold or other air contaminants has been increasing as such exposure has been alleged to have a variety of adverse effects on health. As a result, there have been a number of lawsuits in our industry against owners and managers of apartment communities relating to indoor air quality, moisture infiltration and resulting mold. Some of our properties may contain microbial matter such as mold and mildew. The terms of our property and general liability policies generally exclude certain mold-related claims. Should an uninsured loss arise against us, we would be required to use our funds to resolve the issue, including litigation costs. We can offer no assurance that liabilities resulting from indoor air quality, moisture infiltration and the presence of or exposure to mold will not have a future impact on our business, results of operations and financial condition.
A change in the United States government policy with regard to Fannie Mae and Freddie Mac could impact our financial condition.
Fannie Mae and Freddie Mac are a major source of financing for the apartment real estate sector. We and other apartment companies in the apartment real estate sector depend frequently on Fannie Mae and Freddie Mac to finance growth by purchasing or guarantying apartment loans. Prior initiatives in the recent past, including proposed legislation, have sought to wind down Fannie Mae and Freddie Mac. Any
decision by the government to eliminate or downscale Fannie Mae or Freddie Mac, to reduce their acquisitions or guarantees of apartment real estate mortgage loans, or to reduce government support for multi-family housing more generally, may adversely affect interest rates, capital availability, development of multi-family communities and our ability to refinance our existing mortgage obligations as they come due and to obtain additional long-term financing for the acquisition of additional apartment communities on favorable terms or at all.
If we are not able to cost-effectively maximize the life of our properties, we may incur greater than anticipated capital expenditure costs, which may adversely affect our ability to make distributions to our stockholders.
While the majority of existing properties we acquire have undergone substantial renovations by prior owners since they were constructed, older properties may carry certain risks including unanticipated repair costs associated with older properties, increased maintenance costs as older properties continue to age, and cost overruns due to the need for special materials and/or fixtures specific to older properties. Although we take a proactive approach to property preservation, utilizing a preventative maintenance plan, and selective improvements that mitigate the cost impact of maintaining exterior building features and aging building components, if we are not able to cost-effectively maximize the life of our properties, we may incur greater than anticipated capital expenditure costs which may adversely affect our ability to make distributions to our stockholders.
Any uninsured losses or high insurance premiums will reduce our net income and the amount of our cash distributions to stockholders.
We will attempt to ensure adequate insurance is obtained to cover significant areas of risk to us as a company and to our properties. However, there are types of losses at the property level, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. We may not have adequate coverage for such losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions to stockholders.
We may have difficulty selling real estate investments, and our ability to distribute all or a portion of the net proceeds from such sale to our stockholders may be limited.
Real estate investments are relatively illiquid. We will have a limited ability to vary our portfolio in response to changes in economic or other conditions. We will also have a limited ability to sell assets in order to fund working capital and similar capital needs. When we sell any of our properties, we may not realize a gain on such sale. We may not elect to distribute any proceeds from the sale of properties to our stockholders; for example, we may use such proceeds to:
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purchase additional properties;
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fund capital commitments to our joint ventures;
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repay debt, if any;
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buy out interests of any co-venturers or other partners in any joint venture in which we are a party;
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create working capital reserves; and/or
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make repairs, maintenance, tenant improvements or other capital improvements or expenditures to our remaining properties.
Our ability to sell our properties may also be limited by our need to avoid a 100% penalty tax that is imposed on gain recognized by a REIT from the sale of property characterized as dealer property. In order to ensure that we avoid such characterization, we may be required to hold our properties for the production of
rental income for a minimum period of time, generally two years, and comply with certain other requirements in the Internal Revenue Code of 1986, as amended (the “Code”).
Representations and warranties made by us in connection with sales of our properties may subject us to liability that could result in losses and could harm our operating results and, therefore distributions we make to our stockholders.
When we sell a property, we may be required to make representations and warranties regarding the property and other customary items. In the event of a breach of such representations or warranties, the purchaser of the property may have claims for damages against us, rights to indemnification from us or otherwise have remedies against us. In any such case, we may incur liabilities that could result in losses and could harm our operating results and, therefore distributions we make to our stockholders.
We may be unable to redevelop existing properties successfully and our investments in the development of new properties will be subjected to development risk, which could adversely affect our results of operations due to unexpected costs, delays and other contingencies.
As part of our operating strategy, we intend to selectively expand and/or redevelop existing properties as market conditions warrant, as well as invest in development of new properties through our Invest-to-Own strategy. In addition to the risks associated with real estate investments in general as described above, there are significant risks associated with development activities including the following:
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we or the developers that we finance may be unable to obtain, or face delays in obtaining, necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, which could result in increased development costs and/or lower than expected leases;
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developers may incur development costs for a property that exceed original estimates due to increased materials, labor or other costs, changes in development plans or unforeseen environmental conditions, which could make completion of the property more costly or uneconomical;
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land, insurance and construction costs may be higher than expected in our markets; therefore, we may be unable to attract rents that compensate for these increases in costs;
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we may abandon redevelopment or Invest-to-Own development opportunities that we have already begun to explore, and we may fail to recover expenses already incurred in connection with exploring any such opportunities;
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rental rates and occupancy levels may be lower and operating and/or capital cost may be higher than anticipated;
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changes in applicable zoning and land use laws may require us to abandon projects prior to their completion, resulting in the loss of development costs incurred up to the time of abandonment; and
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possible delays in completion because of construction delays, delays in the receipt of zoning, occupancy and other approvals, or other factors outside of our control.
In addition, if a project is delayed, certain residents and tenants may have the right to terminate their leases. Any one or more of these risks may cause us or the projects in which we invest to incur unexpected development costs, which would negatively affect our results of operations.
As part of otherwise attractive portfolios of properties, we may acquire some properties with existing lock-out provisions, which may prohibit or inhibit us from selling a property for an indeterminate period of time, or may require us to maintain specified debt levels for a period of years on some properties.
Loan provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for distributions to you. Loan provisions may prohibit us from reducing the outstanding indebtedness with respect to properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties.
Loan provisions could impair our ability to take actions that would otherwise be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our stock, relative to the value
that would result if the loan provisions did not exist. In particular, loan provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.
Our investments could be adversely affected if a member of our Bluerock network performs poorly at one of our projects, which could adversely affect returns to our stockholders.
In general, we expect to rely on members of our network for the day-to-day management and development of our real estate investments. Members of our network are not fiduciaries to us, and generally will have limited capital invested in a project, if any. One or more members of our network may perform poorly in managing one of our project investments for a variety of reasons, including failure to properly adhere to budgets or properly consummate the property business plan. A member of our network may also underperform for strategic reasons related to projects or assets that the partner is involved in with a Bluerock affiliate but not our Company. If a member of our network does not perform well at one of our projects, we may not be able to ameliorate the adverse effects of poor performance by terminating the partner and finding a replacement partner to manage our projects in a timely manner. In such an instance, the returns to our stockholders could be adversely affected.
Actions of our joint venture partners could subject us to liabilities in excess of those contemplated or prevent us from taking actions which are in the best interests of our stockholders, which could result in lower investment returns to our stockholders.
We have entered into, and in the future intend to enter into, joint ventures with affiliates and other third parties, including our members of our network, to acquire or improve properties. We may also purchase properties in partnerships, co-tenancies or other co-ownership arrangements. Such investments may involve risks not otherwise present when acquiring real estate directly, including, for example:
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joint venturers may share certain approval rights over major decisions;
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that such co-venturer, co-owner or partner may at any time have economic or business interests or goals which are or which become inconsistent with our business interests or goals, including inconsistent goals relating to the sale of properties held in the joint venture or the timing of termination or liquidation of the joint venture;
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the possibility that our co-venturer, co-owner or partner in an investment might become insolvent or bankrupt;
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the possibility that we may incur liabilities as a result of an action taken by our co-venturer, co-owner or partner;
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that such co-venturer, co-owner or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our policy with respect to maintaining our qualification as a REIT;
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disputes between us and our joint venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable joint venture to additional risk; or
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under certain joint venture arrangements, neither venture partner may have the power to control the venture, and an impasse could be reached which might have a negative influence on the joint venture.
These events might subject us to liabilities in excess of those contemplated and thus reduce your investment returns. If we have a right of first refusal or buy/sell right to buy out a co-venturer, co-owner or partner, we may be unable to finance such a buy-out if it becomes exercisable or we may be required to purchase such interest at a time when it would not otherwise be in our best interest to do so. If our interest is subject to a buy/sell right, we may not have sufficient cash, available borrowing capacity or other capital resources to allow us to elect to purchase an interest of a co-venturer subject to the buy/sell right, in which
case we may be forced to sell our interest as the result of the exercise of such right when we would otherwise prefer to keep our interest. Finally, we may not be able to sell our interest in a joint venture if we desire to exit the venture.
Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act; if we are subject to registration under the Investment Company Act, we will not be able to continue our business.
Neither we, nor our Operating Partnership, nor any of our subsidiaries intend to register as an investment company under the Investment Company Act. We expect that our Operating Partnership’s and subsidiaries’ investments in real estate will represent the substantial majority of our total asset mix, which would not subject us to the Investment Company Act. In order to maintain an exemption from regulation under the Investment Company Act, we intend to engage, through our Operating Partnership and our wholly and majority owned subsidiaries, primarily in the business of buying real estate, and qualifying real estate investments must be made within a year after cash is received by us. If we are unable to invest a significant portion of cash proceeds in properties within one year of receipt, we may avoid being required to register as an investment company by temporarily investing any unused proceeds in government securities with low returns, which would reduce the cash available for distribution to stockholders and possibly lower your returns.
We expect that most of our assets will continue to be held through wholly owned or majority owned subsidiaries of our Operating Partnership. We expect that most of these subsidiaries will be outside the definition of investment company under Section 3(a)(1) of the Investment Company Act as they are generally expected to hold at least 60% of their assets in real property or in entities that they manage or co-manage that own real property. Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. Excluded from the term “investment securities,” among other things, are U.S. government securities and securities issued by majority owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. We believe that we, our Operating Partnership and most of the subsidiaries of our Operating Partnership will not fall within either definition of investment company as we invest primarily in real property, through our wholly or majority owned subsidiaries, the majority of which we expect to have at least 60% of their assets in real property or in entities that they manage or co-manage that own real property. As these subsidiaries would be investing either solely or primarily in real property, they would be outside of the definition of “investment company” under Section 3(a)(1) of the Investment Company Act. We are organized as a holding company that conducts its businesses primarily through the Operating Partnership, which in turn is a holding company conducting its business through its subsidiaries. Both we and our Operating Partnership intend to conduct our operations so that they comply with the 40% test. We will monitor our holdings to ensure continuing and ongoing compliance with this test. In addition, we believe that neither we nor the Operating Partnership will be considered an investment company under Section 3(a)(1)(A) of the Investment Company Act because neither we nor the Operating Partnership will engage primarily or hold itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through the Operating Partnership’s wholly-owned or majority owned subsidiaries, we and the Operating Partnership will be primarily engaged in the non-investment company businesses of these subsidiaries.
In the event that the value of investment securities held by the subsidiaries of our Operating Partnership were to exceed 40%, we expect our subsidiaries to be able to rely on the exclusion from the definition of “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act. Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires each of our subsidiaries relying on this exception to invest at least 55% of its portfolio in “mortgage and other liens on and interests in real estate,” which we refer to as “qualifying real estate assets” and maintain at least 70% to 90% of its assets in qualifying real estate assets or other real estate-related assets. The remaining 20% of the portfolio can consist of miscellaneous assets.
What we buy and sell is therefore limited to these criteria. How we determine to classify our assets for purposes of the Investment Company Act will be based in large measure upon no-action letters issued by the SEC staff in the past and other SEC interpretive guidance. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than ten years ago. Pursuant to this guidance, and depending on the characteristics of the specific investments, certain joint venture investments may not constitute qualifying real estate assets and therefore investments in these types of assets may be limited. No assurance can be given that the SEC will concur with our classification of our assets. Future revisions to the Investment Company Act or further guidance from the SEC may cause us to lose our exclusion from registration or force us to re-evaluate our portfolio and our investment strategy. Such changes may prevent us from operating our business successfully.
In the event that we, or our Operating Partnership, were to acquire assets that could make either entity fall within the definition of investment company under Section 3(a)(1) of the Investment Company Act, we believe that we would still qualify for an exclusion from registration pursuant to Section 3(c)(6). Section 3(c)(6) excludes from the definition of investment company any company primarily engaged, directly or through majority owned subsidiaries, in one or more of certain specified businesses. These specified businesses include the real estate business described in Section 3(c)(5)(C) of the Investment Company Act. It also excludes from the definition of investment company any company primarily engaged, directly or through majority owned subsidiaries, in one or more of such specified businesses from which at least 25% of such company’s gross income during its last fiscal year is derived, together with any additional business or businesses other than investing, reinvesting, owning, holding, or trading in securities. Although the SEC staff has issued little interpretive guidance with respect to Section 3(c)(6), we believe that we and our Operating Partnership may rely on Section 3(c)(6) if 55% of the assets of our Operating Partnership consist of, and at least 55% of the income of our Operating Partnership is derived from, qualifying real estate assets owned by wholly owned or majority owned subsidiaries of our Operating Partnership.
To ensure that neither we, nor our Operating Partnership nor subsidiaries are required to register as an investment company, each entity may be unable to sell assets they would otherwise want to sell and may need to sell assets they would otherwise wish to retain. In addition, we, our Operating Partnership or our subsidiaries may be required to acquire additional income or loss-generating assets that we might not otherwise acquire or forego opportunities to acquire interests in companies that we would otherwise want to acquire. Although we, our Operating Partnership and our subsidiaries intend to monitor our respective portfolios periodically and prior to each acquisition or disposition, any of these entities may not be able to maintain an exclusion from registration as an investment company. If we, our Operating Partnership or our subsidiaries are required to register as an investment company but fail to do so, the unregistered entity would be prohibited from engaging in our business, and criminal and civil actions could be brought against such entity. In addition, the contracts of such entity would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of the entity and liquidate its business.
We have experienced losses in the past, and we may experience similar losses in the future.
From inception of our Company through December 31, 2018, we had a cumulative net loss of $30.6 million. Our losses can be attributed, in part, to acquisition costs and depreciation and amortization expenses, which substantially reduced our income. We cannot assure you that, in the future, we will be profitable or that we will realize growth in the value of our assets.
Our internal control over financial reporting may not be effective, which could adversely affect our reputation, results of operations and stock price.
The accuracy of our financial reporting depends on the effectiveness of our internal control over financial reporting. Internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements and may not prevent or detect misstatements because of its inherent limitations. These limitations include the possibility of human error, inadequacy or circumvention of internal controls and fraud. If we do not attain and maintain effective internal control over financial reporting or implement controls sufficient to provide reasonable assurance with
respect to the preparation and fair presentation of our financial statements, we could be unable to file accurate financial reports on a timely basis, and our reputation, results of operations and stock price could be materially adversely affected.
We have very limited sources of capital other than cash from property operations and the proceeds of offerings of our securities to meet our primary liquidity requirements.
We have very limited sources of capital other than cash from property operations and the net proceeds of offerings of our securities to meet our primary liquidity requirements. As a result, we may not be able to pay our liabilities and obligations when they come due other than with the net proceeds of an offering, which may limit our ability to fully consummate our business plan and diversify our portfolio. In the past, we have relied on borrowing from affiliates to help finance our business activities. We have no current intention to borrow from affiliates, but we may do so in the future. However, there are no assurances that we will be able to borrow from affiliates in the future, or extend the maturity date of any loans that may be outstanding and due to affiliates.
You will have limited control over changes in our policies and day-to-day operations, which limited control increases the uncertainty and risks you face as a stockholder. In addition, our Board may change our major operational policies without your approval.
Our Board determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our Board may amend or revise these and other policies without a vote of the stockholders. Under the Maryland General Corporation Law and our charter, our stockholders have a right to vote only on limited matters. See “Important Provisions of Maryland Corporate Law and Our Charter and Bylaws” in any applicable prospectus or prospectus supplement.
We are responsible for the day-to-day operations of our Company and the selection and management of investments and have broad discretion over the use of proceeds from offerings of our securities. Accordingly, you should not purchase our securities unless you are willing to entrust all aspects of the day-to-day management and the selection and management of investments to us, who will manage our Company. In addition, we may retain independent contractors to provide various services for our Company, and you should note that such contractors will have no fiduciary duty to you or the other stockholders and may not perform as expected or desired.
In addition, while any applicable prospectus or prospectus supplement outlines our investment policies and generally describes our target portfolio, our Board may make adjustments to these policies based on, among other things, prevailing real estate market conditions and the availability of attractive investment opportunities. While we have no current intention of changing our investment policies, we will not forego an attractive investment because it does not fit within our targeted asset class or portfolio composition. We may use the proceeds of an offering to purchase or invest in any type of real estate which we determine is in the best interest of our stockholders. As such, our actual portfolio composition may vary substantially from the target portfolio described in the applicable prospectus or prospectus supplement.
Your rights as stockholders and our rights to recover claims against our officers, and directors are limited.
Under Maryland law, our charter, our bylaws and the terms of certain indemnification agreements with our directors and employment or services agreements with our executive officers, we may generally indemnify our officers, our directors, and their respective affiliates to the maximum extent permitted by Maryland law. Maryland law permits us to indemnify our present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened to be made a party by reason of their service in those or other capacities unless it is established that: (1) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty; (2) the director or officer actually received an improper personal benefit in money, property or services; or (3) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. As a result, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and their
affiliates, than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents in some cases.
A limit on the percentage of our capital stock and common stock a person may own may discourage a takeover or business combination, which could prevent our common stockholders from realizing a premium price for their common stock.
Our charter restricts direct or indirect ownership by one person or entity to no more than 9.8% in value of the outstanding shares of our capital stock or 9.8% in number of shares or value, whichever is more restrictive, of the outstanding shares of our common stock unless exempted (prospectively or retroactively) by our Board. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to our stockholders.
Our charter permits our Board to issue stock with terms that may subordinate the rights of our common stockholders or discourage a third party from acquiring us in a manner that could result in a premium price to our stockholders.
Our Board may amend our charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue and may classify or reclassify any unissued common stock or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption of any such stock. Our Board has authorized a total of 250,000,000 shares of preferred stock for issuance, of which, as of December 31, 2019, there are issued and outstanding 5,721,460 shares of Series A Preferred Stock, 536,695 shares of Series B Preferred Stock, 2,323,750 shares of Series C Preferred Stock, 2,850,602 shares of Series D Preferred Stock, and 17,400 shares of Series T Preferred Stock, all of which are senior to our common stock with respect to priority of dividend payments and rights upon liquidation, dissolution or winding up. Our Board could also authorize the issuance of up to approximately 197,900,000 additional shares of preferred stock with terms and conditions that could have priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to holders of our common stock.
We depend on our key employees. There is no guarantee that our key employees will remain employed with us for any specified period of time, and will not engage in competitive activities if they cease to be employed with us.
We depend on our key employees. In particular, our success depends to a significant degree upon the contributions of Messrs. Kamfar, Babb, MacDonald, Ruddy, Vohs, and DiFranco, who each entered into employment agreements with us, and Mr. Konig, who entered into a services agreement with us through his wholly-owned law firm, Konig & Associates, LLC, on substantially the same terms as the employment agreements. Each such agreement became effective upon the closing of the Internalization (except Mr. DiFranco’s, which became effective on November 5, 2018) and each (including Mr. DiFranco’s) has an initial term through and including December 31, 2020. The departure or the loss of the services of Messrs. Kamfar, Babb, MacDonald, Ruddy, Vohs, DiFranco or Konig could have a material adverse effect on our business, financial condition, results of operations and ability to effectively operate our business.
Further, the employment and services agreements we entered into with each of Messrs. Kamfar, Babb, MacDonald, Ruddy, Vohs, DiFranco and Konig contain certain restrictions on these executives, including a restriction on engaging in activities that are deemed competitive to our business. Although we believe these covenants to be enforceable under current law in the states in which we do business, there can be no guarantee that if our executives were to breach these covenants and engage in competitive activities, a court of law would fully enforce these restrictions. If these executives were to terminate their employment or service relationship with us and engage in competitive activities, such activities could have a material adverse effect on our business, financial condition and results of operations.
Our management manages our portfolio pursuant to very broad investment guidelines approved by our Board, which does not approve each investment and financing decision made by our management unless required by our investment guidelines.
Our management is authorized to follow very broad investment guidelines established by our Board. Our Board will periodically review our investment guidelines and our portfolio of assets but will not, and will not be required to, review all of our proposed investments, except in limited circumstances as set forth in our investment guidelines. In addition, in conducting periodic reviews, our Board may rely primarily on information provided to them by our management. Furthermore, transactions entered into by our management may be costly, difficult or impossible to unwind by the time they are reviewed by our Board. Our management has great latitude within the broad parameters of our investment guidelines in determining the types and amounts of assets in which to invest on our behalf, including making investments that may result in returns that are substantially below expectations or result in losses, which would materially and adversely affect our business and results of operations, or may otherwise not be in the best interests of our stockholders.
We are highly dependent on information systems and systems failures, cybersecurity incidents or other technology disruptions could negatively impact our business.
Our operations are highly dependent upon our information systems that support our business processes, including marketing, leasing, resident and vendor communication, property management and work order processing, finance and intracompany communications throughout our operations. Certain critical components of our information systems are dependent upon third-party providers and a significant portion of our business operations are conducted over the internet. These systems and websites require access to telecommunications or the internet, each of which is subject to system security risks, cybersecurity breaches, outages, and other risks. As a result, we could be severely impacted by a catastrophic occurrence, such as a natural disaster or a terrorist attack, or a circumstance that disrupted access to telecommunications, the internet or operations at our third-party providers, including viruses or experienced computer programmers that could penetrate network security defenses and cause system failures and disruptions of operations. We have implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, maintain the security and integrity of our information technology networks and related systems, and manage the risk of a security breach or disruption, but these measures, as well as our increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that our financial results, operations, business relationships or confidential information will not be negatively impacted by such an incident. In addition, while we believe we utilize appropriate duplication and back-up procedures, a significant outage in telecommunications, the internet or at our third-party providers could nonetheless negatively impact our operations.
Our third-party service providers are primarily responsible for the security of their own information technology environments and in certain instances, we rely significantly on third-party service providers to supply and store our sensitive data in a secure manner. All such third-party vendors face risks relating to cybersecurity similar to ours which could disrupt their businesses and therefore adversely impact us. While we provide guidance and specific requirements in some cases, we do not directly control any of such parties’ information technology security operations, or the amount of investment they place in guarding against cybersecurity threats. Accordingly, we are subject to any flaws in or breaches to their information technology systems or those which they operate for us.
Although no material incidents have occurred to date, we cannot be certain that our security efforts and measures will be effective or that our financial results will not be negatively impacted by such an incident.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
Information security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. In the ordinary course of our business we acquire and store sensitive data, including intellectual property, our proprietary business information and personally identifiable information of our prospective and current residents, our employees and third-party service providers in our offices and on our networks and website and on third-party
vendor networks. We may share some of this information with vendors who assist us with certain aspects of our business. The secure processing and maintenance of this information is critical to our operations and business and growth strategies. Despite our security measures and those of our third-party vendors, our information technology and such infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our operations and the services we provide to customers or damage our reputation, and thus could have a material adverse impact on our business, financial condition or results of operations. In addition, a security breach could require that we expend significant additional resources to enhance our information security systems and could result in a disruption to our operations.
Risks Related to Related Party Transactions
We may pursue less vigorous enforcement of the terms of certain agreements in connection with related party transactions because of conflicts of interest with certain of our officers and directors, and the terms of those agreements may be less favorable to us than they might otherwise be in an arm’s-length transaction.
The agreements we enter into in connection with related party transactions are expected to contain limited representations and warranties and have limited express indemnification rights in the event of a breach of those agreements. Furthermore, Mr. Kamfar, our Chairman and Chief Executive Officer, currently serves as an officer of Bluerock, an affiliate of our former Manager, and will have a conflict with respect to any matters that require consideration by our Board that occur between us and Bluerock. Even if we have actionable rights, we may choose not to enforce, or to enforce less vigorously, our rights under these agreements or under other agreements we may have with these parties, because of our desire to maintain positive relationships with these individuals.
Risks Related to Conflicts of Interest
Conflicts of interest may exist or could arise in the future with our Operating Partnership and its limited partners, which may impede business decisions that could benefit our stockholders.
Conflicts of interest may exist or could arise as a result of the relationships between us and our affiliates, on the one hand, and our Operating Partnership or any member thereof, on the other. Our directors and officers have duties to our Company and our stockholders under applicable Maryland law in connection with their management of our Company. At the same time, we, as general partner of our Operating Partnership, have fiduciary duties to our Operating Partnership and to its limited partners under Delaware law in connection with the management of our Operating Partnership. Our duties to our Operating Partnership and its limited partners as the general partner may come into conflict with the duties of our directors and officers to our Company and our stockholders. These conflicts may be resolved in a manner that is not in the best interest of our stockholders.
Conflicts of interest exist between our interests and the interests of Bluerock and its affiliates.
Examples of these potential conflicts of interest include:
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The possibility that certain of our officers and their respective affiliates will face conflicts of interest relating to the purchase and leasing of properties, and that such conflicts may not be resolved in our favor;
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The possibility that the competing demands for the time of certain of our officers may result in them spending insufficient time on our business, which may result in our missing investment opportunities or having less efficient operations, which could reduce our profitability and result in lower distributions to you;
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Some of our current investments, generally in development projects, have been made through joint venture arrangements with Bluerock Funds (in addition to unaffiliated third parties), which
arrangements were not the result of arm’s-length negotiations of the type normally conducted between unrelated co-venturers, and which could result in a disproportionate benefit to affiliates of our former Manager;
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Competition for the time and services of Bluerock personnel that work for us and our affiliates under the Administrative Services Agreement; and
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Determinations of rental expense sharing between Bluerock and us under the Leasehold Cost-Sharing Agreement.
Any of these and other conflicts of interest could have a material adverse effect on the returns on our investments, our ability to make distributions to stockholders and the trading price of our stock.
The ownership by Mr. Kamfar and Bluerock, and our executive officers, of a significant portion of the outstanding shares of our common stock on a fully diluted basis could give Bluerock and/or our executive officers the ability to control the outcome of matters submitted for stockholder approval, including the election of directors, and otherwise allow Bluerock and/or our executive officers to exert significant influence over our Company in a manner that may not be in the best interests of our other stockholders.
As of February 6, 2020, Mr. Kamfar and Bluerock, in which Mr. Kamfar owns a majority equity interest, beneficially owned approximately 16.8% of our outstanding Class A common stock and Class C common stock on a fully diluted basis. While the shares of Class C common stock issued in connection with the Internalization were not designed to provide for disproportionate voting rights, the issuance of such Class C common stock resulted in Mr. Kamfar controlling significant voting power in matters submitted to a vote of our Class A common stockholders as a result of his beneficial ownership of Class C common stock (which gives him voting power equal to the economic interest in the Company issued to Bluerock in the form of OP Units as if all of those OP Units were redeemed for shares of Class A common stock), including the election of directors. Mr. Kamfar may have interests that differ from our other stockholders, including by reason of his direct or indirect interest in our Operating Partnership, and may accordingly vote in ways that may not be consistent with the interests of those other stockholders. In addition, our other executive officers beneficially own approximately 6.7% of our outstanding Class A common stock and Class C common stock on a fully diluted basis. As a result of Bluerock and our executive officers’ significant ownership in our Company, Bluerock and/or our executive officers will have significant influence over our affairs and could exercise such influence in a manner that is not in the best interests of our other stockholders, including the ability to control the outcome of matters submitted to our stockholders for approval such as the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In particular, this concentrated voting control could delay, defer or prevent a change of control, merger, consolidation or sale of all or substantially all of our assets that our other stockholders and our Board’s support. Conversely, the concentrated voting control held by Bluerock and/or our executive officers could result in the consummation of such a transaction that our other stockholders and our Board do not support.
Certain of our executive officers have interests that may conflict with the interests of stockholders.
Messrs. Kamfar, MacDonald, Ruddy, Vohs, DiFranco and Konig are also affiliated with or are executive and/or senior officers of Bluerock and their affiliates. These individuals may have personal and professional interests that conflict with the interests of our stockholders with respect to business decisions affecting us and our Operating Partnership. As a result, the effect of these conflicts of interest on these individuals may influence their decisions affecting the negotiation and consummation of the transactions whereby we acquire apartment properties in the future from Bluerock or its affiliates, or in the allocation of investment opportunities to us by Bluerock or its affiliates.
Messrs. Kamfar, MacDonald, Ruddy, Vohs, DiFranco and Konig will have competing demands on their time and attention.
Messrs. Kamfar, MacDonald, Ruddy, Vohs, DiFranco and Konig have competing demands on their respective time and attention, principally with respect to the provision of services to certain outside entities affiliated with Bluerock. Such competing demands are not expected to be different from those that existed prior to the Internalization, but there is no assurance those demands will not increase and may result in
these individuals devoting time to such outside entities in a manner that could adversely affect our business. Under their respective employment or services agreements (as applicable), Mr. Kamfar and certain of our other executive officers are permitted to devote time to certain outside activities, so long as those duties and activities do not unreasonably interfere with the performance of their respective duties to us.
If we acquire direct or indirect interests in properties from a Bluerock Fund with which we have joint ventured in a development deal, the price may be higher than we would pay if the transaction were the result of arm’s-length negotiations.
We are a party to certain development joint ventures with the Bluerock Funds, among other third parties, and under the terms of such joint ventures, we may, from time to time, seek to acquire the minority interest held by such Bluerock Fund. The prices we pay for such interests will not be the subject of arm’s-length negotiations, which means that the acquisitions may be on terms less favorable to us than those negotiated in an arm’s-length transaction. We may pay more for such interests than we would have in an arm’s-length transaction, which would reduce our cash available for investment in other properties or distribution to our stockholders.
Legal counsel for us, Bluerock and some of our affiliates is the same law firm.
Kaplan Voekler Cunningham & Frank, PLC acts as legal counsel to us, Bluerock, Fund I and the Bluerock Funds, and some of our affiliates. Kaplan Voekler Cunningham & Frank, PLC is not acting as counsel for any specific group of stockholders or any potential investor. There is a possibility in the future that the interests of the various parties may become adverse and, under the Code of Professional Responsibility of the legal profession, Kaplan Voekler Cunningham & Frank, PLC may be precluded from representing any one or all of such parties. If any situation arises in which our interests appear to be in conflict with those of our affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should such a conflict not be readily apparent, Kaplan Voekler Cunningham & Frank, PLC may inadvertently act in derogation of the interest of parties which could adversely affect us, and our ability to meet our investment objectives and, therefore, our stockholders.
We have entered into joint venture investments with affiliates of Bluerock and may continue to do so in the future.
As of December 31, 2019, twelve of our investments in equity interests in real property have been made through joint venture arrangements with affiliates of Bluerock, as well as unaffiliated third parties. While we have no current expectation of investing in additional development projects with affiliates of Bluerock in the future, in the event such opportunities arise that we determine to be in the best interest of our stockholders, it is likely that we will work together with such Bluerock affiliates to apportion the investments among us and such other programs in accordance with the investment objectives of the various programs, with our Company initially taking a senior or preferred capital position to such affiliates in the development project and having the right to elect into common ownership with such programs under certain conditions. The negotiation of such investments will not be at arm’s-length and conflicts of interest will arise in the process. We cannot assure you that we will be as successful as we otherwise would be if we enter into joint venture arrangements with programs sponsored by Bluerock or with affiliates of Bluerock. It is possible that we could pay more for an asset in this type of transaction than we would pay in an arm’s-length transaction with an unaffiliated third party.
In addition, the co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. Since Bluerock and its affiliates have an interest in us and control any affiliated co-venturer, agreements and transactions between the co-venturers with respect to any such joint venture do not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers.
Risks Related To Debt Financing
We have used and may continue to use mortgage and other debt financing to acquire properties or interests in properties and otherwise incur other indebtedness, which increases our expenses and could subject us to the risk of losing properties in foreclosure if our cash flow is insufficient to make loan payments.
We are permitted to acquire real properties and other real estate-related investments, including entity acquisitions, by assuming either existing financing secured by the asset or by borrowing new funds. In
addition, we may incur or increase our mortgage debt by obtaining loans secured by some or all of our assets to obtain funds to acquire additional investments or to pay distributions to our stockholders. We also may borrow funds if necessary to satisfy the requirement that we distribute at least 90% of our annual “REIT taxable income,” or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes.
There is no limit on the amount we may invest in any single property or other asset or on the amount we can borrow to purchase any individual property or other investment. If we mortgage a property and have insufficient cash flow to service the debt, we risk an event of default which may result in our lenders foreclosing on the properties securing the mortgage.
If we cannot repay or refinance loans incurred to purchase our properties, or interests therein, then we may lose our interests in the properties secured by the loans we are unable to repay or refinance.
We may be adversely affected by changes in LIBOR reporting practices, the method in which LIBOR is determined or the use of alternative reference rates.
As of December 31, 2019, we had approximately $305.5 million of mortgages payable and revolving credit facilities outstanding that are indexed to the London Interbank Offered Rate (“LIBOR”). In July 2017, the United Kingdom regulator that regulates LIBOR announced its intention to phase out LIBOR rates by the end of 2021. The Alternative Reference Rates Committee (“ARRC”), a steering committee comprised of large U.S. financial institutions, has proposed replacing USD-LIBOR with a new index calculated by short-term repurchase agreements - the Secured Overnight Financing Rate (“SOFR”). At this time, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR, and it is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported before or after 2021 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Such developments and any other legal or regulatory changes in the method by which LIBOR is determined or the transition from LIBOR to a successor benchmark may result in, among other things, a sudden or prolonged increase or decrease in LIBOR, a delay in the publication of LIBOR, and changes in the rules or methodologies in LIBOR, which may discourage market participants from continuing to administer or to participate in LIBOR’s determination and, in certain situations, could result in LIBOR no longer being determined and published. If a published U.S. dollar LIBOR rate is unavailable after 2021, the interest rates on our mortgages payable and revolving credit facilities that are indexed to LIBOR will be determined using various alternative methods, any of which may result in interest obligations which are more than or do not otherwise correlate over time with the payments that would have been made on such debt if U.S. dollar LIBOR was available in its current form. Further, the same costs and risks that may lead to the unavailability of U.S. dollar LIBOR may make one or more of the alternative methods impossible or impracticable to determine. Any of these proposals or consequences could have a material adverse effect on our financing costs, and as a result, our financial condition, operating results and cash flows.
High levels of debt or increases in interest rates could increase the amount of our loan payments, which could reduce the cash available for distribution to stockholders.
Our policies do not limit us from incurring debt. For purposes of calculating our leverage, we assume full consolidation of all of our real estate investments, whether or not they would be consolidated under GAAP, include assets we have classified as held for sale, and include any joint venture level indebtedness in our total indebtedness.
Higher debt levels cause us to incur higher interest charges, resulting in higher debt service payments, and may be accompanied by restrictive covenants. Interest we pay reduces cash available for distribution to stockholders. Additionally, with respect to our variable rate debt, increases in interest rates increase our interest costs, which reduces our cash flow and our ability to make distributions to you. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments and could result in a loss. In addition, if we are unable to service our debt payments, our lenders may foreclose on our interests in the real property that secures the loans we have entered into.
High mortgage rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our cash flow from operations and the amount of cash distributions we can make.
To qualify as a REIT, we will be required to distribute at least 90% of our annual taxable income (excluding net capital gains) to our stockholders in each taxable year, and thus our ability to retain internally generated cash is limited. Accordingly, our ability to acquire properties or to make capital improvements to or remodel properties will depend on our ability to obtain debt or equity financing from third parties or the sellers of properties. If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the debt becomes due or of being unable to refinance on favorable terms. If interest rates are higher when we refinance the properties, our income could be reduced. We may be unable to refinance properties. If any of these events occurs, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to you and may hinder our ability to raise capital by issuing more stock or borrowing more money.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to you.
When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage, or impose other limitations. These or other limitations may limit our flexibility and prevent us from achieving our operating plans.
If mortgage debt is unavailable at reasonable rates, it may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our cash flows from operations and the amount of cash distributions we can make.
If we are unable to borrow monies on terms and conditions that we find acceptable, we likely will have to reduce the number of properties we can purchase, and the return on the properties we do purchase may be lower. If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the debt becomes due or of being unable to refinance on favorable terms. If interest rates are higher when we refinance the properties, our income could be reduced. As such, we may find it difficult, costly or impossible to refinance indebtedness which is maturing. If any of these events occur, our interest cost would increase as a result, which would reduce our cash flow. This, in turn, could reduce cash available for distribution to our stockholders and may hinder our ability to raise capital by issuing more stock or borrowing more money. If we are unable to refinance maturing indebtedness with respect to a particular property and are unable to pay the same, then the lender may foreclose on such property.
Financial and real estate market disruptions could adversely affect the multifamily property sector’s ability to obtain financing from Freddie Mac and Fannie Mae, which could adversely impact us.
Fannie Mae and Freddie Mac are major sources of financing for the multifamily sector and both have historically experienced losses due to credit-related expenses, securities impairments and fair value losses. If new U.S. government regulations (i) heighten Fannie Mae’s and Freddie Mac’s underwriting standards, (ii) adversely affect interest rates, or (iii) reduce the amount of capital they can make available to the multifamily sector, it could reduce or remove entirely a vital resource for multifamily financing. Any potential reduction in loans, guarantees and credit-enhancement arrangements from Fannie Mae and Freddie Mac could jeopardize the effectiveness of the multifamily sector’s available financing and decrease the amount of available liquidity and credit that could be used to acquire and diversify our portfolio of multifamily assets.
Volatility in and regulation of the commercial mortgage-backed securities market has limited and may continue to impact the pricing of secured debt.
As a result of the past crisis in the residential mortgage-backed securities markets, the most recent global recession and some concerns over the ability to refinance or repay existing commercial mortgage-backed securities as they come due, liquidity previously provided by the commercial mortgage-backed
securities and collateralized debt obligations markets has significantly decreased. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act imposes significant new regulations related to the mortgage backed securities industry and market participants, which has contributed to uncertainty in the market. The volatility in the commercial mortgage-backed securities market could result in the following adverse effects on our incurrence of secured debt, which could have a materially negative impact on our financial condition, results of operations, cash flow and cash available for distribution:
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higher loan spreads;
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tighter loan covenants;
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reduced loan to value ratios and resulting borrower proceeds; and
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higher amortization and reserve requirements.
Some of our mortgage loans may have “due on sale” provisions, which may impact the manner in which we acquire, sell and/or finance our properties.
In purchasing properties subject to financing, we may obtain financing with “due-on-sale” and/or “due-on-encumbrance” clauses. Due-on-sale clauses in mortgages allow a mortgage lender to demand full repayment of the mortgage loan if the borrower sells the mortgaged property. Similarly, due-on-encumbrance clauses allow a mortgage lender to demand full repayment if the borrower uses the real estate securing the mortgage loan as security for another loan. In such event, we may be required to sell our properties on an all-cash basis, which may make it more difficult to sell the property or reduce the selling price.
Lenders may be able to recover against our other properties under our mortgage loans.
In financing our property acquisitions, we will seek to obtain secured nonrecourse loans. However, only recourse financing may be available, in which event, in addition to the property securing the loan, the lender would have the ability to look to our other assets for satisfaction of the debt if the proceeds from the sale or other disposition of the property securing the loan are insufficient to fully repay it. Also, in order to facilitate the sale of a property, we may allow the buyer to purchase the property subject to an existing loan whereby we remain responsible for the debt.
If we are required to make payments under any “bad boy” carve-out guaranties that we may provide in connection with certain mortgages and related loans, our business and financial results could be materially adversely affected.
In obtaining certain nonrecourse loans, we may provide standard carve-out guaranties. These guaranties are only applicable if and when the borrower directly, or indirectly through agreement with an affiliate, joint venture partner or other third party, voluntarily files a bankruptcy or similar liquidation or reorganization action or takes other actions that are fraudulent or improper (commonly referred to as “bad boy” guaranties). Although we believe that “bad boy” carve-out guaranties are not guaranties of payment in the event of foreclosure or other actions of the foreclosing lender that are beyond the borrower’s control, some lenders in the real estate industry have recently sought to make claims for payment under such guaranties. In the event such a claim were made against us under a “bad boy” carve-out guaranty following foreclosure on mortgages or related loan, and such claim were successful, our business and financial results could be materially adversely affected.
Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds available for distribution to our stockholders.
We may finance our property acquisitions using interest-only mortgage indebtedness. During the interest-only period, the amount of each scheduled payment will be less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan will not be reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we will be required either to make scheduled payments of amortized principal and interest or to make a lump-sum or “balloon” payment at maturity. These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under
the related mortgage loan. If the mortgage loan has an adjustable interest rate, the amount of our scheduled payments also may increase at a time of rising interest rates. Increased payments and substantial principal or balloon maturity payments will reduce the funds available for distribution to our stockholders because cash otherwise available for distribution will be required to pay principal and interest associated with these mortgage loans.
To hedge against interest rate fluctuations, we may use derivative financial instruments that may be costly and ineffective, may reduce the overall returns on your investment, and may expose us to the credit risk of counterparties.
To the extent consistent with maintaining our qualification as a REIT, we may use derivative financial instruments to hedge exposures to interest rate fluctuations on loans secured by our assets and investments in collateralized mortgage-backed securities. Derivative instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions will be determined in light of the facts and circumstances existing at the time of the hedge and may differ from time to time.
To the extent that we use derivative financial instruments to hedge against interest rate fluctuations, we will be exposed to financing, basis risk and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. If we are unable to manage these risks effectively, our results of operations, financial condition and ability to make distributions to you will be adversely affected.
Complying with REIT requirements may limit our ability to hedge risk effectively.
We must satisfy two gross income tests annually to maintain our qualification as a REIT. First, at least 75% of our gross income for each taxable year must consist of defined types of income that we derive, directly or indirectly, from investments relating to real property or mortgages on real property or qualified temporary investment income (the “75% Gross Income Test”). Second, in general, at least 95% of our gross income for each taxable year must consist of income that is qualifying income for purposes of the 75% Gross Income Test, other types of interest and dividends, gain from the sale or disposition of shares or securities, or any combination of these (the “95% Gross Income Test”).
These and other REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. From time to time, we may enter into hedging transactions with respect to one or more of our assets or liabilities. Our hedging transactions may include entering into interest rate swaps, caps and floors, options to purchase these items, and futures and forward contracts. Any income or gain derived by us from transactions that hedge certain risks, such as the risk of changes in interest rates, will not be treated as gross income for purposes of either the 75% Gross Income Test or the 95% Gross Income Test, unless specific requirements are met. Such requirements include that the hedging transaction be properly identified within prescribed time periods and that the transaction either (1) hedges risks associated with indebtedness issued by us that is incurred to acquire or carry real estate assets or (2) manages the risks of currency fluctuations with respect to income or gain that qualifies under the 75% Gross Income Test or 95% Gross Income Test (or assets that generate such income). To the extent that we do not properly identify such transactions as hedges, hedge with other types of financial instruments, or hedge other types of indebtedness, the income from those transactions is not likely to be treated as qualifying income for purposes of the 75% Gross Income Test and the 95% Gross Income Test. As a result of these rules, we may have to limit the use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.
You may not receive any profits resulting from the sale of one of our properties, or receive such profits in a timely manner, because we may provide financing for the purchaser of such property.
If we liquidate our Company, you may experience a delay before receiving your share of the proceeds of such liquidation. In a forced or voluntary liquidation, we may sell our properties either subject to or
upon the assumption of any then outstanding mortgage debt or, alternatively, may provide financing to purchasers. We may take a purchase money obligation secured by a mortgage as partial payment. We do not have any limitations or restrictions on our taking such purchase money obligations. To the extent we receive promissory notes or other property instead of cash from sales, such proceeds, other than any interest payable on those proceeds, will not be included in net sale proceeds until and to the extent the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed of. In certain cases, we may receive initial down payments in the year of sale in an amount less than the selling price and subsequent payments may be spread over a number of years. In such cases, you may experience a delay in the distribution of the proceeds of a sale until such time.
Risks Related to Offerings of our Class A Common Stock
The market price and trading volume of our Class A common stock has been volatile at times following the initial public offering (the “IPO”), and these trends may continue following an offering, which may adversely impact the market for shares of our Class A common stock and make it difficult for purchasers to sell their shares.
Prior to the IPO, there was no active market for our common stock. Although our Class A common stock is listed on the NYSE American, the stock markets, including the NYSE American on which our Class A common stock is listed, have from time to time experienced significant price and volume fluctuations. Our Class A common stock has frequently traded below the IPO price since the completion of the IPO. As a result, the market price of shares of our Class A common stock may be similarly volatile, and holders of shares of our Class A common stock may from time to time experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. The offering price for shares of our Class A common stock is expected to be determined by negotiation between us and the underwriters. Purchasers may not be able to sell their shares of Class A common stock at or above the offering price.
The price of shares of our Class A common stock could be subject to wide fluctuations in response to a number of factors, including those listed in this “Risk Factors” section and others such as:
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our operating performance and the performance of other similar companies;
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actual or anticipated differences in our quarterly operating results;
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changes in our revenues or earnings estimates or recommendations by securities analysts;
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publication of research reports about us, the apartment real estate sector, apartment tenants or the real estate industry;
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increases in market interest rates, which may lead investors to demand a higher distribution yield for shares of our Class A common stock, and would result in increased interest expenses on our debt;
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the current state of the credit and capital markets, and our ability and the ability of our tenants to obtain financing;
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additions and departures of key personnel;
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increased competition in the multifamily real estate business in our target markets;
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the passage of legislation or other regulatory developments that adversely affect us or our industry;
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speculation in the press or investment community;
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equity issuances by us (including the issuances of OP and LTIP Units), or common stock resales by our stockholders, or the perception that such issuances or resales may occur;
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actual, potential or perceived accounting problems;
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changes in accounting principles;
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failure to qualify as a REIT;
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terrorist acts, natural or man-made disasters or threatened or actual armed conflicts; and
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general market and local, regional and national economic conditions, particularly in our target markets, including factors unrelated to our performance.
No assurance can be given that the market price of shares of our Class A common stock will not fluctuate or decline significantly in the future or that holders of shares of our Class A common stock will be able to sell their shares when desired on favorable terms, or at all. From time to time in the past, securities class action litigation has been instituted against companies following periods of extreme volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources.
In addition, our charter contains restrictions on the ownership and transfer of our stock, and these restrictions may inhibit your ability to sell your stock. Our charter contains a restriction on ownership of our shares that generally prevents any one person from owning more than 9.8% in value of our outstanding shares of stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of our outstanding shares of common stock, unless otherwise excepted (prospectively or retroactively) by our Board.
Sales of shares of our Class A common stock, or the perception that such sales will occur, may have adverse effects on our share price.
We cannot predict the effect, if any, of future sales of Class A common stock, or the availability of shares for future sales, on the market price of our Class A common stock. Sales of substantial amounts of Class A common stock, including shares of Class A common stock issued in an offering, issuable upon the exchange of OP Units, the sale of shares of Class A common stock held by our current stockholders, and the sale of any shares we may issue under our incentive plans, or the perception that these sales could occur, may adversely affect prevailing market prices for our Class A common stock. We may be required to conduct additional offerings to raise more funds. These offerings or the perception of a need for offerings may affect the market prices for our Class A common stock.
An increase in market interest rates may have an adverse effect on the market price of our Class A common stock.
One of the factors that investors may consider in deciding whether to buy or sell our Class A common stock is our distribution yield, which is our distribution rate as a percentage of our share price, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher distribution yield on our Class A common stock or may seek securities paying higher dividends or interest. The market price of our Class A common stock likely will be based primarily on the earnings that we derive from rental income with respect to our investments and our related distributions to stockholders, and not from the underlying appraised value of the properties themselves. As a result, interest rate fluctuations and capital market conditions are likely to affect the market price of our Class A common stock, and such effects could be significant. For example, if interest rates rise without an increase in our distribution rate, the market price of our Class A common stock could decrease because potential investors may require a higher distribution yield on our Class A common stock as market rates on interest-bearing securities, such as bonds, rise.
We have paid and may continue to pay distributions from offering proceeds, borrowings or the sale of assets to the extent our cash flow from operations or earnings are not sufficient to fund declared distributions. Rates of distribution to you will not necessarily be indicative of our operating results. If we make distributions from sources other than our cash flows from operations or earnings, we will have fewer funds available for the acquisition of properties and your overall return may be reduced.
Our organizational documents permit us to make distributions from any source, including the net proceeds from an offering. There is no limit on the amount of offering proceeds we may use to pay distributions. We have funded and may continue to fund distributions from the net proceeds of our offerings, borrowings and the sale of assets to the extent distributions exceed our earnings or cash flows from operations. While our policy is generally to pay distributions from cash flow from operations, our distributions through December 31, 2019 have been paid from proceeds from our underwritten and continuous offerings and at the market (“ATM”) offerings, and sales of assets, and may in the future be
paid from additional sources, such as from borrowings. To the extent we fund distributions from sources other than cash flow from operations, such distributions may constitute a return of capital and we will have fewer funds available for the acquisition of properties and your overall return may be reduced. Further, to the extent distributions exceed our earnings and profits, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder will be required to recognize capital gain.
We have issued Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock and intend to issue additional Series T Preferred Stock under our continuous offering, which, along with future issuances of debt securities and preferred equity, ranks senior to our Class A common stock in priority of dividend payment and upon liquidation, dissolution and winding up, and may adversely affect the trading price of our Class A common stock.
As of December 31, 2019, we have issued and outstanding 5,721,460 shares of Series A Preferred Stock, 536,695 shares of Series B Preferred Stock, 2,323,750 shares of Series C Preferred Stock, 2,850,602 shares of Series D Preferred Stock and 17,400 shares of Series T Preferred Stock, and are offering up to an additional 31,982,600 shares of Series T Preferred Stock in our continuous offering, all of which are senior to our common stock with respect to priority of dividend payments and rights upon liquidation, dissolution or winding up. The Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock may limit our ability to make distributions to holders of our Class A common stock. In the future, we may issue debt or additional preferred equity securities or incur other borrowings. Upon our liquidation, holders of our debt securities, other loans and Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock and additional preferred stock, if any, will receive a distribution of our available assets before common stockholders. Any additional preferred stock, if issued, likely will also have a preference on periodic distribution payments, which could eliminate or otherwise limit our ability to make distributions to holders of our Class A common stock and Class C common stock. Holders of shares of our Class A common stock bear the risk that our future issuances of debt or equity securities, including Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock or our incurrence of other borrowings may negatively affect the trading price of our Class A common stock.
We operate as a holding company dependent upon the assets and operations of our subsidiaries, and because of our structure, we may not be able to generate the funds necessary to make dividend payments on our common stock.
We generally operate as a holding company that conducts its businesses primarily through our Operating Partnership, which in turn is a holding company conducting its business through its subsidiaries. These subsidiaries conduct all of our operations and are our only source of income. Accordingly, we are dependent on cash flows and payments of funds to us by our subsidiaries as dividends, distributions, loans, advances, leases or other payments from our subsidiaries to generate the funds necessary to make dividend payments on our common stock. Our subsidiaries’ ability to pay such dividends and/or make such loans, advances, leases or other payments may be restricted by, among other things, applicable laws and regulations, current and future debt agreements and management agreements into which our subsidiaries may enter, which may impair our ability to make cash payments on our common stock. In addition, such agreements may prohibit or limit the ability of our subsidiaries to transfer any of their property or assets to us, any of our other subsidiaries or to third parties. Our future indebtedness or our subsidiaries’ future indebtedness may also include restrictions with similar effects.
In addition, because we are a holding company, stockholders’ claims will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, claims of our stockholders will be satisfied only after all of our and our Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.
Your percentage of ownership may be diluted if we issue new shares of stock.
Stockholders have no rights to buy additional shares of our stock in the event we issue new shares of stock. We may issue common stock, convertible debt or preferred stock pursuant to a subsequent public
offering or a private placement, to sellers of properties we directly or indirectly acquire instead of, or in addition to, cash consideration, or to Bluerock in payment of some or all of the operating expense reimbursements that were earned by Bluerock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Investors purchasing shares of our Class A common stock in an offering who do not participate in any future stock issuances will experience dilution in the percentage of the issued and outstanding shares of Class A common stock they own.
Redemption of our Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series T Preferred Stock for shares of our Class A common stock will dilute the ownership interest of existing holders of our Class A common stock, including stockholders whose shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series T Preferred Stock were previously redeemed for shares of our Class A common stock, and stockholders whose shares of Series B Preferred Stock or Series T Preferred Stock were previously converted into shares of our Class A common stock or whose Warrants were previously exercised for shares of our Class A common stock.
Commencing on October 21, 2022, the holders of shares of our Series A Preferred Stock have the option to cause us to redeem their shares at a redemption price of  $25.00 per share, plus an amount equal to all accrued but unpaid dividends. In addition, commencing on the date of original issuance of the shares of Series B Preferred Stock, the holders of shares of Series B Preferred Stock may require us to redeem such shares at a redemption price equal to their stated value (initially $1,000 per share), less a declining redemption fee (if applicable), plus an amount equal to any accrued but unpaid dividends. Further, commencing on July 19, 2023, the holders of shares of our Series C Preferred Stock have the option to cause us to redeem their shares at a redemption price of  $25.00 per share, plus an amount equal to all accrued but unpaid dividends. In addition, commencing on the date of original issuance of the shares of Series T Preferred Stock, the holders of shares of Series T Preferred Stock may require us to redeem such shares at a redemption price equal to their stated value (initially $25.00 per share), less a declining redemption fee (if applicable), plus an amount equal to any accrued but unpaid dividends. The redemption price for any such redemptions of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series T Preferred Stock is payable, in our sole discretion, in cash or in equal value of shares of our Class A common stock, at our option. The redemption of our Series A Preferred Stock, our Series B Preferred Stock, our Series C Preferred Stock or our Series T Preferred Stock for shares of our Class A common stock may result in the dilution of some or all of the ownership interests of existing stockholders, including stockholders whose shares of Series A Preferred Stock, Series B Preferred Stock Series C Preferred Stock or Series T Preferred Stock were previously redeemed for shares of our Class A common stock, and stockholders whose shares of Series B Preferred Stock or Series T Preferred Stock were previously converted into shares of our Class A common stock or whose Warrants were previously exercised for shares of our Class A common stock. Any sales in the public market of our Class A common stock issuable upon any such redemption could adversely affect prevailing market prices of our Class A common stock. In addition, any redemption of our Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series T Preferred Stock for shares of our Class A common stock could depress the price of our Class A common stock.
Our authorized but unissued shares of common and preferred stock may prevent a change in our control.
Our charter authorizes us to issue additional authorized but unissued shares of common or preferred stock. In addition, our Board may, without stockholder approval, amend our charter from time to time to increase or decrease the aggregate number of shares of our stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock into other classes or series of stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our Board may establish a series of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
Risks Related to Offerings of our Series A Preferred Stock, our Series B Preferred Stock, our Series C Preferred Stock, our Series D Preferred Stock and/or our Series T Preferred Stock
Because we conduct substantially all of our operations through our Operating Partnership, our ability to pay dividends on any of our Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock depends almost entirely on the distributions we receive from our Operating Partnership. We may not be able to pay dividends regularly on our Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series T Preferred Stock.
We may not be able to pay dividends on a regular quarterly basis in the future on any of our Series A Preferred Stock, Series C Preferred Stock or Series D Preferred Stock, or on a monthly basis in the future on our Series B Preferred Stock or Series T Preferred Stock. We have contributed, and intend to contribute in the future, the entire net proceeds from the offerings of all such series of preferred stock to our Operating Partnership in exchange for Series A Preferred Units, Series B Preferred Units, Series C Preferred Units, Series D Preferred Units and Series T Preferred Units (as applicable) that have substantially the same economic terms as the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and Series T Preferred Stock (respectively). Because we conduct substantially all of our operations through our Operating Partnership, our ability to pay dividends on the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock will depend almost entirely on payments and distributions we receive on our interests in our Operating Partnership. If our Operating Partnership fails to operate profitably and to generate sufficient cash from operations (and the operations of its subsidiaries), we may not be able to pay dividends on the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series T Preferred Stock. Furthermore, any new shares of preferred stock on parity with any such series of preferred stock will substantially increase the cash required to continue to pay cash dividends at stated levels. Any common stock or preferred stock that may be issued in the future to finance acquisitions, upon exercise of stock options or otherwise, would have a similar effect.
Your interests in our Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and/or Series T Preferred Stock could be subordinated and/or diluted by the incurrence of additional debt, the issuance of additional shares of preferred stock, including additional shares of any or all of the foregoing series of preferred stock, and by other transactions.
As of December 31, 2019, our total long-term mortgage indebtedness was approximately $1,435.0 million and our credit facilities were approximately $18.0 million, and we may incur significant additional debt in the future. Each of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series T Preferred Stock is subordinate to all of our existing and future debt and liabilities and those of our subsidiaries. Our future debt may include restrictions on our ability to pay dividends to preferred stockholders in the event of a default under the debt facilities or under other circumstances. In addition, our charter currently authorizes the issuance of up to 250,000,000 shares of preferred stock in one or more classes or series, and as of December 31, 2019, we have issued and outstanding 5,721,460 shares of Series A Preferred Stock, 536,695 shares of Series B Preferred Stock, 2,323,750 shares of Series C Preferred Stock, 2,850,602 shares of Series D Preferred Stock and 17,400 shares of Series T Preferred Stock. The issuance of additional preferred stock on parity with or senior to any or all of the foregoing series of preferred stock would dilute the interests of the holders of shares of preferred stock of the applicable series, and any issuance of preferred stock senior to the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series T Preferred Stock or any issuance of additional indebtedness, could affect our ability to pay dividends on, redeem or pay the liquidation preference on any or all of the foregoing series of preferred stock. We may issue preferred stock on parity with any or all of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and/or Series T Preferred Stock without the consent of the holders of shares of preferred stock of the applicable series. Other than the Asset Coverage Ratio (as defined below) with respect to the Series A Preferred Stock and Series C Preferred Stock and the right of holders to cause us to redeem the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series T Preferred Stock or to convert the Series D Preferred Stock, upon a Change of Control/Delisting (as defined below), none of the provisions relating to any of the foregoing series of preferred stock relate to or limit our indebtedness or afford the holders of shares thereof protection in the event of a highly leveraged or other
transaction, including a merger or the sale, lease or conveyance of all or substantially all our assets or business, that might adversely affect the holders of such shares.
In the event a holder of our Series A Preferred Stock exercises a Redemption at Option of Holder on or after October 21, 2022, a holder of our Series B Preferred Stock exercises their redemption option, a holder of our Series C Preferred Stock exercises a Redemption at Option of Holder on or after July 19, 2023, or a holder of Series T Preferred Stock exercises their redemption option we may redeem such shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series T Preferred Stock, as applicable, either for cash, or for shares of our Class A common stock, or any combination thereof, in our sole discretion.
If we choose to so redeem for Class A common stock, the holder will receive shares of our Class A common stock and therefore be subject to the risks of ownership thereof. See “- Risks Related to an Offering of our Class A Common Stock.” Ownership of shares of our Series A Preferred Stock, shares of our Series B Preferred Stock, shares of our Series C Preferred Stock or shares of Series T Preferred Stock will not give you the rights of holders of our common stock. Until and unless you receive shares of our Class A common stock upon redemption, you will have only those rights applicable to holders of our Series A Preferred Stock, our Series B Preferred Stock, Series C Preferred Stock or Series T Preferred Stock (as applicable).
The Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series T Preferred Stock have not been rated.
We have not sought to obtain a rating for the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock or the Series T Preferred Stock. No assurance can be given, however, that one or more rating agencies might not independently determine to issue such ratings or that such a rating, if issued, would not adversely affect the market price of the applicable series of preferred stock. In addition, we may elect in the future to obtain a rating of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and/or Series T Preferred Stock, which could adversely impact the market price of the applicable series. Ratings only reflect the views of the rating agency or agencies issuing the ratings and such ratings could be revised downward, placed on negative outlook or withdrawn entirely at the discretion of the issuing rating agency if in its judgment circumstances so warrant. While ratings do not reflect market prices or the suitability of a security for a particular investor, such downward revision or withdrawal of a rating could have an adverse effect on the market price of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock or the Series T Preferred Stock. It is also possible that the Series A Preferred Stock, Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and/or Series T Preferred Stock will never be rated.
Dividend payments on the Series A Preferred Stock, on the Series B Preferred Stock, on the Series C Preferred Stock, on the Series D Preferred Stock and on the Series T Preferred Stock are not guaranteed.
Although dividends on each of the Series A Preferred Stock, on the Series B Preferred Stock, on the Series C Preferred Stock, on the Series D Preferred Stock and on the Series T Preferred Stock are cumulative, our Board must approve the actual payment of such distributions. Our Board can elect at any time or from time to time, and for an indefinite duration, not to pay any or all accrued distributions. Our Board could do so for any reason, and may be prohibited from doing so in the following instances:
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poor historical or projected cash flows;
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the need to make payments on our indebtedness;
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concluding that payment of distributions on any or all such series of preferred stock would cause us to breach the terms of any indebtedness or other instrument or agreement; or
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determining that the payment of distributions would violate applicable law regarding unlawful distributions to stockholders.
We intend to use the net proceeds from any offerings of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and/or the Series T Preferred Stock to fund future investments and for other general corporate and working capital purposes, but any such offerings will not be conditioned upon the closing of pending property investments and we will have broad discretion to determine alternative uses of proceeds.
We intend to use a portion of the net proceeds from any offerings of our Series A Preferred Stock, our Series B Preferred Stock, our Series C Preferred Stock, our Series D Preferred Stock and/or our Series T Preferred Stock to fund future investments and for other general corporate and working capital purposes. However, the offerings will not be conditioned upon the closing of definitive agreements to acquire or invest in any properties. We will have broad discretion in the application of the net proceeds from any such offerings, and holders of our Series A Preferred Stock, our Series B Preferred Stock, our Series C Preferred Stock, our Series D Preferred Stock and our Series T Preferred Stock will not have the opportunity as part of their investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from any such offerings, their ultimate use may vary substantially from their currently intended use, and result in investments that are not accretive to our results from operations.
If we are required to make payments under any “bad boy” carve-out guaranties, recourse guaranties, and completion guaranties that we may provide in connection with certain mortgages and related loans in connection with an event that constitutes a Change of Control or Change of Control/Delisting, our business and financial results could be materially adversely affected.
In causing our subsidiaries to obtain certain nonrecourse loans, we may provide standard carve-out guaranties. These guaranties are generally only applicable if and when the borrower directly, or indirectly through agreement with an affiliate, joint venture partner or other third party, voluntarily files a bankruptcy or similar liquidation or reorganization action or takes other actions that are fraudulent or improper (commonly referred to as “bad boy” guaranties). We also may enter into recourse guaranties with respect to future mortgages, or provide credit support to development projects through completion guaranties, which also could increase risk of repayment. In some circumstances, pursuant to guarantees to which we are a party or that we may enter into in the future, our obligations pursuant to such “bad boy” carve-out guaranties and other guaranties may be triggered by a Change of Control or Change of Control/Delisting, because, among other things, such an event may result indirectly in a change of control of the applicable borrower. Because a Change of Control while any Series B Preferred Stock or Series T Preferred Stock is outstanding, or a Change of Control/Delisting while any Series A Preferred Stock or Series C Preferred Stock is outstanding, also triggers a right of redemption for cash by the holders thereof, the effect of a Change of Control or Change of Control/Delisting could negatively impact our liquidity and overall financial condition, and could negatively impact the ability of holders of shares of our Series B Preferred Stock, Series A Preferred Stock, Series C Preferred Stock or Series T Preferred Stock to receive dividends or other amounts on their shares of such Series B Preferred Stock, Series A Preferred Stock, Series C Preferred Stock or Series T Preferred Stock.
There is a risk of delay in our redemption of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series T Preferred Stock and we may fail to redeem such securities as required by their terms.
Substantially all of the investments we presently hold and the investments we expect to acquire in the future are, and will be, illiquid. The illiquidity of our investments may make it difficult for us to obtain cash quickly if a need arises. If we are unable to obtain sufficient liquidity prior to a redemption date, we may be forced to, among other things, engage in a partial redemption or to delay a required redemption. If this were to occur, the market price of shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series T Preferred Stock might be adversely affected, and stockholders entitled to a redemption payment may not receive payment.
The Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and the Series T Preferred Stock will bear a risk of early redemption by us.
We may voluntarily redeem some or all of the Series A Preferred Stock solely for cash, on or after October 21, 2020. We may also voluntarily redeem some or all of the Series B Preferred Stock, for cash or
equal value of shares of our Class A common stock, two years after the issuance date. In addition, we may voluntarily redeem some or all of the Series C Preferred Stock, solely for cash, on or after July 19, 2021. Finally, we may voluntarily redeem some or all of the Series D Preferred Stock solely for cash, on or after October 13, 2021. We may also voluntarily redeem some or all of the Series T Preferred Stock, for cash or equal value of shares of our Class A common stock, two years after the issuance date. Any such redemptions may occur at a time that is unfavorable to holders of such preferred stock. We may have an incentive to redeem the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series T Preferred Stock voluntarily if market conditions allow us to issue other preferred stock or debt securities at an interest or distribution rate that is lower than the distribution rate on the applicable series of preferred stock. Given the potential for early redemption of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock, holders of such shares may face an increased reinvestment risk, which is the risk that the return on an investment purchased with proceeds from the sale or redemption of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series T Preferred Stock may be lower than the return previously obtained from the investment in such shares.
Holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and/or Series T Preferred Stock should not expect us to redeem all or any such shares on the date they first become redeemable or on any particular date after they become redeemable.
Except in limited circumstances related to our ability to qualify as a REIT, our compliance with our Asset Coverage Ratio, or a special optional redemption in connection with a Change of Control/Delisting, the Series A Preferred Stock may be redeemed by us at our option, either in whole or in part, only on or after October 21, 2020, and the Series C Preferred Stock may be redeemed by us at our option, either in whole or in part, only on or after July 19, 2021. Except in limited circumstances related to our ability to qualify as a REIT or a special optional redemption in connection with a Change of Control/Delisting, the Series B Preferred Stock or Series T Preferred Stock may be redeemed by us at our option, either in whole or in part, only on or after two years from the issuance date, and the Series D Preferred Stock may be redeemed by us at our option, either in whole or in part, only on or after October 13, 2021. Any decision we make at any time to propose a redemption of any such series of preferred stock will depend upon, among other things, our evaluation of our capital position and general market conditions at the time. It is likely that we would choose to exercise our optional redemption right only when prevailing interest rates have declined, which would adversely affect the ability of holders of shares of the applicable series of preferred stock to reinvest proceeds from the redemption in a comparable investment with an equal or greater yield to the yield on such series of preferred stock had their shares not been redeemed. In addition, there is no penalty or premium payable on redemption, and the market price of the shares of such series of preferred stock may not exceed the liquidation preference at the time the shares become redeemable for any reason.
Compliance with the Asset Coverage Ratio may result in our early redemption of your Series A Preferred Stock and/or Series C Preferred Stock.
The terms of our Series A Preferred Stock and Series C Preferred Stock require us to maintain asset coverage of at least 200% calculated by determining the percentage value of  (1) our total assets plus accumulated depreciation minus our total liabilities and indebtedness as reported in our financial statements prepared in accordance with GAAP (exclusive of the book value of any Redeemable and Term Preferred Stock (as defined below)), over (2) the aggregate liquidation preference, plus an amount equal to all accrued and unpaid dividends, of our outstanding Series A Preferred Stock and Series C Preferred Stock and any outstanding shares of term preferred stock or preferred stock providing for a fixed mandatory redemption date or maturity date (collectively referred to as “Redeemable and Term Preferred Stock”) on the last business day of any calendar quarter (the “Asset Coverage Ratio”).
If we are not in compliance with the Asset Coverage Ratio, we may redeem shares of Redeemable and Term Preferred Stock, which may include Series A Preferred Stock and/or Series C Preferred Stock, including shares that will result in compliance with the Asset Coverage Ratio up to and including 285%. This could result in our ability to redeem a significant amount of the Series A Preferred Stock prior to October 21, 2020 and/or Series C Preferred Stock prior to July 19, 2021.
We may not have sufficient funds to redeem the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series T Preferred Stock upon a Change of Control/Delisting.
A “Change of Control/Delisting” is when, after the original issuance of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series T Preferred Stock any of the following has occurred and is continuing:
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a “person” or “group” within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act”), other than our Company, its subsidiaries, and its and their employee benefit plans, has become the direct or indirect “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, of our common equity representing more than 50% of the total voting power of all outstanding shares of our common equity that are entitled to vote generally in the election of directors, with the exception of the formation of a holding company;
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consummation of any share exchange, consolidation or merger of our Company or any other transaction or series of transactions pursuant to which our common stock will be converted into cash, securities or other property, other than any such transaction where the shares of our common stock outstanding immediately prior to such transaction constitute, or are converted into or exchanged for, a majority of the common stock of the surviving person or any direct or indirect parent company of the surviving person immediately after giving effect to such transaction;
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any sale, lease or other transfer in one transaction or a series of transactions of all or substantially all of the consolidated assets of our Company and its subsidiaries, taken as a whole, to any person other than one of the Company’s subsidiaries;
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our stockholders approve any plan or proposal for the liquidation or dissolution of our Company;
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our Class A common stock ceases to be listed or quoted on a national securities exchange in the United States; or
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at least a majority of our Board ceases to be constituted of directors who were either a member of our Board on October 21, 2015 (February 24, 2016 for Series B Preferred Stock, and November 13, 2019 for Series T Preferred Stock), or who became a member of our Board subsequent to that date and whose appointment, election or nomination for election by our stockholders was duly approved by a majority of the continuing directors on our Board at the time of such approval, either by a specific vote or by approval of the proxy statement issued by our Company on behalf of our Board in which such individual is named as nominee for director (each, a “Continuing Director”).
Upon the occurrence of a Change of Control/Delisting, unless we have exercised our right to redeem the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series T Preferred Stock, each holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series T Preferred Stock will have the right to require us to redeem all or any part of such stockholder’s Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series T Preferred Stock at a price equal to the liquidation preference per share, plus an amount equal to any accumulated and unpaid dividends up to and including the date of payment (and each holder of Series D Preferred Stock will have the right to require us to convert all or some of their Series D Preferred Stock into shares of our Class A common stock (or equivalent value of alternative consideration)). If we experience a Change of Control/Delisting, there can be no assurance that we would have sufficient financial resources available to satisfy our obligations to redeem the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series T Preferred Stock, and any guarantees or indebtedness that may be required to be repaid or repurchased as a result of such event. Our failure to redeem the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series T Preferred Stock could have material adverse consequences for us and the holders of the applicable series of preferred stock. In addition, the special optional redemption in connection with a Change of Control/Delisting feature of the Series A Preferred Stock, Series C Preferred Stock or Series D Preferred Stock may have the effect of inhibiting a third party from making an acquisition proposal for the Company, or of delaying, deferring or preventing a change of control of the Company under circumstances that otherwise could provide the holders of our Class A common stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series T Preferred Stock with the opportunity for liquidity or the opportunity to realize a premium over the then-current market price or that stockholders may otherwise believe is in their best interests.
Holders of our Series D Preferred Stock may not be permitted to exercise conversion rights upon a Change of Control/Delisting. If exercisable, the Change of Control/Delisting conversion feature of our Series D Preferred Stock may not adequately compensate such holders and may make it more difficult for a third party to take over our Company or discourage a third party from taking over our Company.
Upon the occurrence of a Change of Control/Delisting, holders of our Series D Preferred Stock will have the right to convert some or all of their Series D Preferred Stock into shares of our Class A common stock (or equivalent value of alternative consideration). Notwithstanding that we generally may not redeem the Series D Preferred Stock prior to October 13, 2021, we have a special optional redemption right in the event of a Change of Control/Delisting, and if we provide notice of our election to redeem the Series D Preferred Stock (whether pursuant to our optional redemption right or our special optional redemption right), the holders of the Series D Preferred Stock will not be permitted to exercise the Change of Control/Delisting Conversion Right with respect to the shares of Series D Preferred Stock subject to such notice. Upon such a conversion, such holders will be limited to a maximum number of shares of our Class A common stock per share of Series D Preferred Stock equal to the lesser of  (i) the conversion value (equal to the liquidation preference and unpaid and accrued dividends) divided by the closing price on the date of the event triggering the Change of Control/Delisting and (ii) the share cap of 4.15973, subject to adjustments.
The Change of Control/Delisting conversion feature of our Series D Preferred Stock may have the effect of discouraging a third party from making an acquisition proposal for our Company or of delaying, deferring or preventing certain change of control transactions of our Company under circumstances that stockholders may otherwise believe is in their best interests.
The market price of shares of our Class A common stock received in a conversion of our Series D Preferred Stock may decrease between the date received and the date the shares of Class A common stock are sold.
The market price of shares of our Class A common stock received in a conversion may decrease between the date received and the date the shares of Class A common stock are sold. The stock markets, including the NYSE American, have experienced significant price and volume fluctuations. As a result, the market price of our Class A common stock is likely to be similarly volatile, and recipients of our Class A common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. The price of our Class A common stock could be subject to wide fluctuations in response to a number of factors, including sales of Class A common stock by other stockholders who received shares of our Class A common stock upon conversion of their Series D Preferred Stock, our financial performance, government regulatory action or inaction, tax laws, interest rates and general market conditions and other factors.
Market interest rates may have an effect on the value of the Series A Preferred Stock, the Series C Preferred Stock or the Series D Preferred Stock.
One of the factors that will influence the price of the Series A Preferred Stock, Series C Preferred Stock or the Series D Preferred Stock will be the dividend yield on the Series A Preferred Stock, the Series C Preferred Stock or the Series D Preferred Stock (as a percentage of the price of the Preferred Stock, as applicable) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of the Series A Preferred Stock, the Series C Preferred Stock or the Series D Preferred Stock to expect a higher dividend yield and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of the Series A Preferred Stock, the Series C Preferred Stock or the Series D Preferred Stock to decrease.
Holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock will be subject to inflation risk.
Inflation is the reduction in the purchasing power of money resulting from the increase in the price of goods and services. Inflation risk is the risk that the inflation-adjusted, or “real,” value of an investment in
preferred stock or the income from that investment will be worth less in the future. As inflation occurs, the real value of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock and dividends payable on such shares decline.
Holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock have extremely limited voting rights.
The voting rights of holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock will be extremely limited. Our common stock is the only class or series of our stock carrying full voting rights. Voting rights for holders of shares of Series A Preferred Stock, Series C Preferred Stock and Series D Preferred Stock exist primarily with respect to the ability to elect two additional directors in the event that dividends for each of six quarterly dividend periods payable on the applicable series of such preferred stock are in arrears, and with respect to voting on amendments to our charter that materially and adversely affect the rights of the applicable series of such preferred stock or, with holders of Series B Preferred Stock and Series T Preferred Stock, the creation of additional classes or series of preferred stock that are senior to the applicable series of such preferred stock with respect to a liquidation, dissolution or winding up of our affairs. Holders of Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock have certain additional limited voting rights with respect to amendments to our charter that alter only the contract rights set forth therein of either (a) such series of preferred stock alone, or (b) of any preferred stock (i) ranking on parity with such series of preferred stock with respect to dividend rights and rights upon our liquidation, dissolution or winding up, and (ii) upon which like voting rights have been conferred (which preferred stock currently includes the Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, and Series T Preferred Stock, but does not include the Series B Preferred Stock). Other than in these limited circumstances, holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, and Series T Preferred Stock will generally not have voting rights.
The amount of the liquidation preference is fixed and holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock will have no right to receive any greater payment.
The payment due upon liquidation is fixed at the liquidation preference of  $25.00 per share of Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock, and $1,000.00 per share of Series B Preferred Stock, plus an amount equal to all accrued and unpaid dividends thereon, to, but not including, the date of liquidation, whether or not authorized or declared. If, in the case of our liquidation, there are remaining assets to be distributed after payment of this amount, you will have no right to receive or to participate in these amounts. Further, if the market price of a holder’s shares of Series A Preferred Stock, Series C Preferred Stock or Series D Preferred Stock is greater than the liquidation preference, the holder will have no right to receive the market price from us upon our liquidation.
Our charter and the articles supplementary establishing each of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series T Preferred Stock each contain restrictions upon ownership and transfer of such preferred stock which may impair the ability of holders to acquire such preferred stock and the shares of our common stock into which shares thereof may be converted, at the Company’s option, pursuant to the redemption at the option of the holder under certain circumstances. In addition, the Warrant Agreement governing the Warrants issued in connection with the Series B Preferred Stock contains similar restrictions upon ownership and transfer of Warrants, which may impair the ability of holders to acquire Warrants and the shares of our common stock for which such Warrants may be exercisable.
Our charter and the articles supplementary establishing the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, and the Series T Preferred Stock, and the Warrant Agreement with respect to the Warrants issued in connection with the Series B Preferred Stock, each contain restrictions on ownership and transfer of each such series of preferred stock and the Warrants, which restrictions are intended to assist us in maintaining our qualification as a REIT for federal income tax purposes. For example, to assist us in qualifying as a REIT, the articles supplementary establishing each of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock,
the Series D Preferred Stock and the Series T Preferred Stock (respectively) prohibit anyone from owning, or being deemed to own by virtue of the applicable constructive ownership provisions of the Code, more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series T Preferred Stock (as applicable). Additionally, the Warrant Agreement prohibits any person from beneficially or constructively owning more than 9.8% of our Warrants, and provides that Warrants may not be exercised to the extent such exercise would result in the holder’s beneficial or constructive ownership of more than 9.8%, in number or value, whichever is more restrictive, of our outstanding shares of common stock, or more than 9.8% in value of our outstanding capital stock. You should consider these ownership limitations prior to a purchase of shares of any such series of preferred stock. The restrictions could also have anti-takeover effects and could reduce the possibility that a third party will attempt to acquire control of us, which could adversely affect the market price of the Series A Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock.
Our ability to pay dividends or redeem shares is limited by the requirements of Maryland law.
Our ability to pay dividends on or redeem shares of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series T Preferred Stock is limited by the laws of Maryland. Under applicable Maryland law, a Maryland corporation generally may not make a distribution (including a dividend or redemption) if, after giving effect to the distribution, the corporation would not be able to pay its debts as the debts become due in the usual course of business, or the corporation’s total assets would be less than the sum of its total liabilities plus, unless the corporation’s charter provides otherwise, the amount that would be needed, if the corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights are superior to those receiving the distribution. Accordingly, we generally may not make a distribution on the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock or the Series T Preferred Stock if, after giving effect to the distribution, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus, unless the terms of such class or series provide otherwise, the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of any class or series of preferred stock then outstanding, if any, with preferences senior to those of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series T Preferred Stock. Any dividends or redemption payments may be delayed or prohibited.
If our common stock is no longer listed on the NYSE American or another national securities exchange, the ability to transfer or sell shares of the Series A Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock may be limited and the market value of the Series A Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock will be materially adversely affected.
If our Class A common stock is no longer listed on the NYSE American or another national securities exchange, it is likely that the Series A Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock will be delisted as well. Accordingly, if our Class A common stock is delisted, the ability of holders to transfer or sell their shares of the Series A Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock may be limited and the market value of the Series A Preferred Stock, Series C Preferred Stock and the Series D Preferred Stock may be materially adversely affected.
If our Class A common stock is no longer listed on the NYSE American or another national securities exchange, we will be required to terminate any continuous offering(s) of Series B Preferred Stock and/or Series T Preferred Stock.
The Series B Preferred Stock and the Series T Preferred Stock are “covered securities” and therefore are not subject to registration under the state securities, or “Blue Sky,” regulations in the various states in which it may be sold due to its seniority to our Class A common stock, which is listed on the NYSE American. If our Class A common stock is no longer listed on the NYSE American or another appropriate exchange, we will be required to register any offering of Series B Preferred Stock or Series T Preferred Stock in any state in which such offering were subsequently made. This would require the termination of any continuous offering(s) of Series B Preferred Stock or Series T Preferred Stock and could result in our raising an amount
of gross proceeds that is substantially less than the amount of the gross proceeds we expect to raise if the maximum offering amounts are sold. This would reduce our ability to make additional investments and limit the diversification of our portfolio.
Although the Warrants are not “covered securities,” most states include an exemption from securities registration for warrants that are exercisable into a listed security. Therefore, the Warrants are subject to state securities registration in any state that does not provide such an exemption and any offering of Series B Preferred Stock must be registered in order to sell the Warrants in such states.
To the extent that our distributions represent a return of capital for tax purposes, stockholders may recognize an increased gain or a reduced loss upon subsequent sales (including cash redemptions) of their shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series T Preferred Stock.
The dividends payable by us on the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series T Preferred Stock may exceed our current and accumulated earnings and profits as determined for U.S. federal income tax purposes. If that were to occur, it would result in the amount of distributions that exceed our earnings and profits being treated first as a return of capital to the extent of the stockholder’s adjusted tax basis in the stockholder’s Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock and then, to the extent of any excess over the stockholder’s adjusted tax basis in the stockholder’s Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock, as capital gain. Any distribution that is treated as a return of capital will reduce the stockholder’s adjusted tax basis in the stockholder’s Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock, and subsequent sales (including cash redemptions) of such stockholder’s Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock will result in recognition of an increased taxable gain or reduced taxable loss due to the reduction in such adjusted tax basis.
There is no public market for our Series B Preferred Stock, Warrants, or Series T Preferred Stock, and we do not expect one to develop.
There is no public market for the Series B Preferred Stock or Warrants offered in the Series B Preferred Stock offering, or for the Series T Preferred Stock offered in the Series T Preferred Stock offering, and we currently have no plan to list the Series B Preferred Stock, the Warrants, or the Series T Preferred Stock on a securities exchange or to include such shares for quotation on any national securities market. Additionally, our charter contains restrictions on the ownership and transfer of our securities, including our Series B Preferred Stock and Series T Preferred Stock, and these restrictions may inhibit the ability to sell shares of our Series B Preferred Stock or our Warrants, and/or shares of our Series T Preferred Stock, promptly or at all. Furthermore, the Warrants will expire four years from the date of issuance. If holders are able to sell the Series B Preferred Stock, Warrants, or Series T Preferred Stock, they may only be able to be sold at a substantial discount from the price originally paid. Therefore, Units comprised of shares of Series B Preferred Stock and Warrants, and/or shares of Series T Preferred Stock, should in each case be purchased only as a long-term investment. After one year from the date of issuance, the Warrants will be exercisable at the option of the holder for shares of our Class A common stock, which currently are publicly traded on the NYSE American. Beginning immediately upon original issuance of any share of Series B Preferred Stock or Series T Preferred Stock, the holder thereof may require us to redeem, and beginning two years from the date of original issuance, we may redeem, any such share, in each case with the redemption price payable, in our sole discretion, in cash or in equal value of shares of our Class A common stock, based on the closing price per share of our Class A common stock for the single trading day prior to the date of redemption. If we opt to pay the redemption price in shares of our Class A common stock, holders of shares of Series B Preferred Stock or Series T Preferred Stock may receive publicly traded shares, as we currently expect to continue listing our Class A common stock on the NYSE American.
There may not be a broad market for our Class A common stock, which may cause our Class A common stock to trade at a discount and make it difficult for holders of Warrants to sell the Class A common stock for which the Warrants are exercisable and for which shares of our Series B Preferred Stock or Series T Preferred Stock may be redeemable at our option.
Our Class A common stock for which the Warrants are exercisable trades on the NYSE American under the symbol “BRG.” Listing on the NYSE American or another national securities exchange does not ensure an actual or active market for our Class A common stock. Historically, our Class A common stock has had a low trading volume. Accordingly, an actual or active market for our Class A common stock may not be maintained, the market for our Class A common stock may not be liquid, the holders of our Class A common stock may be unable to sell their shares of our Class A common stock, and the prices that may be obtained following the sale of our Class A common stock upon the exercise of Warrants or the redemption of shares of Series B Preferred Stock or Series T Preferred Stock may not reflect the underlying value of our assets and business.
Shares of Series B Preferred Stock or Series T Preferred Stock may be redeemed for shares of our Class A common stock, which rank junior to the Series B Preferred Stock and Series T Preferred Stock with respect to dividends and upon liquidation.
The holders of shares of Series B Preferred Stock or Series T Preferred Stock may require us to redeem such shares, with the redemption price payable, in our sole discretion, in cash or in equal value of shares of our Class A common stock, based on the closing price per share of our Class A common stock for the single trading day prior to the date of redemption. We may opt to pay the redemption price in shares of our Class A common stock. The rights of the holders of shares of Series B Preferred Stock, Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock rank senior to the rights of the holders of shares of our common stock as to dividends and payments upon liquidation. Unless full cumulative dividends on our shares of Series B Preferred Stock, Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock for all past dividend periods have been declared and paid (or set apart for payment), we will not declare or pay dividends with respect to any shares of our Class A common stock for any period. Upon liquidation, dissolution or winding up of our Company, the holders of shares of our Series B Preferred Stock are entitled to receive a liquidation preference of stated value, $1,000 per share, plus an amount equal to all accrued but unpaid dividends, and holders of shares of each of our Series A Preferred Stock, our Series C Preferred Stock, our Series D Preferred Stock and our Series T Preferred Stock are entitled to receive a liquidation preference of  $25.00 per share, plus an amount equal to all accrued and unpaid dividends, in each case prior and in preference to any distribution to the holders of shares of our Class A common stock or any other class of our equity securities.
We will be able to call shares of Series B Preferred Stock or Series T Preferred Stock for redemption under certain circumstances without the consent of the holder.
We will have the ability to call the outstanding shares of Series B Preferred Stock or Series T Preferred Stock after two years from the date of original issuance of such shares of Series B Preferred Stock or Series T Preferred Stock. At that time, we will have the right to redeem, at our option, the outstanding shares of Series B Preferred Stock or Series T Preferred Stock, in whole or in part, at 100% of the Stated Value per share, plus an amount equal to any accrued and unpaid dividends.
Our requirement to redeem the Series B Preferred Stock and/or the Series T Preferred Stock in the event of a Change of Control may, in either case, deter a change of control transaction otherwise in the best interests of our stockholders.
Upon the occurrence of a Change of Control (as defined below) with respect to either the Series B Preferred Stock or the Series T Preferred Stock, we will be required to redeem all outstanding shares of the Series B Preferred Stock or the Series T Preferred Stock (as applicable), in whole, within 60 days after the first date on which such Change of Control occurred, in cash at a redemption price of  (i) $1,000 per share of Series B Preferred Stock, and (ii) $25.00 per share of Series T Preferred Stock; in each case, plus an amount equal to all accrued and unpaid dividends, if any, to and including the redemption date. The mandatory
redemption feature of each of the Series B Preferred Stock and the Series T Preferred Stock in connection with a Change of Control may each have the effect of inhibiting a third party from making an acquisition proposal for the Company, or of delaying, deferring or preventing a change of control of the Company, under circumstances that otherwise could provide the holders of our Class A common stock, Series B Preferred Stock, and/or Series T Preferred Stock with the opportunity for liquidity or the opportunity to realize a premium over the then-current market price or that stockholders may otherwise believe is in their best interests.
A “Change of Control” is when, (i) after the initial issuance of the Series B Preferred Stock (for purposes of the Series B Preferred Stock), or (ii) after the initial issuance of the Series T Preferred Stock (for purposes of the Series T Preferred Stock), any of the following has occurred and is continuing:
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a “person” or “group” within the meaning of Section 13(d) of the Exchange Act, other than our Company, its subsidiaries, and its and their employee benefit plans, has become the direct or indirect “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, of our common equity representing more than 50% of the total voting power of all outstanding shares of our common equity that are entitled to vote generally in the election of directors, with the exception of the formation of a holding company;
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consummation of any share exchange, consolidation or merger of our Company or any other transaction or series of transactions pursuant to which our Class A common stock will be converted into cash, securities or other property, (1) other than any such transaction where the shares of our Class A common stock outstanding immediately prior to such transaction constitute, or are converted into or exchanged for, a majority of the common stock of the surviving person or any direct or indirect parent company of the surviving person immediately after giving effect to such transaction, and (2) expressly excluding any such transaction preceded by our Company’s acquisition of the capital stock of another company for cash, securities or other property, whether directly or indirectly through one of our subsidiaries, as a precursor to such transactions; or
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at least a majority of our Board ceases to be constituted of directors who were either (A) a member of our Board on (i) February 24, 2016, for purposes of the Series B Preferred Stock, or (ii) November 13, 2019, for purposes of the Series T Preferred Stock, or (B) who became a member of our Board subsequent to such applicable date and whose appointment, election or nomination for election by our stockholders was duly approved by a majority of the continuing directors on our Board at the time of such approval, either by a specific vote or by approval of the proxy statement issued by our Company on behalf of our Board in which such individual is named as nominee for director.
Subject to the Cetera Side Letter and the articles supplementary establishing the Series T Preferred Stock (respectively), upon the sale of any individual property, holders of Series B Preferred Stock and Series T Preferred Stock do not have a priority over holders of our common stock regarding return of capital.
Subject to the Cetera Side Letter and the articles supplementary establishing the Series T Preferred Stock (respectively), holders of our Series B Preferred Stock and our Series T Preferred Stock (respectively) do not have a right to receive a return of capital prior to holders of our common stock upon the individual sale of a property. To provide protection to the holders of the Series B Preferred Stock, our Cetera Side Letter restricts us from selling an asset if the sale would cause us to fail to meet a dividend coverage ratio of at least 1.1:1 based on the ratio of our adjusted funds from operations to dividends required to be paid to holders of our Series A, Series B, Series C and Series D Preferred Stock for the two most recent quarters, subject to our ability to maintain status as a REIT for federal income tax purposes. Similarly, to provide protection to the holders of the Series T Preferred Stock, the articles supplementary establishing the Series T Preferred Stock restrict us from selling an asset if the sale would cause us to fail to meet a dividend coverage ratio of at least 1.1:1 based on the ratio of our core funds from operations to dividends required to be paid to holders of our Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series T Preferred Stock for the two most recent quarters, subject to our ability to maintain status as a REIT for federal income tax purposes. Depending on the price at which such property is sold, it is possible that holders of our common stock will receive a return of capital prior to the holders of our Series B Preferred Stock and/or our Series T Preferred Stock, provided that any accrued but unpaid
dividends have been paid in full to holders of Series B Preferred Stock and/or Series T Preferred Stock (as applicable). It is also possible that holders of common stock will receive additional distributions from the sale of a property (in excess of their capital attributable to the asset sold) before the holders of Series B Preferred Stock and/or Series T Preferred Stock (as applicable) receive a return of their capital.
We established the offering prices for each of the Series B Units and the Series T Preferred Stock pursuant to negotiations among us and our affiliated dealer manager; as a result, the actual value of an investment in Series B Units or the Series T Preferred Stock may be substantially less than the amount paid.
The selling prices of the Series B Units and the Series T Preferred Stock were determined, in each case, pursuant to negotiations among us and the dealer manager, which is an affiliate of Bluerock, based upon the following primary factors at the time of each such offering: the economic conditions in and future prospects for the industry in which we compete; our prospects for future earnings; an assessment of our management; the state of our development; the prevailing condition of the equity securities market; the state of the market for non-traded REIT securities; and market valuations of public companies considered comparable to our Company. Because the offering prices are not based upon any independent valuation, the offering prices are not indicative of the proceeds that an investor in the Series B Units or the Series T Preferred Stock would receive upon liquidation.
Your percentage of ownership may become diluted if we issue new shares of stock or other securities, and issuances of additional preferred stock or other securities by us may further subordinate the rights of the holders of our Class A common stock (which you may become upon receipt of redemption payments in shares of our Class A common stock for any of your shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, or Series T Preferred Stock, or upon exercise of any of your Warrants).
Under the terms of our Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series T Preferred Stock, we may make redemption payments in shares of our Class A common stock. Although the dollar amounts of such payments are unknown, the number of shares to be issued in connection with such payments may fluctuate based on the price of our Class A common stock. Any sales or perceived sales in the public market of shares of our Class A common stock issuable upon such redemption payments could adversely affect prevailing market prices of shares of our Class A common stock. The issuance of shares of our Class A common stock upon such redemption payments also may have the effect of reducing our net income per share (or increasing our net loss per share). In addition, the existence of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series T Preferred Stock may encourage short selling by market participants because the existence of redemption payments could depress the market price of shares of our Class A common stock.
Our Board is authorized, without stockholder approval, to cause us to issue additional shares of our Class A common stock or to raise capital through the issuance of additional preferred stock (including equity or debt securities convertible into preferred stock), options, warrants and other rights, on such terms and for such consideration as our Board in its sole discretion may determine. Any such issuance could result in dilution of the equity of our stockholders. Our Board may, in its sole discretion, authorize us to issue common stock or other equity or debt securities to persons from whom we purchase apartment communities, as part or all of the purchase price of the community. Our Board, in its sole discretion, may determine the value of any common stock or other equity or debt securities issued in consideration of apartment communities or services provided, or to be provided, to us.
Our charter also authorizes our Board, without stockholder approval, to designate and issue one or more classes or series of preferred stock in addition to the Series B Preferred Stock (including equity or debt securities convertible into preferred stock) and to set or change the voting, conversion or other rights, preferences, restrictions, limitations as to dividends or other distributions and qualifications or terms or conditions of redemption of each class or series of shares so issued. If any additional preferred stock is publicly offered, the terms and conditions of such preferred stock (including any equity or debt securities convertible into preferred stock) will be set forth in a registration statement registering the issuance of such preferred stock or equity or debt securities convertible into preferred stock. Because our Board has the power to establish the preferences and rights of each class or series of preferred stock, it may afford the holders of any series or class of preferred stock preferences, powers, and rights senior to the rights of holders
of common stock or the Series B Preferred Stock. If we ever create and issue additional preferred stock or equity or debt securities convertible into preferred stock with a distribution preference over common stock or the Series B Preferred Stock, payment of any distribution preferences of such new outstanding preferred stock would reduce the amount of funds available for the payment of distributions on our common stock and our Series B Preferred Stock. Further, holders of preferred stock are normally entitled to receive a preference payment if we liquidate, dissolve, or wind up before any payment is made to the common stockholders, likely reducing the amount common stockholders would otherwise receive upon such an occurrence. In addition, under certain circumstances, the issuance of additional preferred stock may delay, prevent, render more difficult or tend to discourage a merger, tender offer, or proxy contest, the assumption of control by a holder of a large block of our securities, or the removal of incumbent management.
Stockholders have no rights to buy additional shares of stock or other securities if we issue new shares of stock or other securities. We may issue common stock, convertible debt or preferred stock pursuant to a subsequent public offering or a private placement, or to sellers of properties we directly or indirectly acquire instead of, or in addition to, cash consideration. Investors purchasing Series B Units in the offering of our Series B Preferred Stock who do not participate in any future stock issuances will experience dilution in the percentage of the issued and outstanding stock they own. In addition, depending on the terms and pricing of any additional offerings and the value of our investments, you also may experience dilution in the book value and fair market value of, and the amount of distributions paid on, your shares of Series B Preferred Stock and common stock, if any.
Holders of the Series B Preferred Stock and the Series T Preferred Stock have no control over changes in our policies and operations.
Our Board determines our major policies, including with regard to investment objectives, financing, growth, debt capitalization, REIT qualification and distributions. Our Board may amend or revise these and other policies without a vote of the stockholders.
In addition, holders of shares of our Series B Preferred Stock have no voting rights under our charter, and otherwise have no voting rights except as set forth in the Cetera Side Letter. Pursuant to the Cetera Side Letter, holders of shares of Series B Preferred Stock have voting rights only in certain limited circumstances, voting together as a single class with the holders of preferred stock (i) ranking on parity with the Series B Preferred Stock with respect to dividend rights and rights upon our liquidation, dissolution or winding up, and (ii) upon which like voting rights have been conferred (such holders, together with holders of shares of Series B Preferred Stock, the “Parity Holders”). The Parity Holders currently include the holders of Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, and Series T Preferred Stock. The affirmative vote of a majority of the votes cast by the Parity Holders, voting together as a single class, is required to approve (a) the authorization, creation or issuance, or an increase in the number of authorized or issued shares of, any class or series of our capital stock ranking senior to the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series T Preferred Stock with respect to dividend rights and rights upon our liquidation, dissolution or winding up (any such senior stock, the “Senior Stock”), (b) the reclassification of any of our authorized capital stock into Senior Stock, or (c) the creation, authorization or issuance of any obligation or security convertible into, or evidencing the right to purchase, Senior Stock. Other than in these limited circumstances, holders of Series B Preferred Stock have no voting rights.
Holders of shares of Series T Preferred Stock generally have no voting rights under our charter, except as indicated in the immediately preceding paragraph, and with respect to any amendment of our charter that would alter only the contract rights, as expressly set forth therein, of either (a) the Series T Preferred Stock alone, or (b) of any preferred stock (i) ranking on parity with the Series T Preferred Stock with respect to dividend rights and rights upon our liquidation, dissolution or winding up, and (ii) upon which like voting rights have been conferred (which currently includes the Series A Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, and Series T Preferred Stock, but does not include the Series B Preferred Stock). Other than in these limited circumstances, holders of Series T Preferred Stock have no voting rights.
General Risks Related to Ownership of our Securities
The cash distributions you receive may be less frequent or lower in amount than you expect.
Our directors determine the amount and timing of distributions in their sole discretion. Our directors consider all relevant factors, including the amount of cash available for distribution, capital expenditure and
reserve requirements, general operational requirements and the requirements necessary to maintain our REIT qualification. We cannot assure you that we will consistently be able to generate sufficient available cash flow to make distributions, nor can we assure you that sufficient cash will be available to make distributions to you. We may borrow funds, return capital, make taxable distributions of our stock or debt securities, or sell assets to make distributions. We cannot predict the amount of distributions you may receive and we may be unable to pay or maintain cash distributions or increase distributions over time. Our inability to acquire additional properties or make real estate-related investments or operate profitably may have a negative effect on our ability to generate sufficient cash flow from operations to pay distributions.
Also, because we may receive income from rents at various times during our fiscal year, distributions paid may not reflect our income earned in that particular distribution period. The amount of cash available for distributions will be affected by many factors, such as our ability to acquire properties as offering proceeds become available, the income from those investments and yields on securities of other real estate companies that we invest in, as well as our operating expense levels and many other variables. In addition, to the extent we make distributions to stockholders with sources other than cash flow from operations, the amount of cash that is available for investment in real estate assets will be reduced, which will in turn negatively impact our ability to achieve our investment objectives and limit our ability to make future distributions.
If the properties we acquire or invest in do not produce the cash flow that we expect in order to meet our REIT minimum distribution requirement, we may decide to borrow funds to meet the REIT minimum distribution requirements, which could adversely affect our overall financial performance.
We may decide to borrow funds in order to meet the REIT minimum distribution requirements even if our management believes that the then prevailing market conditions generally are not favorable for such borrowings or that such borrowings would not be advisable in the absence of such tax considerations. If we borrow money to meet the REIT minimum distribution requirement or for other working capital needs, our expenses will increase, our net income will be reduced by the amount of interest we pay on the money we borrow and we will be obligated to repay the money we borrow from future earnings or by selling assets, which may decrease future distributions to stockholders.
We intend to use the net proceeds from any offering of our securities to fund future acquisitions and for other general corporate and working capital purposes, but no offering will be conditioned upon the closing of properties in our then-current pipeline and we will have broad discretion to determine alternative uses of proceeds.
As described under “Use of Proceeds” in any applicable prospectus or prospectus supplement, we intend to use a portion of the net proceeds from any offering of our securities to fund future acquisitions and for other general corporate and working capital purposes. However, no offering will be conditioned upon the closing of any properties. We will have broad discretion in the application of the net proceeds from an offering, and holders of our securities will not have the opportunity as part of their investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from an offering, their ultimate use may vary substantially from their currently intended use.
Material Federal Income Tax Risks
Failure to remain qualified as a REIT would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders.
We elected to be taxed as a REIT under the federal income tax laws commencing with our taxable year ended December 31, 2010. We believe that we have been organized and have operated in a manner qualifying us as a REIT commencing with our taxable year ended December 31, 2010 and intend to continue to so operate. However, we cannot assure you that we will remain qualified as a REIT.
If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:
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we would not be able to deduct dividends paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates;
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we could be subject to possibly increased state and local taxes; and
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unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.
In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our securities.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.
To maintain our qualification as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.
In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities, securities of taxable REIT subsidiaries (“TRSs”) and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, securities of TRSs and qualified real estate assets) can consist of the securities of any one issuer, and no more than 20% (25% for 2017 and prior years) of the value of our total assets can be represented by the securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flows.
Even if we remain qualified as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. In addition, any TRS in which we own an interest will be subject to regular corporate federal, state and local taxes. Any of these taxes would decrease cash available for distributions to stockholders.
Failure to make required distributions would subject us to U.S. federal corporate income tax.
We intend to continue to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. In order to remain qualified as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under the Code.
We may satisfy the 90% distribution test with taxable distributions of our stock or debt securities. On August 11, 2017, the Internal Revenue Service (“IRS”) issued Revenue Procedure 2017-45 authorizing elective cash/stock dividends to be made by publicly offered REITs (e.g., REITs that are required to file annual and periodic reports with the SEC under the Exchange Act). Pursuant to Revenue Procedure 2017-45, effective for distributions declared on or after August 11, 2017, the IRS will treat the distribution of stock pursuant to an elective cash/stock dividend as a distribution of property under Section 301 of the Code (e.g., a dividend), as long as at least 20% of the total dividend is available in cash and certain other parameters
detailed in the Revenue Procedure are satisfied. Although we have no current intention of paying dividends in our own stock, if in the future we choose to pay dividends in our own stock, our stockholders may be required to pay taxes in excess of the cash that they receive.
The prohibited transactions tax may subject us to tax on our gain from sales of property and limit our ability to dispose of our properties.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we intend to acquire and hold all of our assets as investments and not for sale to customers in the ordinary course of business, the IRS may assert that we are subject to the prohibited transaction tax equal to 100% of net gain upon a disposition of real property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, not all of our prior property dispositions qualified for the safe harbor and we cannot assure you that we can comply with the safe harbor in the future or that we have avoided, or will avoid, owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or may conduct such sales through a TRS, which would be subject to federal and state income taxation. Additionally, in the event that we engage in sales of our properties, any gains from the sales of properties classified as prohibited transactions would be taxed at the 100% prohibited transaction tax rate.
The ability of our Board to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.
Our charter provides that our Board may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.
Our ownership of any TRSs will be subject to limitations and our transactions with any TRSs will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.
Overall, no more than 20% (25% for 2017 and prior years) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the Code limits the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. Furthermore, we will monitor the value of our respective investments in any TRSs for the purpose of ensuring compliance with TRS ownership limitations and will structure our transactions with any TRSs on terms that we believe are arm’s-length to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 20% REIT subsidiaries limitation or to avoid application of the 100% excise tax.
You may be restricted from acquiring or transferring certain amounts of our common stock.
The stock ownership restrictions of the Code for REITs and the 9.8% stock ownership limits in our charter may inhibit market activity in our capital stock and restrict our business combination opportunities.
In order to qualify as a REIT, five or fewer individuals, as defined in the Code to include specified private foundations, employee benefit plans and trusts, and charitable trusts, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity beneficially or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year. To help insure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of shares of our capital stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted, prospectively or retroactively, by our Board, our charter prohibits any person from beneficially or constructively owning more than 9.8% in value of the aggregate of our outstanding shares of capital stock or 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock. Our Board may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of such thresholds does not satisfy certain conditions designed to ensure that we will not fail to qualify as a REIT. These restrictions on transferability and ownership will not apply, however, if our Board determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance is no longer required for REIT qualification.
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our stock.
At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in the U.S. federal income tax laws, regulations or administrative interpretations.
The “Tax Cuts and Jobs Act” (the “TCJA”) makes significant changes to the U.S. federal income tax rules for taxation of individuals and corporations. In the case of individuals, the tax brackets have been adjusted, the top federal income rate has been reduced to 37%, special rules reduce taxation of certain income earned through pass-through entities and reduce the top effective rate applicable to ordinary dividends from REITs to 29.6% (through a 20% deduction for ordinary REIT dividends received) and various deductions have been eliminated or limited, including limiting the deduction for state and local taxes to $10,000 per year. Most of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017 and before January 1, 2026. The top corporate income tax rate has been reduced to 21%. There are only minor changes to the REIT rules (other than the 20% deduction applicable to individuals for ordinary REIT dividends received). The TCJA makes numerous other large and small changes to the tax rules that do not affect REITs directly but may affect our stockholders and may indirectly affect us.
Stockholders are urged to consult with their tax advisors with respect to the status of the TCJA and any other regulatory or administrative developments and proposals and their potential effect on investment in our stock.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for certain dividends.
The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders taxed at individual rates is 20% plus the 3.8% surtax on net investment income, if applicable. Dividends payable by REITs, however, generally are not eligible for the reduced rates on qualified dividend income. Rather, under the TCJA, REIT dividends constitute “qualified business income” and thus a 20% deduction is available to individual taxpayers with respect to such dividends, resulting in a 29.6% maximum federal tax rate (plus the 3.8% surtax on net investment income, if applicable) for individual U.S. stockholders. Additionally, without further legislative action, the 20% deduction applicable to REIT dividends will expire on January 1, 2026. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our stock.
Distributions to tax-exempt investors may be classified as unrelated business taxable income and tax-exempt investors would be required to pay tax on the unrelated business taxable income and to file income tax returns.
Neither ordinary nor capital gain distributions with respect to our stock nor gain from the sale of stock should generally constitute unrelated business taxable income to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:
•
under certain circumstances, part of the income and gain recognized by certain qualified employee pension trusts with respect to our stock may be treated as unrelated business taxable income if our stock is predominately held by qualified employee pension trusts, such that we are a “pension-held” REIT (which we do not expect to be the case);
•
part of the income and gain recognized by a tax exempt investor with respect to our stock would constitute unrelated business taxable income if such investor incurs debt in order to acquire the stock; and
•
part or all of the income or gain recognized with respect to our stock held by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from federal income taxation under Sections 501(c)(7), (9), (17) or (20) of the Code may be treated as unrelated business taxable income.
We encourage you to consult your tax advisor to determine the tax consequences applicable to you if you are a tax-exempt investor.
Benefit Plan Risks Under ERISA or the Code
If you fail to meet the fiduciary and other standards under the Employee Retirement Income Security Act of 1974, as amended or the Code as a result of an investment in our stock, you could be subject to criminal and civil liabilities and penalties.
Special considerations apply to the purchase of stock or holding of Warrants by employee benefit plans subject to the fiduciary rules of Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), including pension or profit sharing plans and entities that hold assets of such plans, which we refer to as ERISA Plans, and plans and accounts that are not subject to ERISA, but are subject to the prohibited transaction rules of Section 4975 of the Code, including IRAs, Keogh Plans, and medical savings accounts. (Collectively, we refer to ERISA Plans and plans subject to Section 4975 of the Code as “Benefit Plans” or “Benefit Plan Investors”). If you are investing the assets of any Benefit Plan, you should consider whether:
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your investment will be consistent with your fiduciary obligations under ERISA and the Code;
•
your investment will be made in accordance with the documents and instruments governing the Benefit Plan, including the Benefit Plan’s investment policy;
•
your investment will satisfy the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA, if applicable, and other applicable provisions of ERISA and the Code;
•
your investment will impair the liquidity of the Benefit Plan;
•
your investment will produce “unrelated business taxable income” for the Benefit Plan;
•
you will be able to value the assets of the plan annually in accordance with ERISA requirements and applicable provisions of the Benefit Plan;
•
you will be able to satisfy plan liquidity requirements as there may be only a limited market to sell or otherwise dispose of our stock; and
•
your investment will constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.
Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Code may result in the imposition of civil and criminal penalties, and can subject the fiduciary to personal liability for claims for damages or for equitable remedies. In addition, if an investment in our stock or holding of Warrants constitutes a prohibited transaction under ERISA or the Code, the fiduciary or IRA owner who authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested. In the case of a prohibited transaction involving an IRA owner, the IRA may be disqualified and all of the assets of the IRA may be deemed distributed and subjected to tax. Benefit Plan Investors should consult with counsel before making an investment in our securities.
Plans that are not subject to ERISA or the prohibited transactions of the Code, such as government plans or church plans, may be subject to similar requirements under state law. The fiduciaries of such plans should review all details to ensure themselves that the investment satisfies applicable law.
For additional discussion of significant factors that make an investment in our shares risky, see the Liquidity and Capital Resources Section under Item 7. - Management’s Discussion and Analysis of Financial Conditions and Results of Operations of this report.
Item 1B.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Item 2.
Properties
As of December 31, 2019, we owned interests in fifty-three real estate properties, consisting of thirty-five consolidated operating properties and eighteen properties held through preferred equity and mezzanine loan investments. Of the property interests held through preferred equity and mezzanine loan investments, five are under development, four are in lease-up and nine properties are stabilized. The following tables provide summary information regarding our consolidated operating properties and preferred equity and mezzanine loan investments.
Consolidated Operating Properties
(1)
Represents date of last significant renovation or year built if no renovations.
(2)
Represents the average effective monthly rent per occupied unit for all occupied units for the three months ended December 31, 2019. Total concessions for the three months ended December 31, 2019 amounted to approximately $0.3 million.
(3)
Percent occupied is calculated as (i) the number of units occupied as of December 31, 2019, divided by (ii) total number of units, expressed as a percentage.
(4)
Total average rent and total occupancy percentage excludes The District at Scottsdale which is in lease-up. Total average rent excludes Cade Boca Raton which was consolidated on December 31, 2019 and had no operations for the quarter.
Preferred Equity and Mezzanine Loan Investments
(1)
For lease-up and development investments, represents the average pro forma effective monthly rent per occupied unit for all expected occupied units upon stabilization. For operating investments, represents the average effective monthly rent per occupied unit.
(2)
The development is in the planning phase; project specifications are in process.
(3)
Stabilized operating properties in which we have a preferred equity investment. See Note 7 - Preferred Equity Investments and Investments in Unconsolidated Real Estate Joint Ventures in our financial statements for further information.
Item 3.
Item 3.
Legal Proceedings
We are not party to, and none of our properties are subject to, any material pending legal proceeding.
Item 4.
Item 4.
Mining Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our shares of Class A common stock are traded on the NYSE American under the symbol “BRG.”
On February 6, 2020, the closing price of our Class A common stock, as reported on the NYSE American, was $11.94.
On January 13, 2020, our Board authorized, and we declared monthly dividends for the first quarter of 2020 equal to a monthly rate of  $5.00 per share on our Series B Preferred Stock, payable monthly to the stockholders of record as of January 24, 2020, February 25, 2020 and March 25, 2020, which was paid in cash on February 5, 2020, and which will be paid in cash on March 5, 2020 and April 3, 2020, respectively.
On January 13, 2020, our Board authorized, and we declared monthly dividends for the first quarter of 2020 equal to a monthly rate of  $0.128125 per share on our Series T Preferred Stock, payable monthly to the stockholders of record as of January 24, 2020, February 25, 2020 and March 25, 2020, which was paid in cash on February 5, 2020, and which will be paid in cash on March 5, 2020 and April 3, 2020, respectively. Newly-issued shares of Series T Preferred Stock held for only a portion of the applicable monthly dividend period will receive a prorated Series T Preferred Stock dividend based on the actual number of days in the applicable dividend period during which each shares of Series T Preferred Stock was outstanding.
Stockholder Information
As of February 6, 2020, we had approximately 24,504,832 shares of Class A common stock outstanding held by a total of 509 stockholders, one of which is the holder for all beneficial owners who hold in street name.
Distributions
Future distributions paid by the Company will be at the discretion of our Board and will depend upon the actual cash flow of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as our Board deems relevant.
Distributions paid on our Class A common shares, Class C common shares, OP Units and LTIP Units that are entitled to receive distribution equivalents when dividends are paid on the common stock, by quarter for the years ended December 31, 2019 and 2018, respectively, were as follows (amounts in thousands, except per share amounts):
On January 13, 2020, our Board authorized, and we declared monthly dividends for the first quarter of 2020 equal to a monthly rate of  $5.00 per share on our Series B Preferred Stock, payable monthly to the stockholders of record as of January 24, 2020, February 25, 2020 and March 25, 2020, which was paid in cash on February 5, 2020, and which will be paid in cash on March 5, 2020 and April 3, 2020, respectively.
On January 13, 2020, our Board authorized, and we declared monthly dividends for the first quarter of 2020 equal to a monthly rate of  $0.128125 per share on our Series T Preferred Stock, payable monthly to the stockholders of record as of January 24, 2020, February 25, 2020 and March 25, 2020, which was paid in cash on February 5, 2020, and which will be paid in cash on March 5, 2020 and April 3, 2020, respectively. Newly-issued shares of Series T Preferred Stock held for only a portion of the applicable monthly dividend period will receive a prorated Series T Preferred Stock dividend based on the actual number of days in the applicable dividend period during which each shares of Series T Preferred Stock was outstanding.
Distributions paid for the years ended December 31, 2019, 2018 and 2017, respectively, were funded from cash provided by operating activities except with respect to $3,250,000, zero, and $4,824,000, respectively, which was funded from sales of real estate, borrowings, and/or proceeds from our equity offerings.
Although we may use alternative sources of cash to fund distributions in a given period, we expect that distribution requirements for an entire year will be met with cash flows from operating activities.
Equity Compensation Plans
Incentive Plans
The Company’s incentive plans were originally adopted by our Board on December 16, 2013, and approved by our stockholders on January 23, 2014, as the 2014 Equity Incentive Plan for Individuals (the “2014 Individuals Plan”) and the 2014 Equity Incentive Plan for Entities (the “2014 Entities Plan,” and together with the 2014 Individuals Plan, as each was subsequently amended and restated, the “2014 Incentive Plans”).
On August 9, 2018, our Board adopted, and on September 28, 2018 our stockholders approved, the third amendment and restatement of the 2014 Individuals Plan (the “Third Amended 2014 Individuals Plan”) and the 2014 Entities Plan (the “Third Amended 2014 Entities Plan,” and together with the Third Amended 2014 Individuals Plan, the “Third Amended 2014 Incentive Plans,” and together with the 2014 Incentive Plans, the “Incentive Plans”), which superseded and replaced in their entirety the 2014 Incentive Plans Under the Third Amended 2014 Incentive Plans, we have reserved and authorized an aggregate number of 2,250,000 shares of our common stock for issuance. As of February 6, 2020, 762,401 shares were available for future issuance.
The purpose of the Third Amended 2014 Incentive Plans is to attract and retain independent directors, executive officers and other key employees, including officers and employees of our Operating Partnership and their affiliates, and other service providers. The Third Amended 2014 Incentive Plans provide for the grant of options to purchase shares of our common stock, stock awards, stock appreciation rights, performance units, incentive awards and other equity-based awards.
Administration of the Third Amended 2014 Incentive Plans
The Third Amended 2014 Incentive Plans are administered by the compensation committee of our Board, except that the Third Amended 2014 Incentive Plans will be administered by our Board with respect to awards made to directors who are not employees. This summary uses the term “administrator” to refer to the compensation committee or our Board, as applicable. The administrator will approve who will receive grants under the Third Amended 2014 Incentive Plans, determine the type of award that will be granted and will specify the number of shares of our Class A Common Stock subject to each grant.
Eligibility
Employees and officers of our Company and our affiliates (including employees of our Operating Partnership) and members of our Board are eligible to receive grants under the Third Amended 2014 Individuals Plan. In addition, individuals who provide significant services to us or an affiliate, including individuals who provide services to us or an affiliate by virtue of employment with, or providing services to, our Operating Partnership may receive grants under the Third Amended 2014 Individuals Plan.
Entities that provide significant services to us or our affiliates, including our Operating Partnership, may receive grants under the Third Amended 2014 Entities Plan in the discretion of the administrator.
The following table provides information about our common stock that may be issued upon the exercise of options, warrants and rights under our Third Amended 2014 Incentive Plans, as of December 31, 2019.
We have adopted an Amended and Restated Code of Ethics for our directors, officers and employees intended to satisfy NYSE American listing standards and the definition of a “code of ethics” set forth in Item 406 of Regulation S-K. Any information relating to amendments to our Amended and Restated Code of Ethics or waivers of a provision of our Amended and Restated Code of Ethics required to be disclosed pursuant to Item 5.05 of Form 8-K will be disclosed through our website.
Clawback Policy
Any award granted under the Incentive Plans, and any payment made with respect to any such award, is subject to the condition that we may require such award to be returned, and any payment made with respect to such award to be repaid, if such action is required under the terms of any Company recoupment or “clawback” (forfeiture or repayment) policy as in effect on the date the award was granted or if recoupment is required by any law, rule, requirement or regulation.
Unregistered Sales of Equity Securities
We previously disclosed our issuances during the years ended December 31, 2019, 2018 and 2017 of equity securities that were not registered under the Securities Act of 1933, as amended, in our Current Reports on Form 8-K and amendments thereto on Form 8-K/A, as applicable, filed with the Securities and Exchange Commission (the “SEC”) on February 22, 2017, May 15, 2017, August 4, 2017, August 10, 2017, November 6, 2017, November 9, 2017, January 5, 2018, February 22, 2018, May 14, 2018, August 13, 2018, October 9, 2018, November 9, 2018, January 4, 2019, February 21, 2019, May 10, 2019, August 13, 2019, and November 8, 2019.
Issuer Purchases of Equity Securities
(1)
Shares repurchased in the fourth quarter were under the new stock repurchase plans authorized on December 20, 2019.
Item 6.
Item 6.
Selected Financial Data
The following table sets forth our selected consolidated financial data and should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) included elsewhere in this report.
(1)
Under the NAREIT definition, FFO represents net income available to common stockholders and unit holders (computed in accordance with accounting principles generally accepted in the United States of America (“GAAP”), excluding gains (losses) from sales of depreciable property and impairment provisions on depreciable property or on equity investments in depreciable property plus real estate related depreciation and amortization (excluding amortization of financing costs), and adjustments for unconsolidated partnerships and joint ventures. See “Funds From Operations” in Item 7
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Bluerock Residential Growth REIT, Inc., and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Bluerock Residential Growth REIT, Inc., a Maryland corporation, and, as required by context, Bluerock Residential Holdings, L.P., a Delaware limited partnership, which we refer to as our “Operating Partnership,” and to their subsidiaries. We refer to Bluerock Real Estate, L.L.C., a Delaware limited liability company, and Bluerock Real Estate Holdings, LLC, a Delaware limited liability company, together as “Bluerock”, and we refer to our former external manager, BRG Manager, LLC, as our “former Manager.” Both Bluerock and our former Manager are affiliated with the Company. See also “Forward-Looking Statements” preceding Part I.
Overview
We were incorporated as a Maryland corporation on July 25, 2008. Our principal business objective is to generate attractive risk-adjusted investment returns by assembling a high-quality portfolio of apartment properties located in demographically attractive growth markets and by implementing our investment strategies and our “Live/Work/Play Initiatives” to achieve sustainable long-term growth in both our funds from operations and net asset value.
On October 31, 2017, we became an internally-managed REIT as a result of the completion of the management internalization transactions (the “Internalization”), and we are no longer externally managed by our former Manager.
We conduct our operations through our Operating Partnership, of which we are the sole general partner. The consolidated financial statements include our accounts and those of the Operating Partnership.
As of December 31, 2019, we owned interests in fifty-three real estate properties, consisting of thirty-five consolidated operating properties and eighteen properties held through preferred equity and mezzanine loan investments. Of the property interests held through preferred equity and mezzanine loan investments, five are under development, four are in lease-up and nine properties are stabilized. The fifty-three properties contain an aggregate of 15,627 units, comprised of 11,746 consolidated operating units and 3,881 units through preferred equity and mezzanine loan investments. As of December 31, 2019, our consolidated operating properties were approximately 94.0% occupied.
We have elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Code and have qualified as a REIT commencing with our taxable year ended December 31, 2010. In order to continue to qualify as a REIT, we must distribute to our stockholders each calendar year at least 90% of our taxable income (excluding net capital gains). If we qualify as a REIT for federal income tax purposes, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify as a REIT for four years following the year in which our qualification is denied. Such an event could materially and adversely affect our net income and results of operations. We intend to continue to organize and operate in such a manner as to remain qualified as a REIT.
Significant Developments
During 2019, we acquired seven operating multifamily communities generally through various multi-tiered joint ventures in which we have indirect ownership ranging from 90% to 100%, representing an aggregate of 2,365 units, for an aggregate purchase price of approximately $525.7 million. These properties are located in Las Vegas, Nevada; Mount Juliet, Tennessee; Scottsdale, Arizona; Atlanta, Georgia; and Pasco, Washington.
We also invested in or continued to invest in multi-tiered development joint ventures through increased common or preferred equity investments of  $20.1 million, representing an aggregate of 785 units. These properties are located in Atlanta, Georgia; Smyrna, Georgia, and Austin, Texas.
We provided mezzanine or senior loan funds in five developments projects with 754 units in 2019. During 2019 we provided increased mezzanine financing to Chapel Hill of approximately $34.5 million (net). We also provided increased mezzanine financing to Cade, Domain, Arlo and Vickers Historic Roswell of approximately $8.7 million (net).
As part of our effort to simplify our structure, during 2019 we invested approximately $9.7 million to increase our ownership stake to 100% in each of our Pine Lakes Preserve, Sorrel, and Sovereign properties, the latter two of which were subsequently sold in 2019.
During the year ended December 31, 2019, we issued 240,876 shares of Series B Preferred Stock under the Series B Preferred Offering (as hereinafter defined) with net proceeds of approximately $216.8 million after commissions, discounts and dealer manager fees. On October 31, 2019, the Board determined to replace the Series B Preferred Offering with the Series T Preferred Offering (as hereinafter defined). On December 20, 2019, we made the final issuance of Series B Preferred Stock pursuant to the Series B Preferred Offering, and on February 11, 2020, the Board formally approved the termination of the Series B Preferred Offering. In addition, in December 2019 we issued 17,400 shares of Series T Preferred Stock under the Series T Preferred Offering with net proceeds of approximately $0.4 million after commissions, discounts and dealer manager fees.
In February 2018, the Company authorized the repurchase of up to $25 million of its outstanding shares of Class A common stock over a period of one year pursuant to a stock repurchase plan. In December 2018, we renewed our stock repurchase plan for a period of one year and announced a new plan for the repurchase of up to $5.0 million of our outstanding shares of Class A common stock in accordance with the guidelines specified under Rule 10b5-1 of the Exchange Act, which shares were applied against the $25 million under our original stock repurchase plan. On December 20, 2019, the Company authorized new stock repurchase plans for the repurchase of up to an aggregate of  $50 million of the Company’s outstanding shares of Class A common stock, to be conducted in accordance with the Rules 10b5-1 and 10b-18 of the Exchange Act. The stock repurchase plans will terminate upon the earliest to occur of certain specified events as set forth therein. The extent to which the Company repurchases shares of its Class A common stock under the stock repurchase plans, and the timing of any such purchases, depends on a variety of factors including general business and market conditions and other corporate considerations. Repurchases under the stock repurchase plans may be made in the open market or through privately negotiated transactions, subject to certain price limitations and other conditions established thereunder. Open market repurchases will be structured to occur within the method, timing, price and volume requirements of Rule 10b-18 of the Exchange Act. During the year ended December 31, 2019, the Company purchased 1,313,328 shares of Class A common stock under its stock repurchase plans for a total purchase price of approximately $14.1 million.
Industry Outlook
We believe that the apartment sector will continue to deliver attractive performance for the foreseeable future due to favorable underlying demographics and supply and demand fundamentals.
Large demographic trends, including the Millennial generation of 90 million entering prime rental age through 2030, followed by the Gen-Z generation of 82 million, are projected to form more households than the Baby Boomer and the Gen-X generations, which should drive significant renter demand over the coming decades. As one data point, new research from the National Multifamily Housing Council (the “NMHC”) indicates that approximately 4.6 million new rental units will be needed to meet projected demand by 2030, and that current construction trends indicate that only 3 million new units will be delivered.
We believe that a significant amount of institutional capital and public REITs are primarily focused on investing in the big six Gateway Markets of Boston, New York, Washington, D.C., Seattle, San Francisco, and Los Angeles, and that many other primary markets are underinvested by institutional/public capital. As a result, we believe that our target “next generation, knowledge economy” markets, which are primary markets below the “big six,” provide the opportunity to source investments at cap rates that have the potential to provide not only significant current income, but also attractive capital appreciation.
Further, given that a significant portion of the nation’s apartment stock was built prior to 1980, we believe that a number of our target markets are underserved by institutional quality highly amenitized live/
work/play apartment properties desired by Millennials as they continue to move into their prime rental years. We also believe that rising construction costs will continue to limit supply in the near to intermediate term, and as such, there is opportunity in our target markets for development and/or redevelopment to deliver institutional quality highly amenitized live/work/play product and capture premium rental rates and generate value.
Results of Operations
Note 3, “Sale of Real Estate Assets and Joint Venture Equity Interests and Abandonment of Development Project”; Note 4, “Investments in Real Estate”; Note 5, “Acquisition of Real Estate’; Note 6, “Notes and Interest Receivable due from Related Party”; and Note 7, “Preferred Equity Investments and Investments in Unconsolidated Real Estate Joint Ventures,” to our Consolidated Financial Statements provide discussion of the various purchases and sales of properties and joint venture equity interests. These transactions have resulted in material changes to the presentation of our financial statements.
The following is a summary of our stabilized consolidated operating real estate investments as of December 31, 2019:
(1)
Represents date of most recent significant renovation or date built if no renovations.
(2)
Total occupancy percentage excludes The District at Scottsdale which is in lease-up and Cade Boca Raton which was consolidated on December 31, 2019 and had no operations for the quarter.
Year ended December 31, 2019 as compared to the year ended December 31, 2018
Revenue
Rental and other property revenues increased $22.9 million, or 14%, to $185.4 million for the year ended December 31, 2019 as compared to $162.5 million for the same prior year period. This was due to a $28.1 million increase from the acquisition of seven properties in 2019 and the full year impact of five properties acquired in 2018, and a $5.8 million increase from same store properties, partially offset by a $11.0 million decrease driven by the sales of six properties in 2019. See Item 1. Business “Summary of Investments and Dispositions”.
Interest income from related parties increased $2.3 million, or 11%, to $24.6 million for the year ended December 31, 2019 as compared to $22.3 million for the same prior year period due to increases in the average balance of mezzanine loans outstanding.
Expenses
Property operating expenses increased $6.4 million, or 9%, to $74.4 million for the year ended December 31, 2019 as compared to $68.0 million for the same prior year period. This was due to a $10.0 million increase from the acquisition of seven properties in 2019 and the full year impact of five properties acquired in 2018, and a $1.7 million increase from same store properties, partially offset by a $5.3 million decrease driven by the sales of six properties in 2019. Property NOI margins increased to 59.8% of total revenues for the year ended December 31, 2019, from 58.1% in the prior year period. Property NOI margins are computed as total property revenues less property operating expenses, divided by total property revenues.
Property management fees expense increased $0.5 million, or 12%, to $4.9 million for the year ended December 31, 2019 as compared to $4.4 million in the same prior year period. This was due to a $0.6 million increase from the acquisition of seven properties in 2019 and the full year impact of five properties acquired in 2018, a $0.1 million increase from same store properties, partially offset by a $0.3 million decrease driven by the sales of six properties in 2019.
General and administrative expenses amounted to $22.6 million for the year ended December 31, 2019 as compared to $19.6 million for the same prior year period. Excluding non-cash equity compensation expense of  $10.9 million and $6.9 million for the years ended December 31, 2019 and 2018, respectively, general and administrative expenses were $11.6 million, or 5.5% of revenues for the year ended December 31, 2019 as compared to $12.6 million, or 6.8% of revenues, for the same prior year end period.
Acquisition and pursuit costs amounted to $0.6 million for the year ended December 31, 2019 as compared to $0.1 million for the same prior year period. Acquisition and pursuit costs incurred in the year ended December 31, 2019 were related to the write-off of pre-acquisition costs from abandoned deals. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods.
Weather-related losses, net amounted to $0.4 million for the year ended December 31, 2019 as compared to $0.3 million for the same prior year period. In 2019, the expense primarily relates to hail damage at one property in Texas and lightning damage at one property in Florida, partially offset by insurance reimbursements related to prior year storms. In 2018, the expense related to freeze damages at three properties in North Carolina and one property in Texas, along with hail damages at one property in Texas.
Depreciation and amortization expenses increased to $70.5 million for the year ended December 31, 2019 as compared to $62.7 million for the same prior year period. This was due to a $13.7 million increase
from the acquisition of seven properties in 2019 and the full year impact of five properties acquired in 2018, partially offset by a $1.5 million decrease from same store properties and a $4.4 million decrease from the sale of six properties in 2019.
Other Income and Expenses
Other income and expenses amounted to net expense of  $7.6 million for the year ended December 31, 2019 as compared to net expense of  $45.0 million for the same prior year period. This was primarily due to the $48.7 million of gains of on sale of six properties in 2019. This was partially offset by an increase in interest expense of  $6.6 million and a loss on extinguishment of debt of  $5.0 million due to property sales and the refinance of various loans.
Year ended December 31, 2018 as compared to the year ended December 31, 2017
Revenue
Rental and other property revenues increased $46.8 million, or 40%, to $162.5 million for the year ended December 31, 2018 as compared to $115.6 million for the same prior year period. This was due to a $51.9 million increase from the acquisition of five properties in 2018 and the full year impact of twelve properties acquired in 2017, and a $3.7 million increase from same store properties, offset by a $8.7 million decrease driven by the sales of four properties in 2017. See Item 1. Business “Summary of Investments and Dispositions”.
Interest income from related parties increased $14.4 million, or 182%, to $22.3 million for the year ended December 31, 2018 as compared to $7.9 million for the same prior year period due to increases in the average balance of mezzanine loans outstanding.
Expenses
Property operating expenses increased $19.7 million, or 41%, to $68.0 million for the year ended December 31, 2018 as compared to $48.3 million for the same prior year period. Property operating expenses increased $21.8 million primarily from the acquisition of five properties in 2018 and the full year impact of twelve properties acquired in 2017, and a $1.4 million increase from same store properties, offset by a $3.4 million decrease in property operating expenses driven by the sales of four properties in 2017. Property NOI margins decreased to 58.1% of total revenues for the year ended December 31, 2018, from 58.2% in the prior year period. Property margins have been impacted by the sales of stabilized properties owned for longer time periods and the recent purchase of assets that have not yet achieved the same level of operational efficiency. Property NOI margins are computed as total property revenues less property operating expenses, divided by total property revenues.
Property management fees expense increased $1.2 million, or 38%, to $4.4 million for the year ended December 31, 2018 as compared to $3.2 million in the same prior year period. Property management fees increased $1.4 million from the acquisition of five properties in 2018 and the full year impact of twelve properties acquired in 2017, offset by a $0.2 million decrease in property management fees driven by the sales of four properties in 2017.
General and administrative expenses amounted to $19.6 million for the year ended December 31, 2018 as compared to $7.5 million for the same prior year period. Excluding non-cash equity compensation expense of  $6.9 million and $2.3 million for the years ended December 31, 2018 and 2017, respectively, general and administrative expenses were $12.6 million, or 6.8% of revenues for the year ended December 31, 2018 as compared to $5.2 million, or 4.2% of revenues, for the same prior year end period. This increase can be primarily attributed to the impact of the Internalization as we are now incurring expenses that were previously covered by the management fees payable to our former Manager, described below. Combined general and administrative expenses and management fees decreased $0.7 million to $19.6 million for the year ended December 31, 2018 as compared to $20.3 million for the year ended December 31, 2017.
Management fees were eliminated in conjunction with the Internalization. Base management fees of $8.7 million were expensed in the year ended December 31, 2017. Incentive management fees of  $4.0 million
were expensed in the year ended December 31, 2017. All base management and incentive management fees in 2017 were paid in LTIP Units in lieu of cash.
Acquisition and pursuit costs amounted to $0.1 million for the year ended December 31, 2018 as compared to $3.2 million for the same prior year period. Substantially all the expenses for the year ended December 31, 2017 were due to the Company’s decision to abandon the proposed East San Marco Property development and write off the pre-acquisition costs that had been incurred. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods.
Management internalization expenses of  $43.6 million for the year ended December 31, 2017 related to the transaction expenses for the Internalization, including the issuance of Class C common stock and OP units. There were no such costs in 2018.
Weather-related losses, net were $0.3 million for the year ended December 31, 2018 as compared to $1.0 million for the same prior year period. Weather-related losses incurred in the year ended December 31, 2018 primarily related to freeze damages at three properties in North Carolina and one property in Texas for $0.2 million, along with hail damages at one property in Texas for $0.1 million. Weather-related losses incurred in the year ended December 31, 2017 were related to damages sustained from Hurricane Irma at six properties in Florida and three properties in Georgia.
Depreciation and amortization expenses increased to $62.7 million for the year ended December 31, 2018 as compared to $48.6 million for the same prior year period. Depreciation and amortization expense increased $18.4 million from the acquisition of five properties in 2018 and the full year impact of twelve properties acquired in 2017, offset by a $2.0 million decrease in depreciation and amortization driven by the sales of four properties in 2017 and a $2.4 million decrease from same store properties.
Other Income and Expenses
Other income and expenses amounted to net expense of  $45.0 million for the year ended December 31, 2018 as compared to net other income of  $37.6 million for the same prior year period. Interest expense increased $21.5 million, or 68%, to $53.0 million for the year ended December 31, 2018 as compared to $31.5 million for the same prior year period due to the increased amount of properties and an increase in debt to fund the property acquisitions. The balance of the difference was primarily due to $60.4 million of gains on the sales of properties during the year ended December 31, 2017.
Property Operations
We define “same store” properties as those that we owned and operated for the entirety of both periods being compared, except for properties that are in the construction or lease-up phases, or properties that are undergoing development or significant redevelopment. We move properties previously excluded from our same store portfolio for these reasons into the same store designation once they have stabilized or the development or redevelopment is complete and such status has been reflected fully in all quarters during the applicable periods of comparison. For newly constructed or lease-up properties or properties undergoing significant redevelopment, we consider a property stabilized upon attainment of 90.0% physical occupancy.
For comparison of our three months ended December 31, 2019 and 2018, the same store properties included properties owned at October 1, 2018. Our same store properties for the three months ended December 31, 2019 and 2018 consisted of 26 properties, representing 8,779 units.
For comparison of our twelve months ended December 31, 2019 and 2018, the same store properties included properties owned at January 1, 2018. Our same store properties for the twelve months ended December 31, 2019 and 2018 consisted of 22 properties, representing 7,613 units.
Because of the limited number of same store properties as compared to the number of properties in our portfolio in 2019 and 2018, respectively, our same store performance measures may be of limited usefulness.
The following table presents the same store and non-same store results from operations for the three months ended December 31, 2019 and 2018 (dollars in thousands):
(1)
See “Net Operating Income” below for a reconciliation of Same Store NOI, Non-Same Store NOI and Total NOI to net income (loss) and a discussion of how management uses this non-GAAP financial measure.
The following table presents the same store and non-same store results from operations for the years ended December 31, 2019 and 2018 (dollars in thousands):
(1)
See “Net Operating Income” below for a reconciliation of Same Store NOI, Non-Same Store NOI and Total NOI to net income (loss) and a discussion of how management uses this non-GAAP financial measure.
Three Months Ended December 31, 2019 Compared to Three Months Ended December 31, 2018
Same store NOI for the three months ended December 31, 2019 decreased 0.2%, or $0.04 million, compared to the 2018 period. Same store property revenues increased 2.4% as compared to the 2018 period, primarily attributable to a 3.6% increase in average rental rates as twenty-four of our twenty-six same
store properties recognized rental rate increases during the period. Revenues were moderated by a 120 basis points decrease in average occupancy to 93.6% primarily due to a loss of 27 corporate leases in one asset, and the transition of property management at three assets necessitated by performance issues. Occupancy at the above assets has recovered to 96.2% as of end of January 2020.
Same store expenses for the three months ended December 31, 2019 increased 6.5%, or $0.9 million, compared to the 2018 period, primarily due to non-controllable expense increases. Real estate taxes increased $0.6 million from prior year due to $0.3 million in municipality tax increases and to a $0.3 million real estate tax credit recognized in the prior year. In addition, insurance expenses increased $0.2 million due to industrywide multifamily price increases stemming from carrier losses over the past two years from hurricanes, wildfires, and hail.
Property revenues and property expenses for our non-same store properties increased due to the acquisition and disposition transactions in our portfolio since October 1, 2018; the 2019 non-same store property count was eight compared to seven properties for the 2018 period. The results of operations for acquired properties have been included in our consolidated statements of operations from the date of acquisition and the results of operations for disposed properties have been excluded from the consolidated statements of operations since the date of disposition.
Twelve Months Ended December 31, 2019 Compared to Twelve Months Ended December 31, 2018
Same store NOI for the twelve months ended December 31, 2019 increased 5.8%, or $4.1 million, compared to the 2018 period. Same store property revenues increased 4.8% as compared to the 2018 period, primarily attributable to a 5.2% increase in average rental rates; all twenty-two same store properties recognized rental rate increases during the period. Average occupancy decreased 20 basis points to 94.1%. In addition, other revenue increased $0.4 million related to valet trash service and amenity fees.
Same store expenses for the twelve months ended December 31, 2019 increased 3.4%, or $1.7 million, compared to the 2018 period, primarily due to a $0.9 million increase in non-controllable costs. There was a $0.5 million increase in real estate taxes from annual municipality tax increases and a $0.4 million increase in insurance premiums due to pressure on the overall insurance market stemming from carrier losses over the past two years from hurricanes, wildfires, and hail. The remaining $0.7 million expense increase relates to increases of  $0.23 million in turnover, $0.22 million in repairs and maintenance, $0.16 million in trash valet costs, and $0.12 million in marketing.
Property revenues and property expenses for our non-same store properties increased significantly due to the acquisition and disposition transactions in our portfolio since January 1, 2018; the 2019 non-same store property count was eighteen compared to eleven properties for the 2018 period. The results of operations for acquired properties have been included in our consolidated statements of operations from the date of acquisition and the results of operations for disposed properties have been excluded from the consolidated statements of operations since the date of disposition.
Prior year’s comparisons
For comparison of our three months ended December 31, 2018 and 2017, the same store properties included properties owned at October 1, 2017. Our same store properties for the three months ended December 31, 2018 and 2017 consisted of 24 properties, representing 7,962 units.
For comparison of our twelve months ended December 31, 2018 and 2017, the same store properties included properties owned at January 1, 2017. Our same store properties for the twelve months ended December 31, 2018 and 2017 consisted of 16 properties, representing 5,151 units.
Because of the limited number of same store properties as compared to the number of properties in our portfolio in 2018 and 2017, respectively, our same store performance measures may be of limited usefulness.
The following table presents the same store and non-same store results from operations for the three months ended December 31, 2018 and 2017 (dollars in thousands):
(1)
See “Net Operating Income” below for a reconciliation of Same Store NOI, Non-Same Store NOI and Total NOI to net income (loss) and a discussion of how management uses this non-GAAP financial measure.
The following table presents the same store and non-same store results from operations for the years ended December 31, 2018 and 2017 (dollars in thousands):
(1)
See “Net Operating Income” below for a reconciliation of Same Store NOI, Non-Same Store NOI and Total NOI to net income (loss) and a discussion of how management uses this non-GAAP financial measure.
Three Months Ended December 31, 2018 Compared to Three Months Ended December 31, 2017
Same store NOI for the three months ended December 31, 2018 increased 7.6%, or $1.36 million, compared to the 2017 period. There was a 5.5% increase in same store property revenues as compared to
the 2017 period. The increase was primarily attributable to a 4.8% increase in average rental rates; twenty-three of our twenty-four same store properties recognized rental rate increases during the period. In addition, average occupancy increased 80 basis points to 94.6%. Same store expenses for the three months ended December 31, 2018 increased 2.5%, or $0.32 million, compared to the 2017 period. The increase is primarily due to a $0.15 million increase in payroll, a $0.11 million increase in maintenance, and $0.09 million of additional real estate taxes due to higher valuations by municipalities.
Property revenues and property expenses for our non-same store properties increased significantly due to the properties acquired during 2017 and 2018; the 2018 non-same store property count was 9 compared to 4 properties for the 2017 period. The results of operations for acquired properties have been included in our consolidated statements of operations from the date of acquisition and the results of operations for disposed properties have been excluded from the consolidated statements of operations since the date of disposition.
Twelve Months Ended December 31, 2018 Compared to Twelve Months Ended December 31, 2017
Same store NOI for the twelve months ended December 31, 2018 increased 4.9%, or $2.29 million, compared to the 2017 period. There was a 4.5% increase in same store property revenues as compared to the 2017 period. The increase was primarily attributable to a 4.5% increase in average rental rates; all sixteen same store properties recognized rental rate increases during the period. Average occupancy decreased 30 basis points to 94.1%. The remaining increase was due to a $0.45 million increase in resident fees derived from implementing valet trash fees at twelve same store properties, telecommunication royalty programs and a general increase in resident fees, such as pet, pest and late fees. Same store expenses for the twelve months ended December 31, 2018 increased 4.1%, or $1.38 million, compared to the 2017 period, primarily due to a $0.62 million increase in real estate taxes due to higher valuations by municipalities and $0.38 million attributable to the recurring annual maintenance incurred in current year on certain properties which was not required in prior year as the properties were undergoing renovations. The remaining increase is due to a $0.13 million increase in payroll and a $0.12 million increase in utilities.
Property revenues and property expenses for our non-same store properties increased significantly due to having a full year impact in 2018 from twelve properties acquired during 2017 along with the partial year impact of the five properties acquired in 2018. The results of operations for acquired properties have been included in our consolidated statements of operations from the date of acquisition and the results of operations for disposed properties have been excluded from the consolidated statements of operations since the date of disposition.
Net Operating Income
We believe that net operating income (“NOI”) is a useful measure of our operating performance. We define NOI as total property revenues less total property operating expenses, excluding depreciation and amortization and interest. Other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to other REITs. NOI also is a computation made by analysts and investors to measure a real estate company’s operating performance.
We believe that this measure provides an operating perspective not immediately apparent from GAAP operating income or net income. We use NOI to evaluate our performance on a same store and non-same store basis; NOI allows us to evaluate the operating performance of our properties because it measures the core operations of property performance by excluding corporate level expenses and other items not related to property operating performance and captures trends in rental housing and property operating expenses.
However, NOI should only be used as a supplemental measure of our financial performance. The following table reflects net loss attributable to common stockholders together with a reconciliation to NOI
and to same store and non-same store contributions to consolidated NOI, as computed in accordance with GAAP for the periods presented (amounts in thousands):
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements. Our primary liquidity requirements relate to (a) our operating expenses and other general business needs, (b) distributions to our stockholders, (c) investments and capital requirements to fund development and renovations at existing properties and (d) ongoing commitments to repay borrowings, including our credit facilities and maturing short-term debt, and (e) Class A common stock repurchases under our stock repurchase program.
We believe the properties underlying our real estate investments are performing well with an occupancy of 94.0%, exclusive of our development properties, at December 31, 2019.
On May 17, 2018, the Company filed, and on May 23, 2018, the SEC declared effective on Form S-3 (File No. 333-224990), a shelf registration statement that expires in May 2021 (the “May 2018 Shelf Registration Statement”). The securities covered by the May 2018 Shelf Registration Statement cannot exceed $2,500,000,000 in the aggregate and include common stock, preferred stock, depositary shares representing preferred stock, debt securities, warrants to purchase stock or debt securities and units. The Company may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if these securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of the offering.
On February 24, 2016, we filed a prospectus supplement to our registration statement on Form S-3 (File No. 333-200359) filed with the SEC on November 19, 2014 and declared effective on December 19, 2014 (the “December 2014 Shelf Registration Statement”), offering a maximum of 150,000 Units (the “Series B Units”) consisting of 150,000 shares of Series B Redeemable Preferred Stock (the “Series B Preferred Stock”) and warrants (the “Warrants”) to purchase 3,000,000 shares of Class A common stock (liquidation preference $1,000 per share of Series B Preferred Stock) (the “Series B Preferred Offering”). On July 21, 2017, we filed an additional prospectus supplement to the December 2014 Shelf Registration Statement to increase the size of the Series B Preferred Offering to a maximum of 225,000 shares of our Series B Preferred Stock, and Warrants to purchase a maximum of 4,500,000 shares of our Class A common stock (which maximum amounts were inclusive of those reflected in the original Series B Prospectus Supplement). On November 15, 2017, we filed an additional prospectus supplement to our registration statement on Form S-3 (File No. 333-208956) filed with the SEC on January 13, 2016 and declared effective on January 29, 2016 (the “January 2016 Shelf Registration Statement”), to further increase the size of the Series B Preferred Offering to a maximum of 435,000 shares of our Series B Preferred Stock, and Warrants to purchase a maximum of 8,700,000 shares of our Class A common stock (which maximum amounts were inclusive of those reflected in the additional Series B Prospectus Supplement filed on July 21, 2017). On November 15, 2018, we filed a prospectus supplement to our May 2018 Shelf Registration Statement, to further increase the size of the Series B Preferred Offering by offering an additional 500,000 Units (the “Series B Units”) consisting of 500,000 shares of Series B Redeemable Preferred Stock (the “Series B Preferred Stock”) and warrants (the “Warrants”) to purchase 10,000,000 shares of Class A common stock (liquidation preference $1,000 per share of Series B Preferred Stock).
On October 31, 2019, based on general market conditions and related considerations, the Board determined it to be in the best interest of the Company and its stockholders to replace the Series B Preferred Offering with an offering of up to 32,000,000 shares of a new Series T Redeemable Preferred Stock (the “Series T Preferred Stock”), with a maximum of 20,000,000 shares of Series T Redeemable Preferred Stock offered in the primary offering and an additional 12,000,000 shares of Series T Preferred Stock offered pursuant to a dividend reinvestment plan (collectively, the “Series T Preferred Offering”). On November 13, 2019, we filed a prospectus supplement to our May 2018 Shelf Registration Statement for the Series T Preferred Offering, and on December 20, 2019, we made the initial issuance of Series T Preferred Stock pursuant to the Series T Preferred Offering. As of December 31, 2019, the Company has issued and outstanding 17,400 shares of Series T Preferred Stock.
Also, on December 20, 2019, we made the final issuance of Series B Preferred Stock pursuant to the Series B Preferred Offering. No offers, sales or issuances of Series B Preferred Stock have thereafter been made pursuant to the Series B Preferred Offering, and on February 11, 2020, the Board formally approved the termination of the Series B Preferred Offering. As of December 31, 2019, the Company has issued and
outstanding 536,695 shares of Series B Preferred Stock and 546,146 Warrants to purchase 10,922,920 shares of Class A common stock.
On September 13, 2019, we and our Operating Partnership entered into an At Market Issuance Sales Agreement (the “Class A Sales Agreement”) with B. Riley FBR, Inc. (“FBR”) as sales agent. On November 20, 2019, and again on December 18, 2019, the Class A Sales Agreement was amended to add Robert W. Baird & Co. Incorporated, Compass Point Research and Trading, LLC, JMP Securities LLC and Morgan Stanley & Co. LLC with FBR (collectively, the “Sales Agents”) as sales agents. Pursuant to the Class A Sales Agreement, the Sales Agents will act as distribution agents with respect to the offering and sale of up to $100,000,000 in shares of Class A common stock in “at the market offerings” as defined in Rule 415 under the Securities Act, including without limitation sales made directly on or through the NYSE American, or on any other existing trading market for Class A common stock or through a market maker (the “Class A ATM Offering”). The Company has sold 454,237 shares of Class A common stock through the Class A ATM Offering as of December 31, 2019.
Our total stockholders’ equity decreased $30.8 million from $158.3 million as of December 31, 2018 to $127.5 million as of December 31, 2019. The decrease in our total stockholders’ equity is primarily attributable to distributions declared of  $61.0 million for the year ended December 31, 2019, and repurchase of Class A common stock of  $14.1 million, offset by net income attributable to common stockholders of $36.7 million, proceeds of  $4.4 million from the sale of Warrants in conjunction with the Series B Preferred Stock and the issuance of Class A common stock of  $2.6 million for holder redemptions of Series B Preferred Stock and $7.3 million for Company redemptions of Series B Preferred Stock.
In general, we believe our available cash balances, the proceeds from the Class A ATM Offering and the Series T Preferred Offering, the Senior and Junior Credit Facilities, the Fannie Facility (each as defined below), other financing arrangements and cash flows from operations will be sufficient to fund our liquidity requirements with respect to our existing portfolio for the next 12 months. We expect that properties added to our portfolio with the proceeds from the Class A ATM Offering and the Series T Preferred Offering and from the credit facilities will have a positive impact on our future results of operations. In general, we expect that our results related to our portfolio will improve in future periods as a result of anticipated future investments in and acquisitions of real estate.
We believe we will be able to meet our primary liquidity requirements going forward through:
•
$31.7 million in cash available at December 31, 2019;
•
cash generated from operating activities; and
•
our Class A ATM Offering and our continuous Series T Preferred Offering, proceeds from future borrowings and potential offerings, including potential offerings of common and preferred stock through underwritten offerings, as well as issuances of units of limited partnership interest in our Operating Partnership, or OP Units.
Our primary long-term liquidity requirements relate to (a) costs for additional apartment community investments; (b) repayment of long-term debt and our credit facilities; (c) capital expenditures; and (d) cash redemption requirements related to our Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series T Preferred Stock, and (e) Class A common stock repurchases under our stock repurchase program.
In February 2018, we authorized the repurchase of up to $25 million of our outstanding shares of Class A common stock over a period of one year pursuant to a stock repurchase plan. In December 2018, we renewed our stock repurchase plan for a period of one year and announced a new plan for the repurchase of up to $5.0 million of our outstanding shares of Class A common stock in accordance with the guidelines specified under Rule 10b5-1 of the Exchange Act, which shares were applied against the $25 million under our original stock repurchase plan. On December 20, 2019, the Company authorized new stock repurchase plans for the repurchase of up to an aggregate of  $50 million of the Company’s outstanding shares of Class A common stock, to be conducted in accordance with the Rules 10b5-1 and 10b-18 of the Exchange Act. The stock repurchase plans will terminate upon the earliest to occur of certain specified events as set forth therein. The extent to which the Company repurchases shares of its Class A common stock
under the stock repurchase plans, and the timing of any such purchases, depends on a variety of factors including general business and market conditions and other corporate considerations. Repurchases under the stock repurchase plans may be made in the open market or through privately negotiated transactions, subject to certain price limitations and other conditions established thereunder. Open market repurchases will be structured to occur within the method, timing, price and volume requirements of Rule 10b-18 of the Exchange Act. During the year ended December 31, 2019, the Company purchased 1,313,328 shares of Class A common stock under its stock repurchase plans for a total purchase price of approximately $14.1 million.
We intend to finance our long-term liquidity requirements with net proceeds of additional issuances of common and preferred stock, including our Class A ATM Offering, our Series T Preferred Offering, our credit facilities, as well as future borrowings. Our success in meeting these requirements will therefore depend upon our ability to access capital. Further, our ability to access equity capital is dependent upon, among other things, general market conditions for REITs and the capital markets generally, market perceptions about us and our asset class, and current trading prices of our securities.
As we did in 2019 and 2017, we may also selectively sell assets at appropriate times, which would be expected to generate cash sources for both our short-term and long-term liquidity needs.
We may also meet our long-term liquidity needs through borrowings from a number of sources, either at the corporate or project level. In October 2017, we entered into a credit agreement with KeyBank National Association (“KeyBank”) and a syndicate of other lenders, which currently provide for a loan commitment amount of  $75 million, with an accordion feature to a maximum commitment of up to $175 million (the “Senior Credit Facility”). In addition, in November 2019, we entered into an amended and restated credit agreement with KeyBank and other lenders providing for a revolving loan facility with a maximum commitment amount of  $72.5 million (the “Junior Credit Facility”). We believe these facilities will enable us to deploy our capital more efficiently and provide capital structure flexibility as we grow our asset base. Additionally, we instituted a Master Credit Facility Agreement issued through Fannie Mae’s Multifamily Delegated Underwriting and Servicing Program (the “Fannie Facility”), under which we closed our first property on April 30, 2018. We expect the combination of these facilities to provide us flexibility by allowing us, among other things, to use borrowings under our Senior Credit Facility and Junior Credit Facility to acquire properties pending placement of permanent mortgage indebtedness, including under the Fannie Facility. In addition to restrictive covenants, these credit facilities contain material financial covenants. At December 31, 2019, we were in compliance with all covenants under our credit facilities. We will continue to monitor the debt markets, including Fannie Mae and Freddie Mac, and as market conditions permit, access borrowings that are advantageous to us.
We intend to continue to use prudent amounts of leverage in making our investments, which we define as having total indebtedness of approximately 65% of the fair market value of the properties in which we have invested. For purposes of calculating our leverage, we assume full consolidation of all of our real estate investments, whether or not they would be consolidated under GAAP, include assets we have classified as held for sale, and include any joint venture level indebtedness in our total indebtedness. However, we are not subject to any limitations on the amount of leverage we may use, and accordingly, the amount of leverage we use may be significantly less or greater than we currently anticipate. We expect our leverage to decline commensurately as we execute our business plan to grow our net asset value.
If we are unable to obtain financing on favorable terms or at all, we would likely need to curtail our investment activities, including acquisitions and improvements to and developments of, real properties, which could limit our growth prospects. This, in turn, could reduce cash available for distribution to our stockholders and may hinder our ability to raise capital by issuing more securities or borrowing more money. We also may be forced to dispose of assets at inopportune times in order to maintain our REIT qualification and Investment Company Act exemption.
We expect to maintain a distribution paid to our Series A Preferred Stock, our Series B Preferred Stock, our Series C Preferred Stock, our Series D Preferred Stock and our Series T Preferred Stock in accordance with the terms of those securities which require monthly or quarterly dividends depending on the series. On December 20, 2017, we announced that our Board revised the dividend policy for the Class A Common Stock and set an annual dividend rate of  $0.65 per share. The Board’s evaluation considered a
number of factors including, but not limited to, achieving a sustainable dividend covered by current recurring AFFO (vs. pro forma AFFO), multifamily and small cap peer dividend rates and payout ratios, providing financial flexibility for the Company, and achieving an appropriate balance between the retention of capital to invest and grow net asset value and the importance of current distributions. While our policy is generally to pay distributions from cash flow from operations, our distributions through December 31, 2019 have been paid from cash flow from operations, proceeds from our continuous registered public offering, proceeds from the IPO and follow-on offerings, and sales of assets and may in the future be paid from additional sources, such as from borrowings.
We have preferred membership interests in development projects in various stages of completion and lease-up. Our preferred investments are generally structured to provide a current preferred return during the development and lease-up phase. We have the right, in certain development joint ventures, to convert our preferred membership interest, in our sole discretion, into a common membership interest for a period of six months from the date upon which 70% of the units in the related development project have been leased and occupied. If we elect to convert one or more of these investments into common ownership, our income, FFO, CFFO and cash flows would be reflective of our pro rata share of the property’s results, which may be a reduction from what our preferred membership interest currently generates. Alternatively, if we do not convert, and/or the joint ventures do not redeem our preferred membership interest when required, our income, FFO, CFFO and cash flows could be reduced if the development project does not produce sufficient cash flow to pays its operating expenses, debt service and preferred return obligations.
Each joint venture in which we own a preferred membership interest is required to redeem our preferred membership interests plus any accrued but unpaid preferred return on either a certain date or earlier upon the occurrence of certain events. Upon redemption of the preferred membership interests, our income, FFO, CFFO and cash flows could be reduced below the preferred returns currently being recognized.
We have senior or mezzanine loan investments in operating or development projects in various stages of completion and lease-up. Our loan investments are generally structured to provide a current and/or accrued interest return during the operating or development and lease-up phase. If the borrower experiences operating difficulties or delays in development or lease-up and are unable to pay the required debt service on one or more of these investments, our income, FFO, CFFO and cash flows may be reduced from what our loan investment currently generates.
Each entity in which we have a loan investment is required to repay the loan plus any accrued but unpaid return on either a certain date or earlier upon the occurrence of certain events. Upon payoff of the loan investment, our income, FFO, CFFO and cash flows could be reduced below the returns currently being recognized.
Cash Flows
Year ended December 31, 2019 as compared to the year ended December 31, 2018
As of December 31, 2019, we owned interests in fifty-three real estate properties, thirty-five consolidated operating properties and eighteen through preferred equity and mezzanine loan investments. During the year ended December 31, 2019, net cash provided by operating activities was $63.3 million after net income of $29.1 million was adjusted for the following:
•
Non-cash items of  $33.4 million;
•
Distributions and preferred returns from unconsolidated joint ventures of  $9.0 million; offset by
•
a decrease in accounts payable, accrued liabilities and distributions of  $3.4 million;
•
an increase in accounts receivable, prepaid expenses and other assets of  $4.5 million; and
•
a decrease in due to affiliates of  $0.3 million.
Cash Flows from Investing Activities
During the year ended December 31, 2019, net cash used in investing activities was $310.6 million, primarily due to the following:
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$516.2 million used in acquiring consolidated real estate investments;
•
$9.9 million used in purchases of interests from noncontrolling members;
•
$126.0 million used in acquiring investments in unconsolidated joint ventures and notes receivable;
•
$21.4 million used on capital expenditures; offset by
•
$12.1 million of repayments on notes receivable from related parties;
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$313.8 million of proceeds from the sale of depreciable and non-depreciable real estate investments; and
•
$36.6 million proceeds from sale of unconsolidated real estate real estate joint ventures.
Cash Flows from Financing Activities
During the year ended December 31, 2019, net cash provided by financing activities was $245.8 million, primarily due to the following:
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net borrowings of  $450.2 million on mortgages payable;
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net proceeds of  $133.5 million from borrowings on revolving credit facilities;
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net proceeds of  $213.4 million from issuance of Units of Series B Preferred Stock and Warrants;
•
net proceeds of  $5.3 million from issuance of Class A common stock;
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net proceeds of  $0.4 million from issuance of Units of Series T Preferred Stock;
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$3.5 million in capital contributions from noncontrolling interests;
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partially offset by $14.9 million in distributions paid to common stockholders;
•
$45.1 million paid in cash distribution paid to preferred stockholders;
•
$9.1 million paid in cash distribution paid to noncontrolling interests;
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$274.7 million of repayments of our mortgages payable;
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$197.7 million of repayments of revolving credit facilities;
•
$4.8 million increase in deferred financing costs; and
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$14.1 million paid for repurchase of Class A common stock.
Operating Activities
Net cash flow provided by operating activities decreased $1.2 million in 2019 compared to 2018 primarily due to:
•
Operating income, adjusted for non-cash activity, increased $11.3 million as a result of our acquisitions (net of dispositions);
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Net due to affiliates increased $1.7 million; offset by
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Decrease in net distributions of income and preferred returns from preferred equity investments of $0.5 million;
•
Decrease in accounts payable and other accrued liabilities of  $11.2 million; and
•
An increase in accounts receivable, prepaid expenses and other assets of  $2.5 million.
Investing Activities
Net cash used in investing activities decreased $96.3 million in 2019 compared to 2018 primarily due to:
•
Acquisition of real estate investments and capital expenditures increased $182.9 million;
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Increase in investment in notes receivable of  $29.7 million;
•
Higher investments in unconsolidated real estate joint ventures interests of  $56.4 million; offset by
•
Higher proceeds from sales of joint venture interests and real estate investments of  $350.4 million;
•
Lower purchases from noncontrolling interests of  $2.3 million; and
•
Repayments on notes receivable from related parties of  $12.1 million.
Financing Activities
Cash flows from financing activities were $245.8 million in 2019 as compared to $330.1 million in 2018. This decrease of  $84.3 million is primarily explained by:
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A decrease in net mortgage borrowings of  $93.8 million;
•
An increase in distributions paid of  $13.9 million;
•
A decrease in contributions from noncontrolling interests of  $10.1 million;
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A decrease in revolving credit facility borrowings of  $89.0 million and an increase in repayments of $10.3 million;
•
An increase in Class A common stock repurchases of  $5.1 million; offset by
•
An increase in the Series B preferred stock continuous offering of  $104.0 million;
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An increase in other stock offerings of  $5.7 million;
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A decrease in purchase of interest rate caps of  $5.2 million; and
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A decrease in deferred financing costs of  $2.5 million.
Capital Expenditures
The following table summarizes our total capital expenditures incurred for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands):
Redevelopment and renovation costs are non-recurring capital expenditures for significant projects that are revenue enhancing through unit or common area upgrades, such as clubhouse renovations and kitchen remodels. Routine capital expenditures are necessary non-revenue generating improvements that extend the useful life of the property and that are less frequent in nature, such as roof repairs and asphalt resurfacing. Normally recurring capital expenditures are necessary non-revenue generating improvements that occur on a regular ongoing basis, such as carpet and appliances.
Funds from Operations and Core Funds from Operations Attributable to Common Stockholders and Unit Holders
We believe that funds from operations (“FFO”), as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), and core funds from operations (“CFFO”) are important non-GAAP supplemental measures of operating performance for a REIT.
FFO attributable to common stockholders and unit holders is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We consider FFO to be an appropriate supplemental measure of our operating performance as it is based on a net income analysis of property portfolio performance that excludes non-cash items such as depreciation. The historical accounting convention
used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. We define FFO, consistent with the NAREIT definition, as net income, computed in accordance with GAAP, excluding gains or losses on sales of depreciable real estate property, plus depreciation and amortization of real estate assets, plus impairment write-downs of depreciable real estate, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.
CFFO makes certain adjustments to FFO, removing the effect of items that do not reflect ongoing property operations such as acquisition expenses, non-cash interest, unrealized gains or losses on derivatives, losses on extinguishment of debt and debt modification costs (includes prepayment penalties incurred and the write-off of unamortized deferred financing costs and fair market value adjustments of assumed debt), one-time weather-related costs, gains or losses on sales of non-depreciable real estate property, shareholder activism, stock compensation expense and preferred stock accretion. We believe that CFFO is helpful to investors as a supplemental performance measure because it excludes the effects of certain items which can create significant earnings volatility, but which do not directly relate to our core recurring property operations. As a result, we believe that CFFO can help facilitate comparisons of operating performance between periods and provides a more meaningful predictor of future earnings potential.
Our calculation of CFFO differs from the methodology used for calculating CFFO by certain other REITs and, accordingly, our CFFO may not be comparable to CFFO reported by other REITs. Our management utilizes FFO and CFFO as measures of our operating performance after adjustment for certain non-cash items, such as depreciation and amortization expenses, and acquisition and pursuit costs that are required by GAAP to be expensed but may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO and CFFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we also believe that FFO and CFFO may provide us and our stockholders with an additional useful measure to compare our financial performance to certain other REITs.
Neither FFO nor CFFO is equivalent to net income, including net income attributable to common stockholders, or cash generated from operating activities determined in accordance with GAAP. Furthermore, FFO and CFFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor CFFO should be considered as an alternative to net income, including net income attributable to common stockholders, as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.
We have acquired seven operating properties, made six property investments through preferred equity interests or mezzanine loans and sold seven operating properties subsequent to December 31, 2018. As of December 31, 2018, we had acquired five operating properties and made three property investments through preferred equity interests or mezzanine loans subsequent to December 31, 2017. The results presented in the table below are not directly comparable and should not be considered an indication of our future operating performance.
The table below presents our calculation of FFO and CFFO for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands, except per share amounts):
(1)
The real estate depreciation and amortization amount includes our share of consolidated real estate-related depreciation and amortization of intangibles, less amounts attributable to noncontrolling interests for partially owned properties, and our similar estimated share of unconsolidated depreciation and amortization, which is included in earnings of our unconsolidated real estate joint venture investments.
Operating cash flow, FFO and CFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO and CFFO.
Presentation of this information is intended to assist the reader in comparing the sustainability of the operating performance of different REITs, although it should be noted that not all REITs calculate FFO or CFFO the same way, so comparisons with other REITs may not be meaningful. FFO or CFFO should not be considered as an alternative to net income (loss) attributable to common stockholders or as an indication of our liquidity, nor is either indicative of funds available to fund our cash needs, including our ability to make distributions. Both FFO and CFFO should be reviewed in connection with other GAAP measurements.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2019 which consisted of mortgage notes secured by our properties and revolving credit facilities. At December 31, 2019, our estimated future required payments on these obligations were as follows (amounts in thousands):
Estimated interest payments are based on the stated rates for mortgage notes payable and revolving credit facility assuming the interest rate in effect for the most recent quarter remains in effect through the respective maturity dates.
Distributions
(1)
Shares of Series B Preferred Stock issued on or after October 28, 2019 and all newly-issued shares of Series T Preferred Stock that are held only a portion of the applicable monthly dividend period will receive a prorated monthly dividend based on the actual number of days in the applicable dividend period during which each such share of Series B Preferred Stock or Series T Preferred Stock was outstanding.
A portion of each dividend may constitute a return of capital for tax purposes. There is no assurance that we will continue to declare dividends or at this rate. Holders of OP Units and LTIP Units are entitled to receive “distribution equivalents” at the same time as dividends are paid to holders of our Class A common stock.
We have a dividend reinvestment plan that allows for participating stockholders to have their Class A common stock dividend distributions automatically reinvested in additional Class A common shares based on the average price of the Class A common shares on the investment date. We plan to issue Class A common shares to cover shares required for investment.
We also have a dividend reinvestment plan that allows for participating stockholders to have their Series T Preferred Stock dividend distributions automatically reinvested in additional shares of Series T Preferred Stock at a price of  $25.00 per share. We plan to issue shares of Series T Preferred Stock to cover shares required for investment.
Our Board will determine the amount of dividends to be paid to our stockholders. The determination of our Board will be based on several factors, including funds available from operations, our capital expenditure requirements and the annual distribution requirements necessary to maintain our REIT status under the Internal Revenue Code. As a result, our distribution rate and payment frequency may vary from time to time. However, to qualify as a REIT for tax purposes, we must make distributions equal to at least 90% of our “REIT taxable income” each year. While our policy is generally to pay distributions from cash flow from operations, we may declare distributions in excess of funds from operations.
Distributions for the year ended December 31, 2019 were as follows (amounts in thousands):
Declaration of Dividends
(1)
Shares of newly-issued Series T Preferred Stock and held only a portion of the applicable monthly dividend period will receive a prorated monthly Series T Preferred Stock dividend based on the actual number of days in the applicable dividend period during which each such share of Series T Preferred Stock was outstanding.
Critical Accounting Policies
Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain.
Our consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control. All inter-company transactions, balances, and profits have been eliminated in consolidation. Interests in entities acquired will be evaluated based on applicable GAAP, which includes the requirement to consolidate entities deemed to be variable interest entities (“VIE”).
Principles of Consolidation and Basis of Presentation
Our consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control. All inter-company transactions, balances, and profits have been eliminated in consolidation. Interests in entities acquired will be evaluated based on applicable GAAP, which includes the requirement to consolidate entities deemed to be VIEs in which we are the primary beneficiary. If the
entity in which we hold an interest is determined not to be a VIE, then the entity will be evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.
There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and, if so, whether we are the primary beneficiary. The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity. A change in the judgments, assumptions, and estimates used could result in consolidating an entity that should not be consolidated or accounting for an investment using the equity method that should in fact be consolidated, the effects of which could be material to our financial statements.
Real Estate Asset Acquisition and Valuation
Upon the acquisition of real estate properties, we recognize the assets acquired, the liabilities assumed, and any noncontrolling interest as of the acquisition date, measured at their fair values. Acquisition-related costs are capitalized in the period incurred. We assess the acquisition-date fair values of all tangible assets, identifiable intangible assets and assumed liabilities using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis) and that utilize appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it was vacant.
Intangible assets include the value of in-place leases, which represents the estimated value of the net cash flows of the in-place leases to be realized, as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease-up. We amortize the value of in-place leases to expense over the remaining non-cancelable term of the respective leases, which on average is six months. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles would be charged to expense in that period.
Estimates of the fair values of the tangible assets, identifiable intangible assets and assumed liabilities require us to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate assumptions could result in an incorrect valuation of acquired tangible assets, identifiable intangible assets and assumed liabilities, which could impact the amount of our net income (loss).
Our significant accounting policies are more fully described in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our Notes to the Consolidated Financial Statements. Certain of our accounting policies require management to make estimates and judgments regarding uncertainties that may affect the reported amounts presented and disclosed in our consolidated financial statements. These estimates and judgments are affected by management’s application of accounting policies. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods.
We base these estimates on historical experience and various other factors that are believed to be reasonable, the results of which form the basis for making judgments under the circumstances. Due to the inherent uncertainty involved in making these estimates, actual results reported may differ from these estimates under different situations or conditions. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. We consider an accounting estimate to be significant if it requires us to make assumptions about matters that were uncertain at the time the estimate was made and changes in the estimate would have had a significant impact on our consolidated financial position or results of operations.
Revenue Recognition
Rental income related to tenant leases is recognized on an accrual basis over the terms of the related leases on a straight-line basis. Amounts received in advance are recorded as a liability within other related liabilities.
Other property revenues are recognized in the period earned.
The Company recognizes a gain or loss on the sale of real estate assets when the criteria for an asset to be derecognized are met, which include when (i) a contract exists and (ii) the buyer obtains control.
Investments in Joint Ventures
We accounted for the acquisitions of our interests in properties through managing member limited liability companies (“LLCs”) in accordance with the provisions of the Consolidation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).
We analyze an investment to determine if it is a variable interest entity (a “VIE”) and, if so, whether we are the primary beneficiary requiring consolidation. A VIE is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership, or other financial interests in a VIE that change in value with changes in the fair value of the VIE’s net assets. We continuously re-assess at each level of the investment whether the entity is (i) a VIE, and (ii) if we are the primary beneficiary of the VIE. If it was determined that the entity in which we hold an interest qualified as a VIE and we were the primary beneficiary, the entity would be consolidated.
If after consideration of the VIE accounting literature, we have determined that an entity is not a VIE, the Company assesses the need for consolidation under all other provisions of ASC 810. These provisions provide for consolidation of majority-owned entities where majority voting interest held by the Company provides control, or through determination of control by virtue of the Company being the general partner in a limited partnership or the controlling member of a limited liability company.
In assessing whether we are in control of and requiring consolidation of the limited liability company and partnership venture structures we evaluate the respective rights and privileges afforded each member or partner (collectively referred to as “member”). Our member would not be deemed to control the entity if any of the other members have either (i) substantive kickout rights providing the ability to dissolve (liquidate) the entity or otherwise remove the managing member or general partner without cause or (ii) has substantive participating rights in the entity. Substantive participating rights (whether granted by contract or law) provide for the ability to effectively participate in significant decisions of the entity that would be expected to be made in the ordinary course business.
If it has been determined that we do not have control, but do have the ability to exercise significant influence over the entity, we generally account for these unconsolidated investments under the equity method. The equity method of accounting requires these investments to be initially recorded at cost and subsequently increased (decreased) for our share of net income (loss), including eliminations for our share of inter-company transactions, and increased (decreased) for contributions (distributions). The proportionate share of the results of operations of these investments is reflected in our earnings or losses.
Off-Balance Sheet Arrangements
As of December 31, 2019, we have off-balance sheet arrangements that may have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures. As of December 31, 2019, we own interests in fifteen joint ventures that are accounted for under the equity method as we exercise significant influence over, but do not control, the investee.
New Accounting Pronouncements
See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our Notes to the Consolidated Financial Statements for a description of accounting pronouncements. We do not believe these new pronouncements will have a significant impact on our Consolidated Financial Statements, cash flows or results of operations.
Subsequent Events
Issuance of LTIP Units under the Third Amended 2014 Incentive Plans
On January 1, 2020, the Company granted certain equity grants of LTIPs of the Company’s Operating Partnership to various executive officers under the Third Amended 2014 Incentive Plans. These awards, amounting to 741,417 LTIPs, were issued pursuant to the executive officers’ employment and service agreements as time-based LTIPs and performance-based LTIPs. All of these LTIP grants require continuous employment for vesting. Time-based LTIPs were issued amounting to 247,138 LTIPs that vest over approximately three years. Performance-based LTIPs were issued amounting to 494,279 LTIPs, are subject to a three-year performance period, and will thereafter vest upon successful achievement of performance-based conditions.
In addition, on January 1, 2020, the Company granted 7,126 LTIP Units pursuant to the Third Amended 2014 Incentive Plans to each independent member of the Board in payment of the equity portion of their respective annual retainers. The LTIP Units vested immediately upon issuance.
Distributions Declared
On January 13, 2020 our Board authorized, and we declared monthly dividends for the first quarter of 2020 equal to monthly rate of  $5.00 per share on our Series B Preferred Stock, payable monthly to the stockholders of record as of January 24, 2020, February 25, 2020 and March 25, 2020, which was paid in cash on February 5, 2020, and which will be paid in cash on March 5, 2020 and April 3, 2020, respectively.
On January 13, 2020 our Board authorized, and we declared monthly dividends for the first quarter of 2020 equal to monthly rate of  $0.128125 per share on our Series T Preferred Stock, payable monthly to the stockholders of record as of January 24, 2020, February 25, 2020 and March 25, 2020, which was paid in cash on February 5, 2020, and which will be paid in cash on March 5, 2020 and April 3, 2020, respectively. Newly-issued shares of Series T Preferred Stock held for only a portion of the applicable monthly dividend period will receive a prorated Series T preferred Stock dividend based on the actual number of days in the applicable dividend period during which each shares of Series T Preferred Stock was outstanding.
Distributions Paid
The following distributions have been paid subsequent to December 31, 2019 (amounts in thousands):
Stock Activity
Subsequent to December 31, 2019 and as of February 20, 2020, we have completed the following activity as it relates to our Class A common stock and Series B Preferred Stock (refer to Note 13 - Stockholders’ Equity of our consolidated financial statements for further information):
•
sold 166,873 shares of Class A common stock through the Class A ATM Offering with net proceeds of  $2.0 million;
•
initiated the redemption of 15,822 shares of Series B Preferred Stock through the issuance of 1,334,501 Class A common shares; and
•
purchased 351,255 shares of Class A common stock under the stock repurchase plan for a total purchase price of approximately $4.1 million.
Sale of Helios
On January 8, 2020, an underlying asset of an unconsolidated joint venture located in Atlanta, Georgia known as Helios was sold for approximately $65.6 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for the payoff of existing mortgage indebtedness encumbering the property in the amount of  $39.5 million and the payment of early extinguishment of debt costs, closing costs and fees, our pro rata share of the net proceeds was $22.7 million, which included payment for our original investment of  $19.2 million and our additional investment of approximately $3.5 million.
Acquisition of Avenue 25
On January 23, 2020, we, through subsidiaries of our Operating Partnership, acquired a 100% interest in a 254-unit apartment community located in Phoenix, Arizona known as Avenue 25 for approximately $55.6 million. The purchase price of  $55.6 million was funded, in part, with a $29.7 million loan assumption and a $6.9 million supplemental loan secured by the Avenue 25 property.
Sale of Whetstone Apartments
On January 22, 2020, BRG Whetstone Durham, LLC entered into a membership interest purchase agreement to purchase 100% of the common membership interest in BR Whetstone Member, LLC from Fund III. In conjunction with this transaction, BR Whetstone Member, LLC, along with BRG Avenue 25 TRS, LLC, a wholly-owned subsidiary of our Operating Partnership, entered into a membership purchase agreement to purchase the right to all the economic interest promote and the common membership interest of 7.5% held in the joint venture from an unaffiliated member of the joint venture.
On January 24, 2020, we, through a subsidiary of our Operating Partnership, closed on the sale of Whetstone Apartments located in Durham, North Carolina for approximately $46.5 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for the payoff of existing mortgage indebtedness encumbering the property in the amount of  $25.4 million and the payment of early extinguishment of debt costs, closing costs and fees, our net proceeds were $19.6 million, which included payment for our original investment of  $12.9 million, payment of our accrued preferred return of  $2.7 million, and our additional investment of approximately $4.0 million.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate risk primarily through borrowing activities. There is inherent roll-over risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and our future financing requirements. We are not subject to foreign exchange rates or commodity price risk, and all of our financial instruments were entered into for other than trading purposes.
Our interest rate risk is monitored using a variety of techniques. The table below presents the principal payments and the weighted average interest rates on outstanding debt, by year of expected maturity, to
evaluate the expected cash flows and sensitivity to interest rate changes. Fair value adjustments and unamortized deferred financing costs, net, of approximately $(9.8) million are excluded:
The fair value (in thousands) is estimated at $1,436.2 million for mortgages payable as of December 31, 2019.
The table above incorporates those exposures that exist as of December 31, 2019; it does not consider those exposures or positions which could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period and interest rates.
Based on our debt and interest rates in effect at December 31, 2019, a 100 basis point increase or decrease in interest rates on the portion of our debt bearing interest at variable rates would increase future interest expense by approximately $2.5 million or decrease by $3.1 million, respectively, on an annual basis.
Item 8.
Item 8.
Financial Statements and Supplementary Data
The information required by this Item 8 is hereby included in our Consolidated Financial Statements beginning on page of the Annual Report on Form 10-K.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under 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 management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of December 31, 2019, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2019, to provide reasonable assurance that information required to be disclosed by us in this report filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of December 31, 2019, the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting, as of December 31, 2019, were effective.
Report from Our Independent Registered Public Accounting Firm
Grant Thornton LLP, our independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, and issued a report which appears on page of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There has been no change in internal control over financial reporting that occurred during the quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
Our Executive Officers and Directors
The individuals listed as our executive officers below serve to manage the day-to-day affairs and carry out the directives of our Board in the review, selection and recommendation of investment opportunities and operating acquired investments and monitoring the performance of those investments to ensure that they are consistent with our investment objectives. The duties that these executive officers perform also include the performance of corporate governance activities on our behalf that require the attention of our corporate officers, including signing certifications required under Sarbanes-Oxley Act of 2002, as amended, for filing with the periodic reports.
The following table and biographical descriptions set forth certain information with respect to the individuals who currently serve as our executive officers and directors:
Name*
Age**
Position
Year First
Became
Director
R. Ramin Kamfar
Chairman of the Board and Chief Executive Officer
Jordan B. Ruddy
Chief Operating Officer and President
N/A
James G. Babb, III
Chief Investment Officer
N/A
Ryan S. MacDonald
Chief Acquisitions Officer
N/A
Christopher J. Vohs
Chief Financial Officer and Treasurer
N/A
Michael L. Konig
Chief Legal Officer and Secretary
N/A
Michael DiFranco
Executive Vice President, Operations
N/A
I. Bobby Majumder
Independent Director
Romano Tio
Independent Director
Elizabeth Harrison
Independent Director
Kamal Jafarnia
Independent Director
*
The address of each executive officer and director listed is 1345 Avenue of the Americas, 32nd Floor, New York, New York 10105.
**
As of February 6, 2020.
R. Ramin Kamfar, Chairman of the Board and Chief Executive Officer. Mr. Kamfar serves as our Chairman of the Board and as our Chief Executive Officer. Mr. Kamfar has served as our Chairman of the Board since August 2008, and also served as our President from April 2014 until October 2017. Mr. Kamfar also served as Chief Executive Officer of our former advisor, Bluerock Multifamily Advisor, LLC, from August 2008 to February 2013. He has also served as the Chairman of the Board and Chief Executive Officer of Bluerock since its inception in October 2002, where he has overseen the acquisition and development of approximately 28,900 apartment units, and over 2.5 million square feet of office space. In addition, Mr. Kamfar has served as Chairman of the Board of Trustees and as a Trustee of Bluerock Total Income + Real Estate Fund, a closed-end interval fund organized by Bluerock, since 2012. Mr. Kamfar has approximately 30 years of experience in various aspects of real estate, mergers and acquisitions, private equity investing, investment banking, and public and private financings. From 1988 to 1993, Mr. Kamfar worked as an investment banker at Lehman Brothers Inc., New York, New York, where he specialized in mergers and acquisitions and corporate finance. In 1993, Mr. Kamfar left Lehman to focus on private equity transactions. From 1993 to 2002, Mr. Kamfar executed a growth/consolidation strategy to build a startup into a leading public company in the ‘fast casual’ market now known as Einstein Noah Restaurant Group, Inc. with approximately 800 locations and $400 million in gross revenues. From 1999 to 2002, Mr. Kamfar also served as an active investor, advisor and member of the Board of Directors of Vsource, Inc., a technology company subsequently sold to Symphony House (KL: SYMPHNY), a leading business process outsourcing
company focused on the Fortune 500 and Global 500. Mr. Kamfar received an M.B.A. degree with distinction in Finance in 1988 from The Wharton School of the University of Pennsylvania, located in Philadelphia, Pennsylvania, and a B.S. degree with distinction in Finance in 1985 from the University of Maryland located in College Park, Maryland.
Jordan B. Ruddy, Chief Operating Officer and President. Mr. Ruddy serves as our Chief Operating Officer and President. Mr. Ruddy also served as the President of our former Manager from February 2013 to October 2017. Mr. Ruddy joined Bluerock in 2002 and has continuously served in various senior management capacities for it and its affiliates, including as Bluerock’s President until January 2013, as President of Bluerock Total Income + Real Estate Fund and co-portfolio manager for its advisor of since October of 2013. Mr. Ruddy has approximately 30 years of experience in real estate acquisitions, financings, management and dispositions. From 2000 to 2001, Mr. Ruddy served as a real estate investment banker at Banc of America Securities LLC. From 1997 to 2000, Mr. Ruddy served as Vice President of Amerimar Enterprises, a real estate company specializing in value-added investments nationwide, where he managed acquisitions, financings, leasing, asset management and dispositions involving over 1.5 million square feet of commercial and multifamily real estate. From 1995 to 1997, Mr. Ruddy served as a real estate investment banker at Smith Barney Inc. From 1988 to 1993, Mr. Ruddy served in the real estate department of The Chase Manhattan Bank, most recently as a Second Vice President. Mr. Ruddy received an M.B.A. degree in Finance and Real Estate in 1995 from The Wharton School of the University of Pennsylvania, located in Philadelphia, Pennsylvania, and a B.S. degree with high honors in Economics in 1986 from the London School of Economics, located in London, England.
James G. Babb, III, Chief Investment Officer. Mr. Babb serves as our Chief Investment Officer. Mr. Babb previously served as Chief Investment Officer of our former Manager from November 2013 until October 2017, as a director of the Company until April 2, 2014, as our Chief Investment Officer from July 2008 until November 2013, as our President from July 2008 until August 2012, and as the President of our former advisor from July 2008 until February 2013. Mr. Babb joined Bluerock in 2007 and served as its Chief Investment Officer through October 2017, and as a Trustee of Bluerock Total Income + Real Estate Fund from 2012 until November 2019. He has been involved exclusively in real estate acquisition, management, financing and disposition for approximately 30 years. From 1992 to August 2003, Mr. Babb helped lead the residential and office acquisitions initiatives for Starwood Capital Group, or Starwood Capital. Starwood Capital was formed in 1992 and during his tenure raised and invested funds on behalf of institutional investors through seven private real estate funds, which in the aggregate ultimately invested approximately $8 billion in approximately 250 separate transactions and was also active in Starwood Capital’s efforts to expand its platform to invest in Europe. From August 2003 to July 2007, Mr. Babb founded Bluepoint Capital, LLC, a private real estate investment company focused on the acquisition, development and/or redevelopment of residential and commercial properties. Mr. Babb received a B.A. degree in Economics in 1987 from the University of North Carolina at Chapel Hill.
Ryan S. MacDonald, Chief Acquisitions Officer. Mr. MacDonald serves as our Chief Acquisitions Officer. Mr. MacDonald joined Bluerock in 2008 and has continuously served in various senior acquisition and disposition capacities for it and its affiliates, including as Senior Vice President - Investments of our former Manager from November 2013 through February 2016, and as Managing Director - Investments for our former Manager from March 2016 through October 2017. To date, with Bluerock, Mr. MacDonald has been involved with real estate transactions with an aggregate value of approximately $5.0 billion. Prior to joining Bluerock, from 2006 to 2008, Mr. MacDonald was an Analyst for PNC Realty Investors (formerly Mercantile Real Estate Advisors), where he served as part of an investment team that made more than $1.2 billion in investments within all tranches of the capital structure. From 2005 to 2006, Mr. MacDonald served in a corporate development role at Mercantile Bankshares, where he worked with Executive Management focusing on high level strategic initiatives for the $6 billion bank. Mr. MacDonald received a B.A. in Economics in 2005 from the University of Maryland, College Park.
Christopher J. Vohs, Chief Financial Officer and Treasurer. Mr. Vohs serves as our Chief Financial Officer and Treasurer. Mr. Vohs previously served as our Chief Accounting Officer and Treasurer from August 2013 through October 2017. Mr. Vohs joined Bluerock in July 2010 and has continuously served in various senior accounting and financial capacities for it and its affiliates, including as Bluerock’s Chief Accounting Officer from July 2010 until October 2017. In his role as Chief Accounting Officer for Bluerock
and our former advisor, Bluerock Multifamily Advisor, LLC, and our former Manager, all of which are affiliates of our Company, Mr. Vohs has been responsible for the oversight of all financial recordkeeping and reporting aspects of those companies. Previously, Mr. Vohs served as Corporate Controller for Roberts Realty Investors, Inc., a public multifamily REIT based in Atlanta, Georgia, from March 2009 to July 2010, where he was responsible for the accounting and financial reporting for the REIT. From October 2004 to March 2009, Mr. Vohs worked at Pulte Homes, a nationwide builder of single family homes, in various financial roles, including as Internal Audit Manager & Asset Manager and later as Vice President of Finance for Pulte’s Orlando and Southeast Florida operations. As Vice President of Finance, Mr. Vohs was responsible for all finance, accounting, and administrative operations of the division. From January 1999 to October 2004, Mr. Vohs worked as an Audit Manager for Deloitte & Touche, an international professional services firm, where he earned his CPA certification and focused on mid-size to large private and public companies in the manufacturing, finance, and communications industries. Mr. Vohs received his B.A. degree in Accounting from Michigan State University in 1998.
Michael L. Konig, Chief Legal Officer and Secretary. Mr. Konig, through his wholly-owned limited liability company, Konig & Associates, LLC, serves as our Chief Legal Officer and Secretary. Previously, Mr. Konig served as Chief Operating Officer, General Counsel and Secretary of both our Company and our former Manager from November 2013 through October 2017, and as Senior Vice President and General Counsel of our Company and our former advisor from August 2008 through November 2013. Mr. Konig joined Bluerock in 2004 and has continuously served in various senior legal and management capacities for it and its affiliates, including as General Counsel of Bluerock, and served as Chief Legal Officer of the advisor of Bluerock Total Income + Real Estate Fund from October 2012 through May 2018. Mr. Konig has over 25 years of experience in law and business. Mr. Konig was an attorney at the firms of Ravin Sarasohn Cook Baumgarten Fisch & Baime from September 1987 to September 1989, and Greenbaum Rowe Smith & Davis from September 1989 to March 1997, representing borrowers and lenders in numerous financing transactions, primarily involving real estate, distressed real estate and Chapter 11 reorganizations, as well as a broad variety of litigation and corporate law matters. From 1998 to 2002, Mr. Konig served as legal counsel, including as General Counsel, at New World Restaurant Group, Inc. (now known as Einstein Noah Restaurant Group, Inc.). From 2002 to December 2004, Mr. Konig served as Senior Vice President of Roma Food Enterprises, Inc. where he led operations and the restructuring and sale of the privately held company with approximately $300 million in annual revenues. Mr. Konig received a J.D. degree cum laude in 1987 from California Western School of Law, located in San Diego, California, an M.B.A. degree in Finance in 1988 from San Diego State University and a Bachelor of Commerce degree in 1982 from the University of Calgary.
Michael DiFranco, Executive Vice President, Operations. Mr. DiFranco serves as our Executive Vice President, Operations. Mr. DiFranco joined the Company in November 2018. In his role as Executive Vice President, Operations, Mr. DiFranco is responsible for the operational and financial performance of the Company’s multi-family housing portfolio. Prior to joining the Company, from 2005 to 2016, Mr. DiFranco held several roles of increasing responsibilities with Apartment & Investment Management Company (NYSE: AIV), including serving four years as Senior Vice President of Financial Operations. From 2016 to 2018, Mr. DiFranco served as Senior Vice President of Financial Operations with The Irvine Company Apartment Communities, overseeing Revenue Management, Business Intelligence and Portfolio Management. Mr. DiFranco received a B.A in Business from Texas A&M University, College Station in 1990, an M.B.A. from The University of Texas at Austin in 1998 and an M.S. in Information Systems from The University of Colorado, Denver in 2001.
Elizabeth Harrison, Independent Director. Ms. Harrison has served as one of our independent directors since July 2018. Ms. Harrison has over 23 years of branding and marketing experience. Ms. Harrison serves as the CEO and Principal of Harrison & Shriftman (“H&S”), a full-service marketing, branding and public relations agency with offices in New York, Miami and Los Angeles, which she co-founded in 1995. In 2003, Ms. Harrison organized the sale of H&S to Omnicom Group (NYSE: OMC), a leading global marketing and corporate communications company, and continued to serve as CEO where she is responsible for the company’s operations and strategic development, while overseeing communications, partnerships and marketing for clients that include real estate developers, luxury hotel properties and travel technology companies on a global level. In 2011, H&S became the complementary sister-agency of Ketchum, a leading global communications consultancy. Ms. Harrison is the co-author of several books and is frequently
invited to share her luxury branding expertise at high-profile conferences and summits, most recently including Harvard’s 5th Annual CEO Roundtable: Building Leading Brands and Driving Growth. Ms. Harrison has also served as a panelist for Step Up Women’s Network’s “View from the Top” seminar. Ms. Harrison has served on the boards of Love Heals and the Alison Gertz Foundation for AIDS Education, and also works closely with the Ars Nova Theater Group. Ms. Harrison received a B.A. degree in 1986 from Sarah Lawrence College, located in Bronxville, New York.
I. Bobby Majumder, Independent Director. Mr. Majumder has served as one of our independent directors since January 2009. In addition, since May 2017, Mr. Majumder has served as our lead independent director and presides over executive sessions of our non-employee directors. Mr. Majumder is a partner at the law firm of Reed Smith, where he serves as the Managing Partner of the firm’s Dallas office and firmwide Co-Chair of the firm’s India practice. Mr. Majumder specializes in corporate and securities transactions with an emphasis on the representation of underwriters, placement agents and issuers in both public and private offerings, private investment in public equity (PIPE) transactions and venture capital and private equity funds. Prior to Reed Smith, Mr. Majumder was a partner at the law firm of Perkins Coie from March 2013 to May 2019. Prior to Perkins Coie, Mr. Majumder was a partner in the law firm of K&L Gates LLP from May 2005 to March 2013. From January 2000 to April 2005, Mr. Majumder was a partner at the firm of Gardere Wynne Sewell LLP. Through his law practice, Mr. Majumder has gained significant experience relating to the acquisition of a number of types of real property assets including raw land, improved real estate and oil and gas interests. Mr. Majumder also has served as an independent Trustee on the Board of Trustees of Bluerock Total Income + Real Estate Fund, a closed-end interval fund organized by Bluerock, since July 2012. He is an active member of the Park Cities Rotary Club, a charter member of the Dallas Chapter of The Indus Entrepreneurs and an Associates Board member of the Cox School of Business at Southern Methodist University. Mr. Majumder received a J.D. degree in 1993 from Washington and Lee University School of Law, located in Lexington, Virginia, and a B.A. degree in 1990 from Trinity University, located in San Antonio, Texas.
Romano Tio, Independent Director. Mr. Tio has served as one of our independent directors since January 2009. In addition, from February 2016 to May 2017, Mr. Tio served as our lead independent director and presided over executive sessions of our non-employee directors. Mr. Tio serves as Senior Managing Director at Ackman-Ziff, an institutional real estate capital advisory firm. From May 2009 to June 2017, Mr. Tio served as Managing Director of RM Capital Management LLC, a boutique real estate investment and advisory firm. From January 2008 to May 2009, Mr. Tio served as a Managing Director and co-head of the commercial real estate efforts of HCP Real Estate Investors, LLC, an affiliate of Harbinger Capital Partners Funds, a $10+ billion private investment firm specializing in event/distressed strategies. From August 2003 until December 2007, Mr. Tio was a Managing Director at Carlton Group Ltd., a boutique real estate investment banking firm where he was involved in over $2.5 billion worth of commercial real estate transactions. Earlier in his career, Mr. Tio was involved in real estate sales and brokerage for 25 years. Mr. Tio also has served as an independent Trustee of the Board of Trustees of Bluerock Total Income + Real Estate Fund, a closed-end interval fund organized by Bluerock, since July 2012. Mr. Tio served as an independent member of the Board of Directors of Yangtze River Development Ltd. from January 2016 until February 2017. Mr. Tio received a B.S. degree in Biochemistry in 1982 from Hofstra University located in Hempstead, New York.
Kamal Jafarnia, Independent Director. Mr. Jafarnia has served as one of our independent directors since June 2019. Mr. Jafarnia currently serves as General Counsel and Chief Compliance Officer at Artivest Holdings, Inc., which position he has held since October 2018, and as Chief Compliance Officer for the Altegris KKR Commitments Fund. Prior to Artivest, Mr. Jafarnia served as Managing Director for Legal and Business Development at Provasi Capital Partners LP. Prior to that, from October 2014 to December 2017, he served as Senior Vice President of W.P. Carey Inc. (NYSE: WPC), as well as Senior Vice President and Chief Compliance Officer of Carey Credit Advisors, Inc. and as Chief Compliance Officer and General Counsel of Carey Financial, LLC. Prior to joining W. P. Carey Inc., Mr. Jafarnia served as Counsel to two American Lawyer Global 100 law firms in New York. From March 2014 to October 2014, Mr. Jafarnia served as Counsel in the REIT practice group at the law firm of Greenberg Traurig, LLP. From August 2012 to March 2014, Mr. Jafarnia served as Counsel in the Financial Services & Products Group and was a member of the REIT practice group of Alston & Bird, LLP. Between 2006 and 2012, Mr. Jafarnia served as a senior executive, in-house counsel, and Chief Compliance Officer for several alternative investment
program sponsors, including, among others, American Realty Capital, a real estate investment program sponsor, and its affiliated broker-dealer, Realty Capital Securities, LLC. In addition, Mr. Jafarnia has served as a non-executive independent member of the board of directors of Ashford Hospitality Trust, Inc. (NYSE: AHT) since January 2013. Mr. Jafarnia received an LL.M. in Securities and Financial Regulation in 2011 from Georgetown University Law Center, located in Washington, D.C., a J.D. degree in 1992 from Temple University, located in Philadelphia, Pennsylvania, and a B.A. degree in Economics and Government in 1988 from the University of Texas at Austin.
Selection of Our Board
In determining the composition of our Board, our goal was to assemble a group of individuals of sound character, judgment and business acumen, whose varied backgrounds, leadership experience and real estate experience would complement each other to bring a diverse set of skills and perspectives to the board. We have determined that each of our directors, including our independent directors, has at least three years of relevant experience demonstrating the knowledge and experience required to successfully acquire and manage the type of assets being acquired by our Company.
Mr. Kamfar was chosen to serve as the Chairman of the Board because, as our Chief Executive Officer, Mr. Kamfar is well positioned to provide essential insight and guidance to our Board from the inside perspective of the day-to-day operations of the Company. Furthermore, Mr. Kamfar brings to the board approximately 30 years of experience in building operating companies, and in various aspects of real estate, mergers and acquisitions, private equity investing and public and private financings. His experience with complex financial and operational issues in the real estate industry, as well as his strong leadership ability and business acumen, make him critical to proper functioning of our board.
Ms. Harrison was selected as one of our independent directors based on her extensive leadership and entrepreneurial experience, background in luxury branding and marketing, and oversight of global communications, partnerships and marketing for clients including real estate developers, luxury hotel properties and travel technology companies.
Mr. Majumder was selected as one of our independent directors due to his depth of legal experience in advising clients with respect to corporate and securities transactions, including representations of underwriters, placement agents and issuers in both public and private offerings. Mr. Majumder also brings with him significant legal experience relating to the acquisition of a number of types of real estate assets.
Mr. Tio was selected as one of our independent directors as a result of his demonstrated leadership skill and industry-specific experience developed through a number of high-level management positions with investment and advisory firms specializing in the commercial real estate sector.
Mr. Jafarnia was selected as one of our independent directors to leverage his legal background, including his prior service as a regulatory compliance officer, his extensive public company experience, and his background with alternative investment programs, all of which provide him with a skill set and knowledge base unique to our board.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, or the Exchange Act, requires our directors and executive officers, and any persons beneficially owning more than 10% of our outstanding shares of common stock, to file with the SEC reports with respect to their initial ownership of our common stock and reports of changes in their ownership of our common stock. As a matter of practice, our administrative staff and outside counsel assists our directors and executive officers in preparing these reports, and typically file those reports on behalf of our directors and executive officers. Based solely on a review of the copies of such forms filed with the SEC during fiscal year 2019 and on written representations from our directors and executive officers, we believe that during fiscal year 2019, all of our directors and executive officers filed the required reports on a timely basis under Section 16(a).
Code of Ethics and Whistleblower Policy
On March 26, 2014, our Board adopted a Code of Business Conduct and Ethics (as amended and restated by that certain Amended and Restated Code of Business Conduct and Ethics adopted by the
Board on August 2, 2019), Code of Ethics for Senior Executive and Financial Officers, Whistleblower Policy, and Corporate Governance Guidelines that apply to our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions and all members of our Board. We believe these policies are reasonably designed to deter wrongdoing and promote honest and ethical conduct; full, fair, accurate, timely, and understandable disclosure in our reporting to our stockholders and the SEC; compliance with applicable laws; reporting of violations of the code; and accountability for adherence to the code. We will provide to any person without charge a copy of our Amended and Restated Code of Business Conduct and Ethics, Code of Ethics for Senior Executive and Financial Officers, Whistleblower Policy, and Corporate Governance Guidelines, including any amendments or waivers thereto, upon written request delivered to our principal executive office at the address listed on the cover page to our Annual Report on Form 10-K.
Committees of the Board
We currently have a standing audit committee, a standing investment committee, a standing compensation committee and a standing nominating and corporate governance committee. All of our standing committees consist solely of independent directors, except that R. Ramin Kamfar, who serves as our Chief Executive Officer and Chairman of the Board, serves as a member of the investment committee. The principal functions of these committees are briefly described below. Our Board may from time to time establish other committees to facilitate our management.
Audit Committee
Our Board has established an audit committee, which is comprised of three individuals, all of whom are independent directors. The members of our audit committee are I. Bobby Majumder, Kamal Jafarnia and Romano Tio. Mr. Majumder is the chairman of our audit committee, and is designated as the audit committee financial expert as defined by the rules promulgated by the SEC and the NYSE American corporate governance listing standards.
The audit committee meets on a regular basis, at least quarterly and more frequently as necessary. The audit committee’s primary functions are:
•
to evaluate and approve the audit and non-audit services and fees of our independent registered public accounting firm;
•
to periodically review the auditors’ independence; and
•
to assist our Board in fulfilling its oversight responsibilities by reviewing the financial information to be provided to the stockholders and others, management’s system of internal controls and the audit and financial reporting process.
The audit committee also considers and approves certain related party transactions.
Investment Committee
Our Board has established an investment committee, which is comprised of three individuals, Romano Tio, Kamal Jafarnia and R. Ramin Kamfar. Mr. Tio is the chairman of the investment committee.
Our Board has delegated to the investment committee the authority (1) to approve all real property acquisitions, developments and dispositions, including real property portfolio acquisitions, developments and dispositions, as well as all other investments in real estate consistent with our investment guidelines (each, an “Investment Transaction”) involving an equity investment equal to or in excess of ten percent (10%) of our Company Equity at the time of consideration, and (2) to review our investment policies and procedures on an ongoing basis and recommend any changes to our Board.
Our Board has further delegated to a management committee comprised of members of our executive management team the authority to (1) approve all Investment Transactions involving an equity investment amount of less than ten percent (10%) of our Company Equity at the time of consideration, and (2) to review and recommend potential investments equal to or in excess of the 10% threshold for consideration by the investment committee. If the members of the investment committee or the management committee (as
applicable) approve a given investment, then management will be directed to make such investment on our behalf, if such investment can be completed on terms approved by the committee.
Compensation Committee
Our board of directors has established a compensation committee, which is comprised of three of our independent directors. The members of our compensation committee are Romano Tio, Elizabeth Harrison, and I. Bobby Majumder. Mr. Tio is the chairman of our compensation committee. Our compensation committee charter details the principal functions of the compensation committee. These functions include:
•
reviewing and approving on an annual basis the corporate goals and objectives relevant to our chief executive officer’s compensation, if any, evaluating our chief executive officer’s performance in light of such goals and objectives, and determining and approving the remuneration, if any, of our chief executive officer based on such evaluation;
•
reviewing and approving the compensation, if any, of all of our other executive officers;
•
reviewing our executive compensation policies and plans;
•
implementing and administering our incentive compensation equity-based remuneration plans, if any;
•
assisting management in complying with our proxy statement and annual report disclosure requirements;
•
producing a report on executive compensation to be included in our annual proxy statement; and
•
reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors.
Nominating and Corporate Governance Committee
Our Board has established a nominating and corporate governance committee, which is comprised of three of our independent directors, I. Bobby Majumder, Elizabeth Harrison, and Romano Tio. Mr. Majumder is the chairman of our nominating and corporate governance committee. Our nominating and corporate governance committee charter details the principal functions of the nominating and corporate governance committee. These functions include:
•
identifying and recommending qualified candidates to our full Board for election as directors, and recommending nominees for election as directors at the annual meeting of stockholders;
•
developing and recommending corporate governance guidelines to our Board, and implementing and monitoring such guidelines;
•
reviewing and making recommendations on matters involving the general operation of our Board, including board size and composition, and committee composition and structure;
•
recommending nominees for each committee of our Board to our Board;
•
annually facilitating the assessment of our Board’s performance as a whole and of the individual directors, as required by applicable law, regulations and the NYSE American corporate governance listing standards; and
•
overseeing our Board’s evaluation of management.
The nominating and corporate governance committee may form and delegate authority to subcommittees in its discretion, provided that such subcommittees must be comprised entirely of independent directors, and each such committee must have its own charter setting forth its purpose and responsibilities.
Item 11.
Item 11.
Executive Compensation
Compensation Discussion and Analysis
Our Compensation Discussion and Analysis describes our compensation program, objectives and policies for our Named Executive Officers, or NEOs, for fiscal year 2019. Our NEOs for fiscal year 2019
were R. Ramin Kamfar, Chief Executive Officer, Jordan B. Ruddy, President and Chief Operating Officer, James G. Babb, III, Chief Investment Officer, Michael L. Konig, Chief Legal Officer and Secretary, Ryan S. MacDonald, Chief Acquisitions Officer, and Christopher J. Vohs, Chief Financial Officer and Treasurer (the “Executive Officers”).
Overview of Compensation Program and Philosophy
Pre-Internalization Compensation Summary
Prior to the completion of the Internalization on October 31, 2017, we had no employees, and were externally managed by our former Manager, BRG Manager, LLC, pursuant to the Management Agreement. The former Manager provided us with our executive officers and investment team, and administered our business activities and day-to-day operations. The former Manager paid our executive officers and others who provided services to us from the fees collected pursuant to the Management Agreement and other sources. For so long as we were externally managed, we did not pay any cash or other compensation to our NEOs, nor did we make any grants of awards under our 2014 Incentive Plans of any kind to our NEOs. None of our executive officers received any options or stock directly from us, and we have not provided any of our executive officers with pension benefits or nonqualified deferred compensation plans. The former Manager made all decisions regarding the compensation of the executive officers, and any allocation by the former Manager of fees collected pursuant to the Management Agreement to compensation for our officers and other employee benefits was solely in the discretion of the former Manager.
During the period prior to the Internalization, all of our NEOs were employees of an affiliate of the former Manager. Each of our NEOs received compensation reflecting their aggregated services to us, the former Manager and/or its affiliates. We did not play a direct role in establishing or setting the level of compensation or the measures on which bonuses or long-term incentives, if any, would be based. During the period from January 1, 2017 through December 31, 2017, we paid the former Manager approximately $12.7 million in fees pursuant to the Management Agreement, and reimbursed the former Manager for approximately $1.5 million for out-of-pocket expenses (which payments and reimbursements were all made with respect to services provided and expenses incurred by the former Manager prior to the completion of the Internalization on October 31, 2017). The former Manager used a portion of the fees collected pursuant to the Management Agreement, as well as other sources, to compensate its employees. None of our expense reimbursements to the former Manager were related to compensation expenses of the former Manager’s personnel.
Post-Internalization Compensation Summary
Upon the completion of the Internalization, REIT Operator, which became an indirect subsidiary of the Company in connection with the Internalization, entered into Employment Agreements with five of our current NEOs (Messrs. Kamfar, Babb, MacDonald, Ruddy, and Vohs), and has entered into a Services Agreement with our sixth current NEO (Mr. Konig) through his wholly-owned law firm, Konig & Associates, LLC (“K&A”) (such agreements, collectively, the “2017 Executive Agreements”), which 2017 Executive Agreements became effective at closing on October 31, 2017. All references to Mr. Konig herein refer to Mr. Konig acting through K&A. At that time, Messrs. Kamfar, Babb, MacDonald, Ruddy, and Vohs became employees of, and Mr. Konig became an independent contractor with, REIT Operator, and REIT Operator now pays them cash and other compensation in such capacities pursuant to their respective 2017 Executive Agreements. In addition, on November 5, 2018, REIT Operator entered into an Employment Agreement with our other executive officer, Mr. DiFranco (such agreement, together with the 2017 Executive Agreements, the “Executive Agreements”), pursuant to which Mr. DiFranco became an employee of REIT Operator, and on April 1, 2019, Mr. DiFranco fully transitioned into his role as an executive officer of the Company.
In connection with negotiations between us and the former Manager regarding the Internalization, we engaged FPL Associates L.P. (“FPL”), an independent executive compensation consulting firm, to advise the compensation committee on alternatives for post-Internalization executive compensation design. Since that time, FPL has provided the compensation committee with market-based compensation benchmarking analyses summarizing the compensation practices among the Company’s peer companies, including with respect to base salary, annual target bonus opportunities, long-term target equity compensation opportunities,
as well as severance and change in control arrangements at the Company’s peers. FPL has also provided recommendations relating to the proposed compensation arrangements and terms of employment or service for the Company’s executive officers, including our NEOs, and supplemental market benchmarking data that summarizes the typical compensation and perquisites provided to executives in the Company’s peer group. FPL has further provided recommendations with respect to certain terms and conditions of the 2014 Incentive Plans (which have subsequently been amended and restated in their entirety by the Third Amended 2014 Incentive Plans) and the amounts of the equity awards for which our executive officers, including our NEOs, will be eligible pursuant to the terms of their Executive Agreements. Such information as initially provided by FPL was discussed and considered by the compensation committee in negotiating the terms and conditions of the Executive Agreements with each of our NEOs and other executive officer, and was updated by FPL in late 2018 and 2019 and similarly utilized by the compensation committee in establishing the executive compensation structure for 2018 and 2019.
The compensation committee oversees the Company’s Third Amended 2014 Incentive Plans. The compensation committee also oversees the compensation of our NEOs and other executive officer pursuant to the terms of their Executive Agreements, including awarding bonuses and making equity awards pursuant to the Third Amended 2014 Incentive Plans.
Executive Compensation Objectives
The primary objective of our executive compensation program is to align the interests of our NEOs with those of our stockholders in a way that allows us to attract and retain the best executive talent. The compensation committee has designed a compensation program intended to reward, among other things, favorable stockholder returns, share appreciation, same store net operating income growth, on-time and on-budget completion of development projects, return on investment on redevelopment projects, and our competitive position within our segment of the real estate industry, as well as each Executive Officer’s long-term career contributions to our Company. Compensation incentives designed to further these goals and to incentivize long-term careers with the Company will take the form of annual cash compensation, as well as long-term vesting of one-time equity awards and both time- and performance-based incentive compensation, including annual performance bonuses and long-term equity awards, subject to performance criteria and targets established and administered by our compensation committee. In addition, our compensation committee may decide to make awards to new executive officers in order to attract talented professionals.
Elements of Executive Compensation
(A) Base Salary/Base Payment. Our compensation committee believes that payment of a competitive base salary or base payment (as applicable) is a necessary element of any compensation program that is designed to attract and retain talented and qualified executives. The Executive Agreements of our NEOs provide that Mr. Kamfar, Mr. Babb, Mr. MacDonald, Mr. Ruddy, Mr. Vohs, and Mr. Konig will receive an annual base salary or, in the case of Mr. Konig, an annual base payment, of at least $400,000, $325,000, $250,000, $300,000, $250,000, and $300,000, respectively. Each such Executive Agreement provides that the base salary or base payment (as applicable) of each of our NEOs will be reviewed annually for appropriate increases by the compensation committee, but will not be decreased. Subject to our existing contractual obligations, we expect our compensation committee to consider base salary and base payment levels for our NEOs annually as part of our performance review process, as well as upon any promotion or other change in job responsibility. The goal of our base salary and base payment program is to provide such salaries and payments at a level that allows us to attract and retain qualified executives while preserving significant flexibility to recognize and reward individual performance with other elements of the overall compensation program. Base salary and base payment levels also affect the annual cash incentive compensation because the annual bonus target opportunity of each NEO is expressed as a percentage of base salary or base payment (as applicable). The following items are generally considered when determining base salary and base payment levels:
•
market data provided by our outside consultants;
•
our financial resources;
•
the executive officer’s experience, scope of responsibilities, performance and prospects; and
•
internal equity in relation to other executive officers with similar levels of experience, scope of responsibilities, performance, and prospects.
See “2019 Compensation Decisions - 2019 Base Salary/Base Payment” and “2020 Compensation Decisions - 2020 Base Salary/Base Payment” below for information regarding the base salaries and base payments payable to our NEOs for fiscal years 2019 and 2020.
(B) Annual Cash Incentive Compensation. It is the intention of our compensation committee to make a meaningful portion of each of our executives’ compensation in future years contingent on achieving certain performance targets and an executive’s individual objectives in that year. As part of such contingent compensation, during the term of their Executive Agreement, each of our current NEOs will be eligible to receive an annual cash incentive bonus (each, an “Annual Cash Bonus”).
For the period between the date of closing of the Internalization and December 31, 2017, the amounts of prorated Annual Cash Bonuses were determined in the reasonable business judgment of the compensation committee (to which such responsibility was delegated by the Board), based on its review of the Company’s performance and the performance of each such Executive Officer, and on March 14, 2018, the compensation committee approved the payment of prorated Annual Cash Bonuses as follow: $66,667 to Mr. Kamfar; $54,167 to Mr. Babb; $41,667 to Mr. MacDonald; $50,000 to Mr. Ruddy; $20,833 to Mr. Vohs; and $50,000 to Mr. Konig (through K&A).
Beginning in fiscal year 2018 and for each year thereafter during the term of their Executive Agreement, each of our current NEOs will be eligible to receive an Annual Cash Bonus in an amount ranging from 0% to a maximum of 150% (75% for Mr. Vohs) of their annual base salary or base payment (as applicable), with a target equal to 100% (50% for Mr. Vohs) of such annual base salary or base payment. The amount of each such Annual Cash Bonus will further be determined based on the Company’s performance relative to pre-determined performance criteria and targets established and administered by the compensation committee. See “2019 Compensation Decisions - 2019 Annual Cash Bonuses” and “2020 Compensation Decisions - 2020 Annual Cash Bonuses” below for information regarding the Annual Cash Bonuses for which our NEOs are eligible for fiscal years 2019 and 2020, and the applicable performance criteria and targets established by the compensation committee for use in determining the amounts of such Annual Cash Bonuses.
(C) Long-Term Equity Incentive Awards. Our long-term equity incentive awards are comprised of two primary components, each of which are administered by the compensation committee through our Third Amended 2014 Incentive Plans: (1) a time-vested equity award component, and (2) a performance-vested equity award component.
1.
Time-Vested Equity Awards. The objective of our time-vested equity award component is to attract and retain qualified personnel by offering an equity-based program that is competitive with our peer companies. Our compensation committee believes that these time-vested awards are necessary to successfully attract qualified executives, including our NEOs, and will continue to be an important incentive for promoting executive and employee retention going forward. Time-vested equity awards under this plan were determined by the compensation committee in consultation with FPL, and subsequently reviewed with the Chief Executive Officer (with respect to all awards except his own).
(a)
For the period between the date of closing of the Internalization and December 31, 2017, each of our NEOs was entitled to a prorated grant of time-vested equity awards in the form of long-term incentive plan units of the Operating Partnership (“LTIP Units”) (each such award to any recipient, a “Prorated Annual LTIP Award”). Such Prorated Annual LTIP Awards were determined in part based upon each executive’s duration of tenure with the former Manager’s affiliate and pay grade.
Prorated Annual LTIP Awards. Pursuant to the Executive Agreements of our NEOs, on January 1, 2018, the Company granted the following Prorated Annual LTIP Awards: 9,636 LTIP Units to Mr. Kamfar; 3,212 LTIP Units to Mr. Babb; 2,810 LTIP Units to Mr. MacDonald; 3,212 LTIP Units to Mr. Ruddy; 803 LTIP Units to Mr. Vohs; and 3,212
LTIP Units to K&A. The amount of each Prorated Annual LTIP Award was determined by dividing (x) the respective pro-rated amount of  $600,000 for Mr. Kamfar, $200,000 for Mr. Konig (through K&A), $50,000 for Mr. Vohs, $200,000 for Mr. Babb, $175,000 for Mr. MacDonald, and $200,000 for Mr. Ruddy, by (y) the volume weighted average price of a share of the Company’s Class A Common Stock, as reported on the NYSE American for the twenty (20) trading days immediately preceding the date of grant. Each such Prorated Annual LTIP Award vested or will vest and become nonforfeitable in installments of one-third (1/3) of such Prorated Annual LTIP Award as follows: (i) the first installment on December 31, 2018, (ii) the second on October 31, 2019, and (iii) the third installments on October 31, 2020, in each case subject to continued employment and other conditions.
(b)
Beginning in fiscal year 2018 and for each year thereafter during the term of their Executive Agreement, each of our NEOs will be entitled to an annual grant of time-vested equity awards in the form of LTIP Units (each, an “Annual LTIP Award”). The actual number of LTIP Units that will actually vest and become nonforfeitable in three equal installments on each anniversary of the date of grant in respect to each such Annual LTIP Award will be dependent upon continued employment and other conditions as set forth in the Executive Agreements. See “2019 Compensation Decisions - 2019 Annual LTIP Awards” and “2020 Compensation Decisions - 2020 Annual LTIP Awards” below for information regarding the Annual LTIP Awards to which our NEOs are entitled for fiscal years 2019 and 2020.
2.
Performance-Vested Equity Awards. The objective of our performance-vested equity award component is to implement our objective of promoting a performance-focused culture by rewarding our NEOs, and other employees of Manager Sub, based upon achievement of long term Company and individual performance targets. When determining the quantity and amounts of such long term performance-vested equity awards (each, a “Long Term Performance Award”) to be granted, the compensation committee assesses the same factors considered in setting base salaries and base payments, as applicable, described above, but with a greater emphasis on performance measures we believe drive our long-term success. The actual number of LTIP Units that will actually vest and become nonforfeitable as of the last day of the three-year performance period in respect of each such Long Term performance Award will be dependent upon the achievement of the long term Company and individual performance criteria and targets established and administered by the compensation committee as described below.
(a)
For the period between the date of closing of the Internalization and December 31, 2017, no Long Term Performance Awards were granted because of the short timeframe for measurement.
(b)
Beginning in fiscal year 2018 and for each year thereafter during the term of their Executive Agreement, each of our NEOs will be entitled to an annual grant of a Long Term Performance Awards in the form of LTIP Units for a three-year performance period. The actual amount of the annual Long Term Performance Award for which each of our current NEOs will be eligible will range from 0% to a maximum of  (i) 150% of their Annual LTIP Award for 2019 and (ii) 200% of their Annual LTIP Award for 2020, with a threshold equal to 50% of that year’s Annual LTIP Award, a target equal to that year’s Annual LTIP Award, and a maximum equal to (i) 150% of that year’s Annual LTIP Award for 2019 and (ii) 200% of that year’s Annual LTIP Award for 2020. The actual number of LTIP Units that will actually vest and become nonforfeitable in respect of each such Long Term Performance Award will be dependent upon the achievement, over the three-year performance period, of the objective Company performance criteria and targets established and administered by the compensation committee as described below, as well as a subjective evaluation of the performance of each such Executive Officer during such time period. See “2019 Compensation Decisions - 2019 Long Term Performance Awards” and “2020 Compensation Decisions - 2020 Long Term Performance Awards” below for information regarding the Long Term Performance Awards to which our NEOs are entitled for fiscal years 2019 and 2020, and the applicable performance criteria and targets established by the compensation committee for use in determining the amounts of such Long Term Performance Awards.
(D) Executive Compensation Metrics: Objective Performance Criteria. Listed below are the objective performance criteria established by the compensation committee for use in determining Annual Cash Bonuses and/or Long Term Performance Awards for our NEOs for fiscal year 2019. Except as indicated below, the same objective performance criteria were also approved by the compensation committee for use in determining Annual Cash Bonuses and/or Long Term Performance Awards for our NEOs for fiscal year 2020. For information regarding the relative weightings and threshold, target, and maximum achievement levels assigned to each such criterion for each type of equity incentive award for fiscal years 2019 and 2020, see “2019 Compensation Decisions - 2019 Annual Cash Bonuses” and “- 2019 Long Term Performance Awards,” and “2020 Compensation Decisions - 2020 Annual Cash Bonuses” and “- 2020 Long Term Performance Awards,” below.
(a)
Total Shareholder Return (TSR) Rank vs. SNL U.S. Multifamily REIT Index Peer Group
Why is this metric important? The Company’s total stockholder return (“TSR”) metric was designed to increase accountability for creating value for our stockholders as recognized by the market. This metric compares our TSR (calculated based on appreciation/depreciation in the price per share of our common stock and distributions paid thereon, including reinvestment of dividends), relative to that of the peer companies in the SNL U.S. Multifamily REIT Index. We believe that the Company’s relative TSR rank is an important component of our executive compensation program because it helps to align the interests of our NEOs and other executives with, and ensure our NEOs and other executives remain focused on the value they are delivering to, our stockholders.
For Use in Determining: Annual Cash Bonuses and Long Term Performance Awards (fiscal years 2019 and 2020).
Target: For fiscal years 2019 and 2020, the Company’s target is to rank within the 50th percentile in TSR relative to the SNL U.S. Multifamily REIT Index.
(b)
Same Store NOI Growth Rank vs. SNL U.S. Multifamily REIT Index Peer Group
Why is this metric important? The Company’s primary financial measure for evaluating the operating performance of its portfolio is net operating income (“NOI”), which represents rental income less direct property operating expenses (including real estate taxes and insurance). The Company believes that NOI is helpful to stockholders as a supplemental measure of its operating performance because it is a direct measure of the actual operating results of the Company’s portfolio. Comparing the growth of the Company’s “same store” NOI (i.e., looking at NOI growth of the exact same set of stabilized apartment properties over the periods being compared) relative to that of the peer companies in the SNL U.S. Multifamily REIT Index helps stockholders compare the Company’s operating results to the market. The Company’s same store NOI growth rank further provides an indication of the Company’s focus on quality acquisitions, and its execution of its business plan.
For Use in Determining: Annual Cash Bonuses (fiscal year 2019) and Long Term Performance Awards (fiscal years 2019 and 2020).
Target: For fiscal years 2019 and 2020, the Company’s target is to rank within the 50th percentile in same store NOI growth relative to the SNL U.S. Multifamily REIT Index.
(c)
Development Projects: Schedule Performance vs. Targets
Why is this metric important? The on-time development metric focused on the timing of start, completion, initial occupancy and stabilization dates for the Company’s development projects, and compared the Company’s actual performance relative to its targets with respect to such dates. The accuracy of both the Company’s forecasts as to when a development project would begin to generate income, and the Company’s projections with respect to the operating performance of each such project, were dependent upon the timely execution of the Company’s targeted development milestones during fiscal year 2019. The on-time development
metric was designed for use during fiscal year 2019 to ensure our NEOs and other executives remained focused on the timely execution of such milestones.
For Use in Determining: Annual Cash Bonuses (fiscal year 2019).
Target: For fiscal year 2019, the Company’s target was to be on schedule relative to its target start, completion, initial occupancy and stabilization dates for its development projects.
(d)
Development Projects: Budget Performance vs. Target
Why is this metric important? The on-budget development metric compares the Company’s actual performance relative to its target budget with respect to each of its development projects. On-budget completion of the Company’s development projects ensures that the Company’s strategic business objectives with respect to each such project is achieved in a cost-effective manner. The on-budget development metric was designed to ensure our NEOs and other executives remain focused on maintaining the Company’s target budget with respect to its development projects.
For Use in Determining: Annual Cash Bonuses (fiscal years 2019 and 2020).
Target: For fiscal years 2019 and 2020, the Company’s target is to be on budget for its development projects.
(e)
Redevelopment Projects: Return on Investment (IRR)
Why is this metric important? This metric focuses on the Company’s return on investment with respect to its redevelopment projects, and was designed to ensure our NEOs and other executives remain focused on maximizing return on the Company’s value-added investments.
For Use in Determining: Annual Cash Bonuses and Long Term Performance Awards (fiscal years 2019 and 2020).
Target: For fiscal years 2019 and 2020, the Company’s target is to achieve an internal rate of return of 20% on its redevelopment projects.
(f)
Total Asset Growth vs. SNL U.S. Multifamily REIT Index Peer Group
Why is this metric important? This metric helps stockholders compare the growth in value of the Company’s asset base to that of the peer companies in the SNL U.S. Multifamily REIT Index. The value of the Company’s portfolio of assets further provides an indication of the Company’s execution of its business plan
For Use in Determining: Annual Cash Bonuses (fiscal year 2020 only).
Target: For fiscal year 2020, the Company’s target is to rank within the 50th percentile in total asset growth relative to the SNL U.S. Multifamily REIT Index.
(E) Distributions on LTIP Units. Distributions on LTIP Units granted to our NEOs pursuant to the equity incentive awards described above will be paid from the date of grant; provided, that (i) solely with respect to LTIP Units granted as part of Long Term Performance Awards, distributions will be paid at the rate of ten percent (10%) of the distributions otherwise payable with respect to such LTIP Units until the last day of the three-year performance period (or the date of forfeiture, if earlier); and (ii) with respect to each LTIP Unit granted as part of a Long Term Performance Award that becomes fully vested in accordance with the terms of an NEO ’s Executive Agreement, such NEO shall be entitled to receive, as of the date of such vesting, a single cash payment equal to the distributions payable with respect to each such LTIP Unit back to the date of grant, minus the distributions already paid on each such LTIP Unit in accordance with clause (i), in each case subject to certain potential limitations on distributions set forth in the limited partnership agreement of our Operating Partnership and intended to preserve the U.S. federal income tax treatment of such LTIP Units as “profits interests.”
(F) Post-Termination Compensation. The Executive Agreements with our six NEOs (Messrs. Kamfar, Babb, MacDonald, Ruddy, Vohs and Konig) provide for payments and other benefits if the executive’s employment terminates under specified circumstances. See “Executive Officer Compensation Tables - Narrative Discussion of Summary Compensation Table -Employment Agreements” and “Executive Officer Compensation Tables - Potential Payments upon Termination or Change in Control” for a description of these termination and severance benefits with our executive officers.
2019 Compensation Decisions
2019 Base Salary/Base Payment. For fiscal year 2019, the compensation committee set the base salaries or base payment, as applicable, of our current NEOs as set forth in the table below:
2019 Annual Cash Bonuses. For fiscal year 2019, the compensation committee determined that 75% of the Annual Cash Bonus for which each of our NEOs would be eligible would be determinable based upon the objective performance criteria set forth below, and the remaining 25% would be determinable based upon subjective performance criteria.
For fiscal year 2019, in recognition of the Company’s greater emphasis on value-add investments in redevelopment projects, the compensation committee elected to revise the objective performance criteria applicable to the Annual Cash Bonuses, to increase the weighting for the “Redevelopment Projects - Return on Investment (IRR)” criterion (which, for fiscal year 2018, was weighted at 16.67%) to 30%. To accommodate this change, the compensation committee further elected to decrease the weighting (i) for each of the “Total Shareholder Return (TSR) Rank vs. SNL U.S. Multifamily REIT Index Peer Group” and the “Same Store NOI Growth Rank vs. SNL U.S. Multifamily REIT Index Peer Group” criteria (which, for fiscal year 2018, were both weighted at 33.33%) to 30%; and (ii) for each of the “Development Projects: Schedule Performance vs. Targets” and the “Development Projects: Budget Performance vs. Targets” criteria (which, for fiscal year 2018, were weighted at 8.33% and 8.34%, respectively) to 5%. For fiscal year 2019, the objective performance criteria, their relative weightings, and threshold, target, and maximum achievement levels were thus be as follow:
*
For performance between achievement levels, the award will be determined by linear interpolation.
Each component of the 2019 objective performance criteria was weighted as indicated above. For fiscal year 2019, the target amount of each Executive Officer’s Annual Cash Bonus was equal to the 2019 Base Salary or 2019 Base Payment (as applicable) of each such Executive Officer (50% of the 2019 Base Salary for Mr. Vohs). For achievement of the threshold level, 50% of the target amount of each such executive’s Annual Cash Bonus can be earned (35% for Mr. Vohs); for achievement of the target level, 100% can be earned (50% for Mr. Vohs); and for achievement of the maximum level, 150% can be earned (75% for Mr. Vohs ). If performance for a component of the objective performance criteria is below the threshold level, no bonus will be earned for that component. In December 2018, each Executive Officer other than Mr. Vohs executed a Second Side Letter to their Employment or Services Agreement (as applicable) to reflect their prospective election to receive any Annual Cash Bonus earned for 2019 in the form of LTIP Units, rather than in cash. The actual amounts of such Annual Cash Bonuses for fiscal year 2019 will be determined by the compensation committee in March 2020, in its reasonable business judgment and based on its review of the Company’s performance with respect to the objective performance criteria set forth above and the performance of each such Executive Officer during the applicable time period. The Annual Cash Bonuses for fiscal year 2019 will be payable by March 15, 2020.
2019 Annual LTIP Awards. Also pursuant to the Executive Agreements of our NEOs,, on January 1, 2019, the Company granted the following Annual LTIP Awards for fiscal year 2019: 76,252 LTIP Units to Mr. Kamfar; 27,872 LTIP Units to Mr. Babb; 27,872 LTIP Units to Mr. MacDonald; 27,872 LTIP Units to Mr. Ruddy; 8,283 LTIP Units to Mr. Vohs; and 27,872 LTIP Units to K&A. The amount of each such Annual LTIP Award was determined by dividing (x) $725,000 for Mr. Kamfar, $265,000 for Mr. Babb, $265,000 for Mr. MacDonald, $265,000 for Mr. Ruddy, $78,750 for Mr. Vohs, and $265,000 for Mr. Konig, by (y) the volume weighted average price of a share of the Company’s Class A Common Stock as reported on the NYSE American for the twenty (20) trading days immediately preceding the date of grant. The number of LTIP Units that will actually vest and become nonforfeitable in three equal installments on each anniversary of the date of grant, shall also be deemed to be January 1, 2019) in respect of each such Annual LTIP Award will be dependent upon continued employment and other conditions as set forth in the Executive Agreements.
2019 Long Term Performance Awards. For fiscal year 2019, the compensation committee determined that 75% of the Long Term Performance Award for which each of our NEOs would be eligible will be determinable based upon the objective performance criteria set forth below, and the remaining 25% would be determinable based upon subjective performance criteria.
For fiscal year 2019, in recognition of the Company’s greater emphasis on value-add investments in redevelopment projects, the compensation committee elected to revise the objective performance criteria applicable to the Long Term Performance Awards, to eliminate the criterion related to inclusion in the Morgan Stanley REIT (MCSI) and S&P 600 Indices (as used for fiscal year 2018), and replace it with the “Redevelopment Projects - Return on Investment (IRR)” criterion (which, for fiscal year 2018, was applicable only to the Annual Cash Bonuses). For fiscal year 2019, the objective performance criteria, their relative weightings, and threshold, target, and maximum achievement levels were thus as follow:
*
For performance between achievement levels, the award will be determined by linear interpolation.
Each component of the 2019 objective performance criteria was weighted as indicated above. For achievement of the threshold level, 50% of the weighted portion of each executive’s target Long Term Performance Award (i.e., 50% of the weighted portion of their Annual LTIP Award) could be earned; for achievement of the target level, 100% could be earned; and for achievement of the maximum level, 150%
could be earned. If performance for a component of the objective performance criteria was below the threshold level, no bonus would be earned for that component.
Pursuant to the Executive Agreements of our NEOs, on January 1, 2019, the Company granted the following Long Term Performance Awards for fiscal year 2019: 114,379 LTIP Units to Mr. Kamfar; 41,807 LTIP Units to Mr. Babb; 41,807 LTIP Units to Mr. MacDonald; 41,807 LTIP Units to Mr. Ruddy; 12,424 LTIP Units to Mr. Vohs; and 41,807 LTIP Units to Mr. Konig. The number of LTIP Units that will actually vest and become nonforfeitable as of the last day of the three-year performance period in respect of each such Long Term Performance Award will be dependent upon the achievement, over the three-year performance period, of the objective Company performance criteria and targets set forth above, and the performance of each such Executive Officer during such time period.
2020 Compensation Decisions
2020 Base Salary/Base Payment. For fiscal year 2020, the compensation committee has set the base salaries or base payment, as applicable, of our current NEOs as set forth in the table below:
2020 Annual Cash Bonuses. For fiscal year 2020, the compensation committee has determined that 75% of the Annual Cash Bonus for which each of our NEOs will be eligible will be determinable based upon the objective Company performance criteria set forth below, and the remaining 25% will be determinable based upon subjective performance criteria.
For fiscal year 2020, in recognition of the Company’s greater emphasis on growth in value of its asset base and adherence to budget with respect to its development projects, the compensation committee elected to revise the objective performance criteria applicable to the Annual Cash Bonuses, to include the new “Total Asset Growth vs. SNL U.S. REIT Multifamily Index Peer Group” criterion (which, was not utilized for fiscal year 2019), which was weighted at 25%, and to increase the weighting for the “Development Projects - Budget Performance vs. Target” criterion (which, for fiscal year 2019, was weighted at 5%) to 25%. To accommodate this change, the compensation committee further elected to decrease the weighting for (i) the “Total Shareholder Return (TSR) Rank vs. SNL U.S. Multifamily REIT Index Peer Group” criterion (which, for fiscal year 2019, was weighted at 30%) to 25%; and (ii) the “Redevelopment Projects - Return on Investment (IRR)” criterion (which, for fiscal year 2019, was weighted at 30%) to 25%; and to eliminate the “Same Store NOI Growth Rank vs. SNL U.S. Multifamily REIT Index Peer Group” and the “Development Projects: Schedule Performance vs. Targets” criteria (which, for fiscal year 2019, had been weighted at 30% and 5%, respectively). For fiscal year 2020, the objective performance criteria, their relative weightings, and threshold, target, and maximum achievement levels will thus be as follow:
*
For performance between achievement levels, the award was determined by linear interpolation.
Each component of the 2020 objective performance criteria will be weighted as indicated above. For fiscal year 2020, the target amount of each Executive Officer’s Annual Cash Bonus is equal to the 2020 Base Salary or 2020 Base Payment (as applicable) of each such executive officer (50% of the 2020 Base Salary for Mr. Vohs). For achievement of the threshold level, 50% of the target amount of each such executive’s Annual Cash Bonus can be earned (35% for Mr. Vohs); for achievement of the target level, 100% can be earned (50% for Mr. Vohs); and for achievement of the maximum level, 150% can be earned (75% for Mr. Vohs). If performance for a component of the objective performance criteria is below the threshold level, no bonus will be earned for that component. In December 2019, each Executive Officer other than Mr. Vohs executed a Third Side Letter to their Employment or Services Agreement (as applicable) to reflect their prospective election to receive any Annual Cash Bonus earned for 2020 in the form of LTIP Units, rather than in cash. The actual amounts of such Annual Cash Bonuses for the year ended December 31, 2020 will be determined by the compensation committee in March 2021, in its reasonable business judgment and based on its review of the Company’s performance with respect to the objective performance criteria set forth above and the performance of each such Executive Officer during the applicable time period. The Annual Cash Bonuses for fiscal year 2021 will be payable on March 15, 2021.
2020 Annual LTIP Awards. Pursuant to the Executive Agreements of our NEOs, on January 1, 2020, the Company granted the following Annual LTIP Awards for fiscal year 2020: 104,791 LTIP Units to Mr. Kamfar; 22,216 LTIP Units to Mr. Babb; 41,916 LTIP Units to Mr. MacDonald; 31,437 LTIP Units to Mr. Ruddy; 6,958 LTIP Units to Mr. Vohs; and 31,437 LTIP Units to Mr. Konig. The amount of each such Annual LTIP Award was determined by dividing (x) $1,250,000 for Mr. Kamfar, $265,000 for Mr. Babb, $500,000 for Mr. MacDonald, $375,000 for Mr. Ruddy, $83,000 for Mr. Vohs, and $375,000 for Mr. Konig, by (y) the volume weighted average price of a share of the Company’s Class A Common Stock as reported on the NYSE American for the twenty (20) trading days immediately preceding the date of grant. The actual number of LTIP Units that will actually vest and become nonforfeitable in three equal installments on each anniversary of the date of grant in respect of each such Annual LTIP Award will be dependent upon continued employment and other conditions as set forth in the Executive Agreements.
2020 Long Term Performance Awards. For fiscal year 2020, the compensation committee has determined that 75% of the Long Term Performance Award for which each of our NEOs will be eligible will be determinable based upon the objective performance criteria set forth below, and the remaining 25% will be determinable based upon subjective performance criteria.
For fiscal year 2020, in recognition of the Company’s emphasis on total shareholder return, the compensation committee elected to revise the objective performance criteria applicable to the Long Term Performance Awards, to increase the weighting for the “Total Shareholder Return (TSR) Rank vs. SNL U.S. Multifamily REIT Index” criterion (which, for fiscal year 2019, was weighted at 33.33%) to 40%, To accommodate this change, the compensation committee further elected to decrease, to 30%, the weighting for both (i) the “Same Store NOI Growth Rank vs. SNL U.S. Multifamily REIT Index” criterion (which, for fiscal year 2019, was weighted at 33.33%) and (ii) the “Redevelopment Projects - Return on Investment (IRR)” criterion (which, for fiscal year 2019, was weighted at 33.34%). The objective performance criteria, their relative weightings, and threshold, target, and maximum achievement levels will thus be as follow:
*
For performance between achievement levels, the award will be determined by linear interpolation.
Each component of the 2020 objective performance criteria will be weighted as indicated above. For achievement of the threshold level, 50% of the weighted portion of each executive’s target Long Term Performance Award (i.e., 50% of the weighted portion of their Annual LTIP Award) can be earned; for achievement of the target level, 100% can be earned; and for achievement of the maximum level, 200% can be earned. If performance for a component of the objective performance criteria was below the threshold level, no bonus will be earned for that component.
Pursuant to the Executive Agreements of our NEOs, on January 1, 2020, the Company granted the following Long Term Performance Awards for fiscal year 2020: 209,582 LTIP Units to Mr. Kamfar; 44,431 LTIP Units to Mr. Babb; 83,833 LTIP Units to Mr. MacDonald; 62,875 LTIP Units to Mr. Ruddy; 13,916 LTIP Units to Mr. Vohs; and 62,875 LTIP Units to Mr. Konig. The actual number of LTIP Units that will actually vest and become nonforfeitable as of the last day of the three-year performance period in respect of each such Long Term Performance Award will be dependent upon the achievement, over the three-year performance period, of the objective Company performance criteria and targets set forth above, and the performance of each such Executive Officer during such time period.
Peer Groups
To assist the compensation committee in developing the post-Internalization compensation program for the Company’s NEOs, FPL was engaged to examine current market compensation practices. In connection with that process, FPL provided the compensation committee with a market-based compensation benchmarking analysis summarizing the executive compensation practices among a peer group of companies consisting of REITs reasonably comparable in size to the Company based on total market capitalization and total return. The size-based peer group was utilized to assist the compensation committee in understanding current compensation structures and practices. However, the compensation committee did not rely solely upon benchmarking to determine the compensation of the Company’s NEOs and other executive officers, but used the compensation levels, structures and practices of the peer group as one of many factors to formulate the Company’s executive compensation structure. The compensation of the Company’s NEOs is not tied to a specified percentile of a peer group.
2019 Peer Group. The size-based peer group utilized by the compensation committee in establishing compensation metrics for the Company’s NEOs for fiscal year 2019 was comprised of the following:
•
Armada Hoffler Properties, Inc.
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Independence Realty Trust, Inc.
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CatchMark Timber Trust, Inc.
•
Rexford Industrial Realty, Inc.
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Cedar Realty Trust, Inc.
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Summit Hotel Properties, Inc.
•
Chatham Lodging Trust
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Terreno Realty Corporation
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Chesapeake Lodging Trust
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TIER REIT, Inc.
•
Easterly Government Properties, Inc.
•
Whitestone REIT
•
Hersha Hospitality Trust
2020 Peer Group. The size-based peer group utilized by the compensation committee in establishing compensation metrics for the Company’s NEOs was comprised of the following:
•
Agree Realty Corporation
•
Independence Realty Trust, Inc.
•
Chatham Lodging Trust
•
Kite Realty Group Trust
•
Columbia Property Trust
•
Retail Opportunity Investments Corp.
•
Easterly Government Properties, Inc.
•
Summit Hotel Properties, Inc.
•
Hannon Armstrong Sustainable
Infrastructure Capital, Inc.
•
Terreno Realty Corporation
•
Whitestone REIT
•
Hersha Hospitality Trust
Say-on-Pay Vote
At our 2017 annual meeting of stockholders, we provided our stockholders with the opportunity to vote to approve, on an advisory basis, the compensation of our NEOs. A substantial majority of our stockholders (91.94%) that voted at the 2017 annual meeting of stockholders approved the compensation of our NEOs as described in our proxy statement for the 2017 annual meeting of stockholders, which descriptions included both the proposed annual salaries for each NEO for 2018, as well as the proposed formulas for the calculation of each element of incentive compensation for which our NEOs were proposed to be eligible in 2018. The compensation committee reviewed and considered the results of this advisory “say-on-pay” vote in determining specific award amounts granted to our NEOs for 2018. The compensation committee will also carefully consider the results of other future stockholder votes on executive compensation, along with other expressions of stockholder views it receives on specific policies and desirable actions.
Say-on-Frequency Vote
At our 2014 annual meeting of stockholders, our stockholders who voted recommended by a strong majority (77.15%) that we hold an advisory stockholder vote on the compensation of our NEOs every three years. As a result of this vote, as noted above, the stockholders held an advisory vote on the NEOs compensation at the 2017 annual meeting of stockholders. Our next say-on-pay vote and our next say-on-frequency vote are both scheduled for our 2020 annual meeting of stockholders.
Incentive Plans
The Company’s incentive plans were originally adopted by our Board on December 16, 2013, and approved by our stockholders on January 23, 2014, as the 2014 Equity Incentive Plan for Individuals (the “2014 Individuals Plan”) and the 2014 Equity Incentive Plan for Entities (the “2014 Entities Plan,” and together with the 2014 Individuals Plan, as each was subsequently amended and restated, the “2014 Incentive Plans”).
On August 9, 2018, our Board adopted, and on September 28, 2018 our stockholders approved, the third amendment and restatement of the 2014 Individuals Plan (the “Third Amended 2014 Individuals Plan”) and the 2014 Entities Plan (the “Third Amended 2014 Entities Plan,” and together with the Third Amended 2014 Individuals Plan, the “Third Amended 2014 Incentive Plans,” and together with the 2014 Incentive Plans, the “Incentive Plans”), which superseded and replaced in their entirety the 2014 Incentive Plans Under the Third Amended 2014 Incentive Plans, we have reserved and authorized an aggregate number of 2,250,000 shares of our common stock for issuance. As of February 6, 2020, 762,401 shares were available for future issuance.
The purpose of the Third Amended 2014 Incentive Plans is to attract and retain independent directors, executive officers and other key employees, including officers and employees of our Operating Partnership and their affiliates, and other service providers. The Third Amended 2014 Incentive Plans provide for the grant of options to purchase shares of our common stock, stock awards, stock appreciation rights, performance units, incentive awards and other equity-based awards.
Stock Ownership Guidelines
On December 20, 2017, to further align the interests of our executive officers and directors with the interest of our stockholders, and to promote our commitment to sound corporate governance, our Board implemented stock ownership guidelines (“Stock Ownership Guidelines”) for our executive officers, including our NEOs, and non-employee directors.
The stock ownership guidelines provide that, within five years of the later date of adoption of the guidelines or the date an individual first becomes subject to the guidelines upon becoming a director or executive officer:
•
our Chief Executive Officer is encouraged to own shares of our common stock, including restricted stock, valued at a minimum of six times annual base compensation;
•
all other executive officers are encouraged to own shares of our common stock, including restricted stock, valued at a minimum of three times annual base compensation; and
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non-employee directors are encouraged to own shares of our common stock valued at a minimum of three times their annual director compensation.
As of December 31, 2019, all of our directors and Executive Officers were in compliance with our stock ownership guidelines or on track to be compliant within the five-year period specified by the guidelines.
Pledging Policy
In February 2019, our Board adopted a Pledging Policy Regarding Company Securities (the “Pledging Policy”). The Pledging Policy prohibits the Company’s executive officers and directors from pledging, or otherwise using as collateral to secure any loan or other obligation, any Company securities that such executive officer or director is required to hold pursuant to the Company’s Stock Ownership Guidelines. To encourage our executive officers and directors to continue to hold Company securities currently owned by them that are in excess of the amounts required under the Stock Ownership Guidelines, and to encourage them to increase such ownership over time, our executive officers and directors will be permitted to pledge only such Company securities held in excess of the Stock Ownership Guidelines applicable to such executive officer or director (such excess, to the extent pledged, the “Pledged Shares”) and subject to certain restrictions and limitations. The Pledging Policy requires that the average outstanding loan balance on any separate loan arrangement secured in whole or in part by such Pledged Shares must be limited, on an annual basis, to thirty percent (30%) of the time-weighted value of the creditor’s collateral package, inclusive of any Pledged Shares. Within thirty (30) days of entering into any new pledge or loan arrangement, the executive officer or director will be required to certify to the audit committee that such pledge is limited to only such Company securities held in excess of the applicable Stock Ownership Guidelines. In addition, within thirty (30) days of the effective date of the Pledging Policy, any executive officer or director who, prior to such effective date, had entered into a pledge or loan arrangement with respect to Pledged Shares must certify to the audit committee that such arrangement does not include any pledge of Company securities required to be held under the Stock Ownership Guidelines applicable to such executive officer or director. Finally, within ten (10) days following each annual meeting of the Company’s stockholders, each executive officer or director will be required to certify to the audit committee that each such pledge or loan arrangement is limited, on an annual basis, to thirty percent (30%) of the time-weighted value of the creditor’s collateral package, inclusive of any Pledged Shares.
Clawback Policy
Our compensation committee has adopted a policy on the clawback of incentive compensation. The policy is applicable to incentive-based compensation (including equity and equity-based compensation) that is paid, issued or vests based on the achievement of performance objectives (“Incentive Awards”) granted on or after its effective date to current or former executive officers while an executive officer (“Covered Executives”). The policy will be invoked in the event that (a) the Company is required to restate its financial statements due to material noncompliance with any financial reporting requirement under U.S. federal securities laws (whether or not based on fraud or misconduct) and the Board or the compensation committee has not determined that such restatement (i) is required or permitted under GAAP in connection with the adoption or implementation of a new accounting standard or (ii) was caused by the Company’s decision to change its accounting practice as permitted by applicable law, and (b) the performance measurement period with respect to the grant or vesting of such Incentive Awards includes one or more fiscal periods affected by such restatement.
In such event, under the terms of the policy, our Board or the compensation committee will determine whether, within three (3) completed fiscal years preceding the restatement date and any interim period, any Covered Executives received Incentive Awards in excess of the amount to which he or she would otherwise have been entitled based on the restated financial statements (such excess amount, “Excess Compensation”). If the Board or the compensation committee determines that any Covered Executive received Excess Compensation, the Company will be entitled to recover such Excess Compensation from such Covered Executive, and our Board or the compensation committee, in its sole discretion and subject to applicable
law, will take such action as it deems necessary to recover such Excess Compensation. Such actions may include (i) requiring repayment or return of prior Incentive Awards made to such Covered Executive, including Incentive Awards not affected by the accounting restatement, (ii) cancelling unvested Incentive Awards, or (iii) adjusting the future compensation of such Covered Executive.
In the event that the Board or the compensation committee determines that a Covered Executive’s acts or omissions constituted fraud or misconduct, then in addition to the recovery of Incentive Awards, the Board or the compensation committee may (i) take (in the case of the Board), or recommend to the Board (in the case of the compensation committee), disciplinary action, including termination, and (ii) pursue other available remedies, including legal action.
In addition, each award that may be granted under the Third Amended 2014 Incentive Plans will be subject to the condition that we may require that such award be returned, and that any payment made with respect to such award must be repaid, if such action is required under the terms of any recoupment or “clawback” policy of ours as in effect on the date that the payment was made, or on the date the award was granted or exercised or vested or earned, as applicable.
Our Board and compensation committee recognize that the Dodd-Frank legislation enacted in 2010 may, following rulemaking, require some modification of these policies. Our Board and compensation committee intend to review any rules adopted as a result of that legislation and to adopt any modifications to these policies that become required by applicable law.
Compensation Policies and Practices Relating to Risk Management
The compensation committee, with the assistance of FPL, conducts regular analytical reviews focusing on several key areas of the Company’s compensation program for its NEOs and other executive officer, including external market compensation data, pay mix, selection of performance metrics, the goal-setting process, and internal equity (i.e., compensation differences between individuals) on the payment of compensation. These reviews provide a framework for consideration by the compensation committee with respect to whether any of the Company’s current programs, practices or procedures regarding compensation of its NEOs and other executive officer should be altered to help ensure the Company maintains an appropriate balance between prudent business risk and resulting compensation.
As a result of this process, the compensation committee has concluded that while a significant portion of the Company’s compensation program for its NEOs and other executive officer is performance-based, the program does not encourage excessive or unnecessary risk-taking. The compensation committee further concluded that the Company’s policies and procedures largely achieve the appropriate balance between the Company’s annual goals and its long-term financial success and growth. While risk-taking is a necessary part of the growth of any business, the compensation committee focuses on aligning the Company’s compensation policies with its long-term interests, and on avoiding short-term rewards for management decisions that could pose long-term risks to the Company, including as follows:
•
Use of Long-Term Compensation. In order to more closely align the interests of the Company’s NEOs and other executive officer with those of its stockholders, more than half of the total compensation payable or potentially payable to our NEOs and other executive officer is non-cash compensation in the form of long-term equity-based awards. This structure is also intended to maximize retention, as such equity-based awards are subject to either time- or performance-based vesting, generally over a period of at least three years (subject to accelerated vesting upon certain terminations of the holder’s employment as described under “Potential Payments Upon Termination or Change-in-Control” below). Such vesting periods encourages our NEOs and other executive officer to focus on sustaining the Company’s long-term performance. Grants of such long-term equity-based awards are typically made annually, so our NEOs and other executive officer generally have unvested awards that could decrease significantly in value if the Company’s business is not managed for the long-term.
•
Stock Ownership Guidelines. The Board has implemented stock ownership guidelines for our NEOs and other executive officer, which are described above under “Stock Ownership Guidelines.” The compensation committee believes that significant ownership of the Company’s common stock by its NEOs and other executive officer helps to align the interests of the Company’s management with
those of its stockholders, and is consistent with the Company’s commitment to sound corporate governance. As of December 31, 2019, all of our NEOs and our other executive officer were in compliance with our stock ownership guidelines or on track to be compliant within the five-year period specified by the guidelines.
•
Clawback Policy. The compensation committee has also adopted a policy on the clawback of incentive compensation, which is described above under “Clawback Policy.” Under the clawback policy, if the Company is required to restate its financial results due to material noncompliance with any financial reporting requirement under the U.S. federal securities laws (whether or not based on fraud or misconduct) and the Board or the compensation committee has not determined that such restatement is subject to certain exceptions, the Company may recover certain excess incentive-based compensation (including equity and equity-based compensation) that is paid, issued or vests based on the achievement of performance objectives and that is granted on or after the policy’s effective date to current or former NEOs or other executive officer while an NEO or other executive officer.
•
Performance Metrics. The compensation committee further believes in linking pay with performance. In 2019 (as in 2018), the Company used a variety of quantifiable performance metrics for its annual incentive programs, which are described in more detail under “Compensation Discussion and Analysis - Elements of Compensation and 2019 Compensation Decisions.”
In summary, the compensation committee believes that structuring the Company’s executive compensation program such that a considerable amount of the compensation of its NEOs and other executive officer is tied to the Company’s long-term success and share value provides incentives for our NEOs and other executive officer to manage the Company for long-term growth in a prudent manner, and avoids creating disproportionately large short-term incentives that could otherwise serve to promote the taking of risks that would not be in the long-term interests of the Company.
Lending Policies
We may not make loans to our directors, officers or other employees except in accordance with our code of business conduct and ethics and applicable law.
Compensation Committee Report(1)
The compensation committee has reviewed and discussed with management the Compensation Discussion and Analysis contained in this Annual Report on Form 10-K. Based on such review and discussion, the compensation committee has recommended to our Board that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Submitted by the Compensation Committee:
Romano Tio, Chairman
Elizabeth Harrison
I. Bobby Majumder
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee are Romano Tio, Elizabeth Harrison and I. Bobby Majumder, each of whom is an independent director. None of these directors has at any time served as an officer or employee of the Company. None of our executive officers has served as a director or member of the compensation committee of any entity that has one or more of its executive officers serving as a member of our Board or compensation committee. Accordingly, during 2019 there were no interlocks with other companies within the meaning of the SEC’s rules.
(1)
The Compensation Committee Report does not constitute “soliciting material” and will not be deemed “filed” or incorporated by reference into any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate our SEC filings by reference, in whole or in part, notwithstanding anything to the contrary set forth in those filings.
EXECUTIVE OFFICER COMPENSATION TABLES
Summary Compensation Table
The table below summarizes the total compensation paid or earned by our NEOs in 2019, 2018 and 2017.
*
Pursuant to a Services Agreement with his wholly-owned law firm, K&A.
(1)
Each executive officer is eligible for an annual cash incentive bonus for the year ended December 31, 2019. The amounts of such bonuses are not calculable through the latest practicable date, but will be determined by the compensation committee, in its reasonable business judgment and based on its review of the Company’s performance and the performance of each such executive officer during that time period, in March 2020. The annual cash incentive bonuses will be payable on March 15, 2020.
(2)
Amounts shown do not reflect compensation actually received by the named executive officer. Instead, the amounts shown are the full grant date fair value of LTIP Unit awards issued to the executives in 2019. In accordance with SEC disclosure requirements, the amounts for 2019 include the full grant date fair value of awards issued under the Incentive Plans. The grant date fair value is computed in accordance with FASB ASC 718, “Compensation-Stock Compensation,” or “ASC 718.”
The actual value of awards with respect to these awards are contingent on continued employment and assumes maximum performance had been achieved under any long term performance awards.
(3)
The executive officers did not receive any non-equity incentive plan compensation in 2019.
Grants of Plan-Based Awards for 2019
Estimated Future Payouts Under Equity Incentive Plan Awards
(1)
The amounts presented in this column represent the full grant date fair value of equity awards (calculated pursuant to FASB ASC Topic 718) granted to the Named Executive Officers in 2019. Pursuant to the rules and regulations of the SEC, the amounts exclude the impact of estimated forfeitures related to service-based vesting conditions. The grant date fair value, including the impact of estimated forfeitures related to service-based vesting conditions, is the amount we would expense in our consolidated financial statements over the award’s vesting schedule. For additional information on our value assumptions, refer to Note 13 of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC.
(2)
Represents long-term incentive plan units in the Operating Partnership, of which the Issuer is the general partner. These LTIP Units will vest ratably over a three year period and may convert to OP Units upon reaching capital account equivalency with the OP Units held by the Issuer, and may then be redeemed for cash or, at the option of the Issuer and after a one year holding period (including any period during which the LTIP Units were held), settled in shares of the Issuer’s Class A common stock on a one-for-one basis.
(3)
Represents long-term incentive plan units in the Operating Partnership of which the Issuer is the general partner. These Long Term Performance Awards LTIP Units are subject to a three-year performance period beginning January 1, 2019 and may vest at the end of that period subject to performance criteria and established targets. The LTIP Units may convert to OP Units upon reaching capital account equivalency with the OP Units held by the Issuer, and may then be redeemed for cash, or at the option of the Issuer and after a one-year holding period (including any period during which the LTIP Units were held), settled in shares of the Issuer’s Class A common stock on a one-for-one basis.
Outstanding Equity Awards at December 31, 2019
The following table sets forth certain information with respect to outstanding equity awards held by the named executive officers as of December 31, 2019:
(1)
Based upon the closing price of our Class A common stock on December 31, 2019 of  $12.05.
(2)
Each LTIP award vests and becomes nonforfeitable as follows: (i) the first and second installments vested on December 31, 2018 and October 31, 2019, respectively, in the amount of one-fifth (1/5) of the LTIP award and (ii) the third through fifth installments on the third through fifth anniversary of October 31, 2017, respectively, in an amount equal to one-fifth (1/5) of the LTIP award, in each case subject to continued employment and other conditions.
(3)
The amount of each such LTIP award was determined as set forth above. Each LTIP award vests and becomes nonforfeitable in three equal installments on each anniversary of the date of grant, subject to continued employment and other conditions.
(4)
Each LTIP award vests and becomes nonforfeitable as follows: (i) the first and second installments vested on December 31, 2018 and October 31, 2019, respectively, in the amount of one-third (1/3) of the LTIP award, and (ii) the third installment on the third anniversary of October 31, 2017, respectively, in the amount of one-third (1/3) of the LTIP award, in each case subject to continued employment and other conditions.
(5)
Each Initial Long Term Performance Award was granted in the form of LTIP Units for a three-year performance period, with a threshold equal to 50% of that year’s Annual LTIP Award, a target equal to that year’s Annual LTIP Award and a maximum equal to 150% of that year’s Annual LTIP Award, subject to the performance criteria and targets established and administered by the compensation committee. The amounts in the table assume maximum performance. The actual number of LTIP Units that become fully vested in respect of each such Long Term Performance Award will be based on the attainment, over the three-year performance period, of targets related to relative total stockholder return, relative same store net operating income growth, and inclusion in certain peer indices, as well as a subjective evaluation of the achievement of strategic objectives. Each such Long Term Performance Award will vest and become nonforfeitable effective as of the last day of the performance period. Due to limitations on the number of LTIP Units then available for issuance under the 2014 Incentive Plans, these Long Term Performance Awards were, in aggregate, lower than those to which the recipients were entitled pursuant to the terms of their respective Executive Agreements. Upon stockholder approval of the Third Amended 2014 Incentive Plans, such remaining LTIP Units were issued by the Company to each such recipient at such time. See footnote (6).
(6)
The increased capacity under the Third Amended 2014 Incentive Plans enabled the Company to issue the Shortfall LTIP Units, for a three-year performance period from the date of grant of the Initial Long Term Performance Award, subject to performance criteria and targets established and administered by the compensation committee. Each such Shortfall Long Term Performance Award will vest and become nonforfeitable effective as of the last day of the performance period, subject to certain clawback and termination provisions.
(7)
Each Initial Long Term Performance Award was granted in the form of LTIP Units for a three-year performance period, with a threshold equal to 50% of that year’s Annual LTIP Award, a target equal to that year’s Annual LTIP Award and a maximum equal to 150% of that year’s Annual LTIP Award, subject to the performance criteria and targets established and administered by the compensation committee. The amounts in the table assume maximum performance. The actual number of LTIP Units that become fully vested in respect of each such Long Term Performance Award will be based on the attainment, over the three-year performance period, of targets related to relative total stockholder return, relative same store net operating income growth, and return on investment on certain redevelopment projects, as well as a subjective evaluation of the achievement of strategic objectives. Each such Long Term Performance Award will vest and become nonforfeitable effective as of the last day of the performance period.
Stock Vested in 2019
The following table sets forth certain information with respect to the vesting of LTIP Units for each named executive officer during the fiscal year ended December 31, 2019.
(1)
Based on a price of  $9.02 and $12.02 per LTIP Unit, which were the closing prices on the NYSE American of one share of Class A common stock on January 1, 2019 and October 31, 2019, respectively. Assumes that the value of LTIP Units on a per unit basis is equal to the per share value of our Class A common stock.
Narrative Discussion of Summary Compensation Table
We provide additional disclosure below of factors relating to the Summary Compensation Table, including descriptions of the Executive Agreements of our NEOs. For further narrative disclosures concerning the information set forth in the Summary Compensation Table, please see “Compensation Discussion and Analysis” in this Form 10-K.
Executive Agreements with our NEOs
We have entered into Employment Agreements with Messrs. Kamfar, Babb, MacDonald, Ruddy, and Vohs, as well as a Services Agreement with Mr. Konig on substantially the same terms as the Employment Agreements. Hereinafter, references to “Executive Agreement(s)” will refer solely to the Employment and/or Service Agreement(s) of our NEOs. The post-termination and severance provisions of these agreements are discussed in “Potential Payments Upon Termination or Change-in-Control” below.
Term. The Executive Agreements became effective as of the closing of the Internalization on October 31, 2017. The Executive Agreements will continue in effect for an initial term through and including December 31, 2020, subject to automatic renewals of additional successive one-year periods unless either party thereto provides at least sixty (60) days’ advance notice of non-renewal. The Executive Agreements provide that each of Mr. Kamfar, Mr. Babb, Mr. MacDonald, Mr. Ruddy, Mr. Vohs, and Mr. Konig, each in their respective capacity as executive officers (collectively, the “Executive Officers,” and each, an “Executive Officer”) can voluntarily terminate his employment or service for any reason upon 60 days’ notice or by sending a notice of non-renewal to the Company, or may resign for good reason. The Company may also terminate the Executive Agreements upon the disability of the Executive Officer, and the Executive Officer’s
employment or service shall terminate upon such Executive Officer’s death. The terms “cause,” “disability,” and “good reason,” are discussed in “Potential Payments on Termination or Change-In-Control” below.
Duties. The Executive Agreements provide that each Executive Officer will perform duties and provide services to us that are commensurate with the duties, authorities and responsibilities of persons in similar capacities in similarly sized companies, and such other duties, authorities and responsibilities as may reasonably be assigned to him from time to time by the Board or, in the case of Executive Officers other than Mr. Kamfar, the Chief Executive Officer. The Executive Agreements further provide that the Executive Officers will, without additional compensation, also serve on the Board of, serve as an officer of, and/or perform such executive and consulting services for, or on behalf of, such subsidiaries of the Company as the Board may, from time to time, request. The Executive Agreements also provide that the Executive Officers will devote substantially all of their business time and attention to the performance of their duties to the Company, but will be permitted to devote time as they determine in good faith to be necessary or appropriate to fulfill their duties to Bluerock and its affiliates, and engage in certain other outside activities, so long as those duties and activities do not unreasonably interfere with the performance of their duties to us.
Compensation. The Executive Agreements provide that Mr. Kamfar, Mr. Babb, Mr. MacDonald, Mr. Ruddy, and Mr. Vohs will receive an annual base salary or, in the case of Mr. Konig, an annual base payment, of at least $400,000, $325,000, $300,000, $300,000, $250,000, and $300,000, respectively. Each Executive Agreement provides that each Executive Officer’s base salary or base payment, as applicable, will be reviewed annually for appropriate increases by the compensation committee, but will not be decreased. Each Executive Agreement further states that each Executive Officer is eligible to receive an annual incentive bonus payable in cash, and annual grants of time- and performance-based equity awards, in each case as described above in “Elements of Executive Compensation” and “2019 Compensation Decisions.” Each Executive Agreement provides that each Executive Officer is entitled to participate in all executive incentive and, and except for Mr. Konig, all employee benefit programs of the Company made available to the Company’s senior executives generally, and to be reimbursed for reasonable and customary expenses related to his employment and to paid vacation in accordance with the Company’s policies.
Clawback. Each Executive Agreement provides that any compensation paid to the Executive Officer pursuant to the Executive Agreement or any other agreement or arrangement with the Company is subject to mandatory repayment by the Executive Officer to the Company if and to the extent any such compensation or gain is or becomes subject to (i) the Company’s clawback policy, or (ii) any law, rule, requirement or regulation which imposes mandatory recoupment, under circumstances set forth in such law, rule, requirement or regulation.
Non-Competition, Non-Solicitation, Intellectual Property, Confidentiality and Non-Disparagement. The Executive Agreements provide that for the one-year period following the termination of his employment or its service relationship with the Company for any reason, the respective Executive Officer will not solicit our employees or exclusive consultants or independent contractors, and for the eighteen-month period following the termination of his employment or its service relationship with us for any reason, each Executive Officer will not solicit our investors or customers or compete with us. Each Executive Agreement also contains covenants relating to the treatment of confidential information and intellectual property matters and restrictions on the ability of each of the Executive Officers on the one hand and us on the other hand to disparage the other.
Parachute Payments. Each Executive Agreement provides that the Executive Officer shall bear all expense of, and be solely responsible for, all federal, state, local or foreign taxes due with respect to any amount payable to or other benefit receivable by the Executive Officer under their Executive Agreement, including, without limitation, any excise tax imposed by Section 4999 of the Code; provided, however, that any such amount or benefit deemed to be a “parachute payment” (as defined in Section 280G of the Code) alone or when added to any other amount payable or paid to or other benefit receivable or received by the Executive Officer which is deemed to constitute a parachute payment (whether or not under an existing plan, arrangement or other agreement), and would result in the imposition on the Executive Officer of an excise tax under Section 4999 of the Code (all such amounts and benefits being referred to as total payments), shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code but only if, by reason of such reduction, the net after-tax benefit received by the
Executive Officer shall exceed the net after-tax benefit received by the Executive Officer if no such reduction was made. Net after-tax benefit is defined as (i) the total of all payments and the value of all benefits which the Executive Officer receives or is then entitled to receive from the Company that would constitute parachute payments, less (ii) the amount of all federal, state and local income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to the Executive Officer (based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of the foregoing) and the amount of applicable employment taxes, less (iii) the amount of excise taxes imposed with respect to the payments and benefits described in (i) above by Section 4999 of the Code.
Section 409A. Each Executive Agreement provides that it is intended to comply with the requirements of Section 409A of the Code, to the extent applicable, and the Executive Agreement will be interpreted to avoid any penalty sanctions under Section 409A of the Code. Accordingly, each Executive Agreement provides that all of its provisions will be construed and interpreted to comply with Section 409A and, if necessary, any such provision shall be deemed amended to comply with Section 409A of the Code and regulations thereunder. If any payment or benefit cannot be provided or made at the time specified herein without incurring sanctions under Section 409A of the Code, then such benefit or payment shall be provided in full at the earliest time thereafter when such sanctions will not be imposed. For purposes of Section 409A of the Code, each payment made under the Executive Agreement shall be treated as a separate payment. In no event may the Executive Officer, directly or indirectly, designate the calendar year of payment. The Executive Officer will be deemed to have a termination of employment for purposes of determining the timing of any payments or benefits hereunder that are classified as deferred compensation only upon a “separation from service” within the meaning of Section 409A of the Code.
Each Executive Agreement provides that if on the date of the Executive Officer’s termination of employment, the Executive Officer is a “specified employee” (as such term is defined in Section 409A(a)(2)(B)(i) of the Code and its corresponding regulations) as determined by the board (or its delegate) in its sole discretion in accordance with its “specified employee” determination policy, then all cash severance payments payable to the Executive Officer under the Executive Agreement that are deemed as deferred compensation subject to the requirements of Section 409A of the Code shall be postponed for a period of six months following the Executive Officer’s “separation from service” with the Company (or any successor thereto). The postponed amounts shall be paid to the Executive Officer in a lump sum on the date that is six (6) months and one (1) day following the Executive Officer’s “separation from service” with the Company (or any successor thereto). If the Executive Officer dies during such six-month period and prior to payment of the postponed cash amounts hereunder, the amounts delayed on account of Section 409A of the Code shall be paid to the personal representative of the Executive Officer’s estate on the sixtieth (60th) day after the Executive Officer’s death. If any of the cash payments payable pursuant to the Executive Agreement are delayed due to the requirements of Section 409A of the Code, there shall be added to such payments interest during the deferral period at an annualized rate of interest equal to the prime rate as reported in the Wall Street Journal (or, if unavailable, a comparable source) at the relevant time.
All reimbursements provided under the Executive Agreements that constitute deferred compensation under Section 409A of the Code shall be made or provided in accordance with the requirements of Section 409A, including, where applicable, the requirement that (i) any reimbursement is for expenses incurred during the Executive Officer’s lifetime (or during a shorter period of time specified in the Executive Agreement), (ii) the amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement in any other calendar year, (iii) the reimbursement of an eligible expense will be made on or before the last day of the taxable year following the year in which the expense is incurred, and (iv) the right to reimbursement is not subject to liquidation or exchange for another benefit.
Potential Payments Upon Termination or Change-in-Control
The following section describes potential payments and benefits to the NEOs under the Company’s compensation and benefit plans and arrangements upon termination of employment or a change of control of the Company.
We have entered into Employment Agreements with Messrs. Kamfar, Babb, MacDonald, Ruddy, and Vohs, as well as a Services Agreement with Mr. Konig on substantially the same terms as the Employment Agreements (hereinafter, collectively, the “Executive Agreements”). The Executive Agreements provide for payments and other benefits if the NEO’s employment with us is terminated under circumstances specified in his respective Executive Agreement. An NEO’s rights upon the termination of his employment or service will depend upon the circumstances of the termination. The table below summarizes these rights and the amount of any payments and benefits due under the circumstances specified for the NEO indicated.
Further, certain of the Company’s benefit plans and arrangements contain provisions regarding acceleration of vesting and payment upon specified termination events; see “- Company Share-Based Plans” below. In addition, the Company may authorize discretionary severance payments to its NEOs upon termination.
Company Share-Based Plans
Third Amended 2014 Incentive Plan (the “Incentive Plans”). A “Change in Control” under the Third Amended 2014 Incentive Plans occurs if:
•
a person, entity or affiliated group (with certain exceptions) acquires, in a transaction or series of transactions, more than 50% of the total combined voting power of our outstanding securities;
•
there occurs a merger, consolidation, reorganization, or business combination, unless the holders of our voting securities immediately prior to such transaction have more than 50% of the combined voting power of the securities in the successor entity or its parent;
•
we (i) sell or dispose of all or substantially all of our assets or (ii) acquire assets or stock of another entity, unless the holders of our voting securities immediately prior to such transaction have more than 50% of the combined voting power of the securities in the successor entity or its parent; or
•
during any period of twelve consecutive months, individuals who, at the beginning of such period, constitute our Board together with any new directors (other than individuals who become directors in connection with certain transactions or election contests) cease for any reason to constitute a majority of our Board.
If we experience a Change in Control, the administrator may, at its discretion, provide that awards (including LTIP Units) that vest, are earned or become exercisable based solely on continued employment or service (“Time-Based Awards”) that are outstanding on the date of such Change in Control will be assumed by the surviving entity, will be replaced by a comparable substitute award of substantially equal value granted by the surviving entity, or will otherwise automatically become fully exercisable, restrictions and conditions on outstanding stock awards will lapse, and performance units, incentive awards or other equity-based awards will become earned and nonforfeitable in their entirety, on such date. Any Time-Based Awards so assumed or replaced with substitute awards in connection with the Change in Control will vest in accordance with their original terms, except that any such assumed or substitute awards for Time-Based Awards originally granted under the Incentive Plans will automatically become vested in full on the last day of the holder’s employment if  (A) the holder’s employment or service with the Company, the Successor Entity, or an affiliate thereof is terminated (i) involuntarily without Cause or following non-renewal of the holder’s employment agreement, (ii) voluntarily by the holder with Good Reason, or (iii) on account of the holder’s death or disability, and (B) the holder remained in the continuous employ or service of the Company, the Successor Entity, or the applicable affiliate thereof from the date of such Change in Control until the date of such termination of employment or service.
Awards that are not Time-Based Awards (“Performance Awards”) that are outstanding on the date of such Change in Control must be assumed or replaced with substitute awards in connection with the Change in Control. Such assumed or substituted Performance Awards will be of the same type of award as the original Performance Awards being assumed or replaced, and will have a value, as of the date of such Change in Control, that is substantially equal to the value of the original Performance Awards. In addition, such assumed or substituted Performance Awards will continue to vest in accordance with the terms and conditions of the original Performance Awards being assumed or replaced; provided, that the performance objectives and measures of the original Performance Awards being assumed or replaced shall be adjusted as the
administrator determines is equitably required. Notwithstanding the preceding sentence (and solely with respect to assumed or substitute awards for Performance Awards originally granted under the Plans), if (A) the holder’s employment with the Company, the Successor Entity, or an affiliate thereof is terminated (i) involuntarily without Cause, (ii) following non-renewal of the employment agreement, if any, between the holder and the Company, the Successor Entity or the applicable affiliate thereof  (if the holder has an employment agreement requiring accelerated vesting in such case), (iii) voluntarily by the holder with Good Reason, or (iv) on account of the holder’s death or disability, and (B) the holder remained in the continuous employ of the Company, the Successor Entity or the applicable affiliate thereof from the date of such Change in Control until the date of such termination of employment, then the assumed or substituted Performance Awards will automatically become vested with respect to a pro rata number of the shares or other securities subject to such assumed or substituted Performance Awards based on the extent to which the performance or other objectives are achieved as of the date of such termination of employment or service. Any portion of any such Performance Awards that does not become so vested will be forfeited.
The administrator may also provide that any Time-Based Awards (or any portion thereof) that become vested in connection with the Change in Control as set forth above may be cancelled, in the sole discretion of the administrator, in exchange for a payment, in cash or shares of our common stock or other securities or consideration received by stockholders in the Change in Control transaction, in an amount substantially equal to (i) the price per share of Class A Common Stock received by stockholders (in the case of vested shares of Class A Common Stock), (ii) the amount by which the price per share of Class A Common Stock received by stockholders exceeds the option price or Initial Value (in the case of Options and SARs), and (iii) if applicable, the value of the other securities or property in which a Performance Unit or Other Equity-Based Award is denominated. However, in the case of Options and SARs, if the option price or Initial Value exceeds the price per share of Class A Common Stock received by stockholders in the Change in Control transaction, the Option or SAR may be cancelled without any payment to the holder.
The Code has special rules that apply to “parachute payments,” i.e., compensation or benefits the payment of which is contingent upon a Change in Control. If certain individuals receive parachute payments in excess of a safe harbor amount prescribed by the Code, the payor is denied a federal income tax deduction for a portion of the payments and the recipient must pay a 20% excise tax, in addition to income tax, on a portion of the payments.
If we experience a Change in Control, benefits provided under the Incentive Plans could be treated as parachute payments. In that event, the Incentive Plans provide that the benefits under the Incentive Plans, and all other parachute payments provided under other plans and agreements, will be reduced to the safe harbor amount, i.e., the maximum amount that may be paid without excise tax liability or loss of deduction, if the reduction allows the participant to receive greater after-tax benefits. The benefits under the Incentive Plans and other plans and agreements will not be reduced, however, if the participant will receive greater after-tax benefits (taking into account the 20% excise tax payable by the participant) by receiving the total benefits. The Incentive Plans also provide that these provisions do not apply to a participant who has an agreement with us providing that the participant cannot receive payments in excess of the safe harbor amount.
Change in Control/Severance Payment Table as of December 31, 2019
The following table estimates the potential payments and benefits to our Executive Officers upon termination of employment or a change in control of the Company, assuming such event occurs on December 31, 2019. These estimates do not reflect the actual amounts that would be paid to such persons, which would only be known at the time that they become eligible for payment and would only be payable if the specified event occurs.
Items Not Reflected in Table. The following items are not reflected in the table set forth below:
•
Accrued salary, bonus and vacation.
•
Welfare benefits provided to all salaried employees having substantially the same value.
•
Amounts outstanding under the Company’s 401(k) plan.
Change in Control and Severance Payments as of December 31, 2019
(1)
Each Executive Agreement provides that the Company may terminate the Executive Officer’s employment, to the extent permitted by applicable law, if the Executive Officer (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an
accident and health plan covering employees of the Company, or a disability. If the Company terminates the Executive Officer’s employment for disability, the Executive Officer will be entitled to receive the following:
(A) Any unpaid base salary and accrued but unused vacation and/or paid time off  (determined in accordance with Company policy) through the date of termination (paid in cash within 30 days, or such shorter period required by applicable law, following the effective date of termination);
(B) Reimbursement for all necessary, customary and usual business expenses and fees incurred and paid by the Executive Officer prior to the effective date of termination in connection with his employment or service upon presentation to the Company of reasonable substantiation and documentation (payable in accordance with the Company’s expense reimbursement policy);
(C) Vested benefits, if any, to which the Executive Officer may be entitled under the Company’s employee benefit plans as provided under his Executive Agreement (payable in accordance with the applicable employee benefit plan), and directors and officers liability coverage pursuant to the applicable provisions of the Executive Agreement for actions and inactions occurring during the term of such agreement, and continued coverage for any actions or inactions by the Executive Officer while providing cooperation under the Executive Agreement (all such benefits set forth under subsection (A) through (C) to this footnote (1), collectively, the “Accrued Benefits”); and
(D) The Executive Officer’s outstanding equity awards (x) that are subject solely to time-based vesting conditions shall become fully vested as of Executive Officer’s date of termination for disability and (y) that are subject to performance-based vesting conditions, will vest if and to the extent the applicable performance-based conditions are satisfied as of the date of termination (without regard to the original length of the performance period); provided, however, that any performance-based award that vests pursuant to clause (y) will be pro-rated for the actual number of days in the applicable vesting period preceding the date of termination of Executive Officer’s employment.
(2)
Each Executive Agreement provides that the Company may elect not to extend the term of such Executive Agreement by giving written notice to the Executive Officer at least sixty (60) days prior to any anniversary of December 31, 2020 (a “Non-Renewal”). In the event that the Executive Officer’s employment is terminated by reason of a Non-Renewal by the Company and the Executive Officer is willing and able, at the time of such Non-Renewal, to continue performing services on the terms and conditions set forth herein for the renewal term that would have occurred but for the Non-Renewal, then the Executive Officer shall be entitled to receive:
(A)
The Accrued Benefits; and,
(B)
If the Executive Officer signs a general release of claims in favor of the Company (subject to the expiration of any applicable or legally required revocation period) within sixty (60) days after the effective date of termination (the “Release Requirement”):
(1) A lump sum cash payment equal to a multiple (the “Severance Multiple”) of  (a) three times the sum (in the case of Mr. Kamfar), or (b) two times the sum (in the case of Messrs. Babb, MacDonald, Ruddy, Vohs and Konig) of  (i) his base salary, and (ii) his average annual bonus with respect to two prior calendar years (in the case of Messrs. Kamfar, Babb, MacDonald, Ruddy, Vohs and Konig);
(2) A lump sum cash payment in an amount equal to his target bonus for the then-current calendar year, pro-rated for the number of days in such calendar year ending on the effective date of termination;
(3) All outstanding equity-based awards (x) that are subject solely to time-based vesting conditions will become fully vested as of the effective date of termination, and (y) that are subject to performance-based vesting conditions will vest if and to the extent the applicable performance- based vesting conditions are satisfied as of the date of termination (without regard to the original length of the performance period); provided, that any performance-based award that
vests pursuant to clause (y) will be pro-rated for the actual number of days in the applicable vesting period preceding the effective date of termination;
(4) If entitled to elect continuation of coverage under any Company group health plan under applicable law, reimbursement for 100% of COBRA premiums incurred for he and his dependents under such plan during the duration of his COBRA continuation;
(5) A lump-sum cash payment of any unpaid base salary or unpaid base payment and accrued but unused vacation and/or paid time off through the date of termination; and
(6) Reimbursement for all necessary, customary and usual business expenses and fees incurred and paid prior to the effective date of termination (all such benefits set forth under this subsection (B) to footnote (2), collectively, the “Release Benefits”).
(3)
Under each Executive Agreement, the Company may terminate an Executive Officer’s employment or service at any time without “cause” (defined below) upon not less than sixty (60) days’ prior written notice to the Executive Officer. In addition, the Executive Officer may initiate a termination of employment or service by resigning for “good reason” (defined below). The Executive Officer must give the Company not less than sixty (60) days’ prior written notice of such resignation. In addition, the Company may initiate a termination of employment or service by sending a notice of non-renewal of the Executive Agreement to the Executive Officer, as described above. If the Executive Officer satisfies the Release Requirement in these circumstances, the Executive Officer will be entitled to receive the Accrued Benefits and the Release Benefits. If the Executive Officer does not satisfy the Release Requirement in these circumstances, we refer to the termination as a no-release termination. Upon any no-release termination, the Executive Officer is entitled to receive only the amount due to the Executive Officer under the Company’s then current severance pay plan for employees, if any, and no other payments or benefits will be due under the Executive Agreement to the Executive Officer, but the Executive Officer will be entitled to receive the Accrued Benefits.
Each Executive Agreement defines “cause” as any of the following grounds for termination of the Executive Officer’s employment or service:
i.
the Executive Officer’s conviction of, or plea of guilty or nolo contendere to, a felony (excluding traffic-related felonies), or any financial crime involving the Company (including, but not limited to, fraud, misappropriation or embezzlement of Company assets);
ii.
the Executive Officer’s willful and gross misconduct in the performance of his duties (other than by reason of his incapacity or disability); provided, that the Company’s dissatisfaction with the Executive Officer’s performance shall not constitute “cause”;
iii.
the Executive Officer’s continuous, willful and material breach of the Executive Agreement after written notice of such breach has been given by the Board in its reasonable discretion exercised in good faith; provided that, in no event shall any action or omission in subsection (ii) or (iii) constitute “cause” unless (1) the Company gives notice to the Executive Officer stating that the Executive Officer will be terminated for cause, specifying the particulars thereof in reasonable detail and the effective date of termination (which shall be no less than ten (10) business days following the date on which such written notice is received by the Executive Officer) (the “Cause Termination Notice”), (2) the Company provides the Executive Officer and his counsel with an opportunity to appear before the Board to rebut or dispute the alleged reason for termination on a specified date that is at least three (3) business days following the date on which the Cause Termination Notice is given, but prior to the stated termination date described in clause (1), and (3) a majority of the Board (calculated without regard to the Executive Officer, if applicable) determines that the Executive Officer has failed to materially cure or cease such misconduct or breach within ten (10) business days after the Cause Termination Notice is given to him. For purposes of the foregoing sentence, no act, or failure to act, on the Executive Officer’s part shall be considered willful unless done or omitted to be done by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company, and any act or omission by the
Executive Officer pursuant to the authority given pursuant to a resolution duly adopted by the Board or on the advice of counsel to the Company will be deemed made in good faith and in the best interest of the Company.
Each Executive Agreement defines “good reason” to mean the occurrence of any of the following events without the Executive Officer’s consent:
iv.
the assignment to the Executive Officer of duties or responsibilities substantially inconsistent with his title at the Company or a material diminution in the Executive Officer’s title, authority or responsibilities; provided (in the case of Mr. Kamfar only) that failing to maintain Mr. Kamfar as a member of the Board will constitute “good reason”; and provide (in the case of the other Executive Officers) that a change in title or modification of authority or responsibilities in connection with hiring new or elevating other executives as reasonably required or commensurate with the growth of the Company shall not constitute “good reason”;
v.
a material reduction in base salary, or the annual or long-term target incentive opportunities, of the Executive Officer;
vi.
the Company’s continuous, material and willful breach of the Executive Agreement; or
vii.
the relocation (without the written consent of the Executive Officer) of the Executive Officer’s principal place of employment or service by more than thirty-five (35) miles from its location on the effective date of the Executive Agreement.
Each Executive Agreement provides that (i) “good reason” will not be deemed to exist unless notice of termination on account thereof  (specifying a termination date of at least sixty (60) days but no more than ninety (90) days from the date of such notice) is given no later than ninety (90) days after the time at which the event or condition purportedly giving rise to “good reason” first occurs or arises, and (ii) if there exists an event or condition that constitutes “good reason,” the Company will have thirty (30) days from the date notice of such a termination is given to cure such event or condition and, if the Company does so, such event or condition will not constitute “good reason;” provided, however, that the Company’s right to cure such event or condition will not apply if there have been repeated breaches by the Company.
(4)
Pursuant to the Third Amended 2014 Incentive Plans, the outstanding Time-Based Awards and Performance Awards held by any Executive Officer may be entitled to accelerated vesting in the event of a “Change in Control” of the Company. Immediate acceleration of vesting upon a Change in Control occurs only with respect to outstanding Time-Based Awards that are not assumed or replaced with a substitute award of substantially equal value by the surviving entity, whereas upon such event, outstanding Time-Based Awards that are so assumed or replaced, and all outstanding Performance Awards, will generally vest in accordance with their original terms and conditions. However, if upon a Change in Control or thereafter, an Executive Officer’s employment or service is terminated (i) involuntarily without “cause,” (ii) following non-renewal of the Executive Officer’s Executive Agreement (if the Executive Agreement requires accelerated vesting in such case), (iii) voluntarily by the Executive Officer with “good reason,” or (iv) on account of the Executive Officer’s death or disability, and the Executive Officer remained in the continuous employ or service of the Company or the successor entity from the date of such Change in Control until the date of such termination, then under the Third Amended 2014 Incentive Plans, all such assumed or replaced Time-Based Awards, and all or a pro rata portion (based on the extent to which the applicable performance or other objectives are achieved) of such Performance Awards, will automatically become fully vested as of the last day of the Executive Officer’s employment or service.
In addition, the Executive Agreement of each Executive Officer other than Mr. Kamfar provides that if a Change in Control of the Company occurs and, upon or within 18 months thereafter, the Company terminates the Executive Officer’s employment or service without “cause” or the Executive Officer terminates his employment or service for “good reason,” then the Executive Officer shall be entitled to receive (A) the Accrued Benefits; and (B) if the Executive Officer satisfies the Release Requirement, the Release Benefits, except that the Severance Multiple shall be three rather than two. The “Change in Control” provision in the Executive Agreement of each Executive Officer other than Mr. Kamfar serves
to change the Severance Multiple to be used in calculating the amount of cash severance to which each such Executive Officer may be entitled, under the preceding circumstances, in the event of a Change in Control, but does not affect or accelerate the vesting, in such event, of the outstanding Time-Based Awards or Performance Awards held by the Executive Officer.
The Executive Agreement of each Executive Officer other than Mr. Kamfar defines “Change in Control” to have the same meaning as the same term under the Third Amended 2014 Incentive Plans, which definition is set forth above under “Potential Payments Upon Termination or Change-in-Control - Company Share-Based Plans.”
(5)
Amount reflects the occurrence of a Change in Control and, (A) upon or within 18 months thereafter, (i) the Company’s termination of the Executive Officer’s employment or service without “cause” or (ii) the Executive Officer’s termination of his employment or service for “good reason,” and (B) the Executive Officer’s satisfaction of the Release Requirement, thereby triggering, under the Executive Agreement of each of Messrs. Babb, MacDonald, Ruddy, Vohs and Konig, a cash severance payment calculated using a Severance Multiple of three rather than two.
Amount reflects the occurrence of a Change in Control and, (A) upon or within 18 months thereafter, (i) the Company’s termination of the Executive Officer’s employment or service without “cause” or (ii) the Executive Officer’s termination of his employment or service for “good reason,” and (B) the Executive Officer’s satisfaction of the Release Requirement, thereby triggering, under the Executive Agreement of each of Messrs. Babb, MacDonald, Ruddy, Vohs and Konig, a cash severance payment calculated using a Severance Multiple of three rather than two.
(6)
Amount reflects accelerated vesting of  (i) all Time-Based Awards outstanding as of 12/31/19, and (ii) approximately 38% of Performance Awards outstanding as of 12/31/19.
(7)
$120,000 represents the maximum amount paid under the Company’s Long-Term Disability Plan to an employee if disabled for 90 consecutive days and the employee was eligible to receive the long-term disability payments. $120,000 represents the aggregate of maximum monthly payments of  $2,000 payable as a long-term disability benefit for a maximum of 5 years or to age 70 (such payments would continue for the length of the disability).
(8)
Represents COBRA payments for a maximum of 18 months.
In the event of the death of an Executive Officer during the term of their Executive Agreement, the Executive Officer will be entitled to receive (i) the Accrued Benefits, and (ii) all outstanding equity awards (a) that are subject solely to time-based vesting conditions, which will become fully vested as of the date of such Executive Officer’s death, and (b) that are subject to performance-based vesting conditions, which will vest if and to the extent the applicable performance-based vesting conditions are satisfied as of the date of such Executive Officer’s death (without regard to the original length of the performance period); provided, however, that any performance-based award that vests and becomes payable pursuant to clause (b) will be pro-rated for the actual number of days in the applicable performance period preceding the Executive Officer’s death.
In the event of  (i) the Company’s termination of an Executive Officer’s employment or service at any time for “cause” or (ii) voluntary termination by the Executive Officer without “good reason” upon sixty (60) days’ prior written notice to the Company, the Executive Officer will be entitled to receive the Accrued Benefits. In such event, all payments and benefits under the Executive Agreement will otherwise cease, and all then-unvested awards or benefits will be forfeited.
CEO Pay Ratio
The amount earned in 2019 by our Chief Executive Officer with respect to the annual cash incentive bonus (the “Annual Cash Bonus”) for the year ended December 31, 2019 is not calculable as of the date of this Annual Report on Form 10-K, because the final performance data for the 2019 performance period used in determining the amount of such Annual Cash Bonus was not yet available as of the date of this Annual Report on Form 10-K. For this reason, pursuant to Instruction 6 to Item 402(u) of Regulation S-K, we have omitted the CEO pay ratio disclosure required by Section 953(b) of the Dodd-Frank Wall Street Reform
and Consumer Protection Act and Item 402(u) of Regulation S-K from this Annual Report on Form 10-K. We expect to determine the amount payable to our Chief Executive Officer with respect to such Annual Cash Bonus in March 2020, and will include such amount, and the required CEO pay ratio disclosure, in a Current Report on Form 8-K to be filed no later than four business days after our compensation committee approves the Chief Executive Officer’s Annual Cash Bonus, if any, for the year ended December 31, 2019.
Compensation of Directors
During 2019, the independent directors’ compensation consisted of cash and equity retainers amounting to $40,000 and $65,000, respectively. In addition, the lead independent director, the audit committee chairman, the compensation committee chairman, investment committee chairman and the nominating & corporate governance chairman received annual retainers of  $25,000, $20,000, $15,000, $15,000 and $10,000, respectively. Each member of the audit committee, the compensation committee, the nominating & corporate governance committee and the investment committee received annual retainers of  $10,000, $7,500, $5,000 and $5,000, respectively. All directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attendance at meetings of the Board.
We have provided below certain information regarding compensation earned by and paid to our directors and during fiscal year 2019 (amounts in thousands).
(1)
Reflects 6,836 LTIP Units granted under the Third Amended 2014 Individuals Plan to Ms. Harrison, Mr. Majumder and Mr. Tio, and 2,929 LTIP Units granted for Mr. Jafarnia, each a non-employee director. The amounts reported for each non-employee director reflect the grant date fair value of the award based on the closing price of the shares on January 1, 2019 and August 9, 2019, respectively (i.e. $9.02 and $12.05).
(2)
Includes standard Board retainer of  $40,000, compensation committee member retainer of  $7,500, and nominating committee member retainer of  $5,000.
(3)
Includes standard Board retainer of  $40,000, audit committee member retainer of  $10,000, and investment committee member retainer of  $5,000, pro-rated for Mr. Jafarnia’s service during 2019.
(4)
Includes standard Board retainer of  $40,000, lead independent director retainer of  $25,000, audit committee chairman or member retainers of  $20,000 or $10,000 prorated, compensation committee member retainer of  $7,500 and nominating committee chairperson retainer of  $10,000.
(5)
Includes standard Board retainer of  $40,000, compensation committee chairman retainer of  $15,000 prorated, audit committee member retainer of  $10,000, investment committee chairman retainer of $15,000, and nominating committee member retainer of  $5,000, offset by $2,398 paid in 2018 for services rendered in 2019.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Stock Ownership
The table below sets forth, as of February 6, 2020, certain information regarding the total beneficial ownership of our shares of Class A common stock, Class C common stock, and shares of Class A common stock issuable upon redemption of OP Units for (1) each person who is expected to be the beneficial owner of 5% or more of our outstanding shares of common stock, (2) each of our directors and NEOs, and
(3) all of our directors and executive officers as a group. Each person named in the table has sole voting and investment power with respect to all of the shares of common stock shown as beneficially owned by such person, except as otherwise set forth in the notes to the table.
The SEC has defined “beneficial ownership” of a security to mean the possession, directly or indirectly, of voting power and/or investment power over such security. A stockholder is also deemed to be, as of any date, the beneficial owner of all securities that such stockholder has the right to acquire within 60 days after that date through (1) the exercise of any option, warrant or right, (2) the conversion of a security, (3) the power to revoke a trust, discretionary account or similar arrangement or (4) the automatic termination of a trust, discretionary account or similar arrangement. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, our shares of common stock subject to options, vesting or other rights (as set forth above) held by that person that are exercisable or will become exercisable within 60 days thereafter, are deemed outstanding, while such shares are not deemed outstanding for purposes of computing percentage ownership of any other person.
*
Less than 1%.
(1)
The address of each beneficial owner listed is 1345 Avenue of the Americas, 32nd Floor, New York, New York 10105.
(2)
Numbers and percentages in the table are based on 24,504,832 shares of Class A common stock outstanding, 76,603 shares of Class C common stock outstanding, 6,384,467 units of limited partnership interest in our Operating Partnership (“OP Units”) outstanding and 1,457,600 vested long-term incentive plan units of the Operating Partnership (“LTIP Units”) outstanding, in each case as of February 6, 2020, for a total of 32,423,502 shares of Class A common stock, Class C common stock, OP Units and vested LTIP Units outstanding. Numbers and percentages in the table exclude an additional 1,910,786 unvested LTIP Units outstanding as of February 6, 2020 as set forth in footnotes 3 and 4 below.
(3)
Percent of common stock for each executive officer and director is calculated using the combined total of all shares of Class A common stock, Class C common stock, OP Units and vested LTIP Units owned by each such individual, as each is an equivalent unit of ownership, relative to the total of
32,423,502 shares of Class A common stock and Class C common stock, OP Units, and vested LTIP Units outstanding as of February 6, 2020 (comprised of 24,504,832 shares of Class A common stock outstanding, 76,603 shares of Class C common stock outstanding, 6,384,467 OP Units outstanding, and 1,457,600 vested LTIP Units outstanding). Further, the number of vested LTIP Units owned by each of the following executive officers and directors include the indicated number of LTIP Units that, though vested, may not yet have achieved capital account equivalency with the OP Units held by the Company (at which time such LTIP Units may convert to OP Units and may then be settled in shares of Class A Common Stock): (a) 320,819 vested LTIP Units owned by Mr. Kamfar; (b) 9,291 vested LTIP Units owned by Mr. Ruddy; (c) 9,291 vested LTIP Units owned by Mr. Babb; (d) 9,291 vested LTIP Units owned by Mr. MacDonald; (e) 2,761 vested LTIP Units owned by Mr. Vohs; (f) 9,291 vested LTIP Units owned by Mr. Konig; (g) 13,962 vested LTIP Units owned by Ms. Harrison; (h) 13,962 vested LTIP Units owned by Mr. Majumder; (i) 13,962 vested LTIP Units owned by Mr. Tio; and (j) 10,055 vested LTIP Units owned by Mr. Jafarnia.
(4)
10,148 shares of Class A Common Stock, 4,000,437 OP Units and 1,409,310 LTIP Units reflected in the totals are pledged as security in connection with third party loans.
(5)
Totals do not include 733,328 remaining unvested LTIP Units issued to Mr. Kamfar pursuant to his Executive Agreement, which will vest and become nonforfeitable in accordance with the vesting periods (and any applicable performance criteria and targets) of each award, subject to continued employment and other conditions.
(6)
Totals do not include the following remaining unvested LTIP Units issued to each such Executive Officer pursuant to the Executive Agreement: (a) 263,368 unvested LTIP Units issued to Mr. Ruddy; (b) 235,703 unvested LTIP Units issued to Mr. Babb; (c) 290,255 unvested LTIP Units issued to Mr. MacDonald; (d) 76,826 unvested LTIP Units issued to Mr. Vohs; and (e) 263,368 unvested LTIP Units issued to Mr. Konig. The remaining unvested LTIP Units attributable to each such Executive Officer will vest and become nonforfeitable in accordance with the vesting periods (and any applicable performance criteria and targets) of each award, subject to continued employment and other conditions.
(7)
472,296 OP Units reflected in total are pledged as security in connection with a third party loan.
(8)
Numbers and percentages in the table are based on 24,504,832 shares of Class A common stock outstanding.
(9)
Based on the Schedule 13G/A filed with the SEC on February 5, 2020. This report includes holdings of various subsidiaries of BlackRock, Inc.
(10)
Based on Schedule 13G filed with the SEC on February 12, 2020. This report includes holdings of Renaissance Technologies LLC and Renaissance Technologies Holding Corporation.
Equity Compensation Plans
Incentive Plans
The Company’s incentive plans were originally adopted by our Board on December 16, 2013, and approved by our stockholders on January 23, 2014, as the 2014 Equity Incentive Plan for Individuals (the “2014 Individuals Plan”) and the 2014 Equity Incentive Plan for Entities (the “2014 Entities Plan,” and together with the 2014 Individuals Plan, as each was subsequently amended and restated, the “2014 Incentive Plans”).
On August 9, 2018, our Board adopted, and on September 28, 2018 our stockholders approved, the third amendment and restatement of the 2014 Individuals Plan (the “Third Amended 2014 Individuals Plan”) and the 2014 Entities Plan (the “Third Amended 2014 Entities Plan,” and together with the Third Amended 2014 Individuals Plan, the “Third Amended 2014 Incentive Plans,” and together with the 2014 Incentive Plans, the “Incentive Plans), which superseded and replaced in their entirety the 2014 Incentive Plans Under the Third Amended 2014 Incentive Plans, we have reserved and authorized an aggregate number of 2,250,000 shares of our common stock for issuance. As of February 6, 2020, 762,401 shares were available for future issuance.
The purpose of the Third Amended 2014 Incentive Plans is to attract and retain independent directors, executive officers and other key employees, including officers and employees of our Operating Partnership and their affiliates, and other service providers. The Third Amended 2014 Incentive Plans provide for the grant of options to purchase shares of our common stock, stock awards, stock appreciation rights, performance units, incentive awards and other equity-based awards.
Administration of the Third Amended 2014 Incentive Plans
The Third Amended 2014 Incentive Plans are administered by the compensation committee of our Board, except that the Third Amended 2014 Incentive Plans will be administered by our Board with respect to awards made to directors who are not employees. This summary uses the term “administrator” to refer to the compensation committee or our Board, as applicable. The administrator will approve who will receive grants under the Third Amended 2014 Incentive Plans, determine the type of award that will be granted and will specify the number of shares of our Class A Common Stock subject to each grant.
Eligibility
Employees and officers of our Company and our affiliates (including employees of our Operating Partnership) and members of our Board are eligible to receive grants under the Third Amended 2014 Individuals Plan. In addition, individuals who provide significant services to us or an affiliate, including individuals who provide services to us or an affiliate by virtue of employment with, or providing services to, our Operating Partnership may receive grants under the Third Amended 2014 Individuals Plan.
Entities that provide significant services to us or our affiliates, including our Operating Partnership, may receive grants under the Third Amended 2014 Entities Plan in the discretion of the administrator.
The following table provides information about our common stock that may be issued upon the exercise of options, warrants and rights under our Third Amended 2014 Incentive Plans, as of December 31, 2019.
Item 13.
Item 13.
Certain Relationships and Related Transactions and Director Independence
Director Independence
A majority of the members of our Board, and all of the members of the audit committee, are “independent.” One of our current directors, Ramin Kamfar, is affiliated with us and we do not consider Mr. Kamfar to be an independent director. Our other current directors, Elizabeth Harrison, Kamal Jafarnia, I. Bobby Majumder and Romano Tio, qualify as “independent directors” as defined under the rules of the New York Stock Exchange American. Messrs. Majumder and Tio each serve as an independent director of the Board of Directors of Bluerock Total Income + Real Estate Fund, an affiliate of our former Manager (“TIPRX”). Serving as a director of, or having an ownership interest in, another program sponsored by Bluerock will not, by itself, preclude independent director status. The Board has determined that Messrs. Jafarnia, Majumder and Tio and Mrs. Harrison each satisfy the independence criteria. None of these directors has ever served as (or is related to) an employee of ours or any of our predecessors or acquired companies or received or earned any compensation from us or any such other entities except for compensation directly related to service as a director of us or TIPRX. Therefore, we believe that all of these directors are independent directors.
Certain Transactions with Related Persons
Related Person Transaction Policy
Our Board has adopted a written related person transaction policy. The purpose of this policy is to describe the procedures used to identify, review and approve any existing or proposed transaction, arrangement, relationship (or series of similar transactions, arrangements or relationships) in which (a) we, our Operating Partnership or any of our subsidiaries were, are or will be a participant, (b) the aggregate amount involved exceeds $120,000, and (c) a related person has or will have a direct or indirect interest. For purposes of this policy, a related person is (i) any person who is, or at any time since the beginning of the current fiscal year was, a director, director nominee, or executive officer of the Company, (ii) any beneficial owner of more than 5% of our stock, or (iii) any immediate family member of any of the foregoing persons.
Under this policy, our audit committee is responsible for reviewing and approving or ratifying each related person transaction or proposed related person transaction. In determining whether to approve or ratify a related person transaction, the audit committee is required to consider all relevant facts and circumstances of the related person transaction available to the audit committee and to approve only those related person transactions that are in, or not inconsistent with, our best interests and those of our stockholders, as the audit committee determines in good faith. No member of the audit committee is permitted to participate in any consideration of a related person transaction with respect to which that member or any of his or her immediate family is a related person.
Affiliate Transactions
As described further below, we have entered into agreements with certain affiliates pursuant to which they will provide services to us. Our independent directors have reviewed the material transactions between our affiliates and us since the beginning of 2019. Set forth below is a description of such transactions and the independent directors’ determination of their fairness.
Administrative Services Agreement
In connection with the closing of the Internalization, the Company, the Operating Partnership, and Bluerock TRS Holdings, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Operating Partnership (the “the OP Sub”), and Manager Sub (collectively, the “Company Parties,” and each, a “Company Party”) entered into an Administrative Services Agreement (the “Administrative Services Agreement”) with Bluerock and its affiliate, Bluerock Real Estate Holdings, LLC (together “Bluerock”). Pursuant to the Administrative Services Agreement, Bluerock provides the Company with certain human resources, investor relations, marketing, legal and other administrative services (the “Services”) to facilitate a smooth transition in the management of our operations and enable us to benefit from operational efficiencies created by access to such services following closing, to give us time to develop such services in-house or to hire other third-party service providers for such services. The Services are provided on an at-cost basis, generally allocated based on the use of such Services for the benefit of our business, and are invoiced on a quarterly basis. In addition, the Administrative Services Agreement permits, from time to time, certain of our employees to provide or cause to be provided services to Bluerock, on an at-cost basis, generally allocated based on the use of such services for the benefit of the business of Bluerock and invoiced on a quarterly basis, and otherwise subject to the terms of the Services provided by Bluerock to us under the Administrative Services Agreement. Our payment invoices and other amounts payable under the Administrative Services Agreement will be made in cash or, in the sole discretion of the Board, in the form of fully-vested LTIP Units.
The initial term of the Administrative Services Agreement was one year from October 31, 2017, subject to our right to renew it for successive one-year terms upon sixty (60) days written notice prior to expiration. The initial term of the Administrative Services Agreement expired on October 31, 2018. On August 6, 2018, we delivered written notice to Bluerock of our intention to renew the Administrative Services Agreement for an additional one-year term, to expire on October 31, 2019, and on August 2, 2019, we delivered written notice to BRE of the our intention to renew the Administrative Services Agreement for an additional one-year term, to expire on October 31, 2020. The Administrative Services Agreement automatically terminates (i) upon our termination of all Services, or (ii) in the event we do not renew. Any
Party of ours can also be able to terminate the Administrative Services Agreement with respect to any individual Service upon written notice to the applicable Bluerock entity, in which case the specified Service will discontinue as of the date stated in such notice, which date must be at least ninety (90) days from the date of such notice. Further, either Bluerock entity can terminate the Administrative Services Agreement at any time upon the occurrence of a “Change of Control Event” (as defined therein) upon at least one hundred eighty (180) days prior written notice to us.
In the event of  (i) the failure by any Party of ours to pay for Services as required under the Administrative Services Agreement, (ii) any material default by either Bluerock entity in the due performance or observance of any term or agreement in the Administrative Services Agreement, or (iii) the adjudication of any party as insolvent and/or bankrupt, or the appointment of a receiver or trustee for any party or its property, or the approval of a petition for reorganization or arrangement under any bankruptcy or insolvency Law, or the filing by any party of a voluntary petition in bankruptcy, or the consent by any party to the appointment of a receiver or trustee (in each such case, the “Defaulting Party”), then the non-Defaulting Party shall have the right, at its sole discretion, (A) in the case of a default under clause (iii), to immediately terminate the applicable Service(s) and/or the Administrative Services Agreement and its participation with the Defaulting Party thereunder; and (B) in the case of a default under clause (i) or (ii), to terminate the applicable Service(s) and/or the Administrative Services Agreement and its participation with the Defaulting Party thereunder if the Defaulting Party has failed to (x) cure the default within thirty (30) days after receiving written notice of such default, or (y) take substantial steps towards and diligently pursue the curing of the default. Parties of ours have each agreed that in the event of the termination of the Administrative Services Agreement or of a Service thereunder, the obligation of Bluerock to provide the terminated Services, or to cause the terminated Services to be provided, shall immediately cease.
Pursuant to the Administrative Services Agreement, Bluerock is responsible for the payment of all employee benefits and any other direct and indirect compensation for the employees of Bluerock (or their affiliates or permitted subcontractors) assigned to perform the Services, as well as such employees’ worker’s compensation insurance, employment taxes, and other applicable employer liabilities relating to such employees.
In connection with the closing of the Internalization, BRE and the former Manager entered into a use and occupancy agreement (the “NY Agreement”) for certain corporate space located in New York, NY and for certain space located in Southfield, MI (the “MI Premises”). On December 1, 2017, BRE and Bluerock REIT Operator, LLC (the “Manager Sub”) entered into a sublease for the MI Premises (“MI Sublease”). Pursuant to the NY Agreement and MI Sublease, collectively, BRE permits the Manager Sub and certain of its subsidiaries and/or affiliates to share occupancy of the Premises. Expense reimbursements paid by us related to our shared occupancy under the MI Sublease are included in amounts presented in the table below. For expense reimbursements related to the NY Agreement, please refer to the Leasehold-Cost Sharing Agreement noted below.
In connection with us moving our New York (Manhattan) headquarters, effective on February 15, 2019, we and Bluerock jointly and severally, on the one hand, and an unaffiliated third party landlord, on the other hand, entered into a sublease for separate corporate space (the “Current NY Premises Sublease”) located at 1345 Avenue of the Americas, New York, New York (the “Current NY Premises”). The Current NY Premises Sublease became effective upon the date of the landlord’s consent thereto, which occurred on March 18, 2019. We and Bluerock have also entered into a Leasehold Cost-Sharing Agreement dated as of February 15, 2019 (the “Leasehold Cost-Sharing Agreement”) with respect to the Current NY Premises, to provide for the allocation and sharing between us and Bluerock of the costs under the Current NY Premises Sublease, including costs associated with tenant improvements. The Current NY Premises Sublease permit us and certain of our respective subsidiaries and/or affiliates to share occupancy of the Current NY Premises with Bluerock. Under the Leasehold Cost-Sharing Agreement, if there is a change in control of either us or Bluerock: (i) the allocation of costs under the Current NY Premises Sublease shall be modified to thereafter allocate such costs based on the average of the cost-sharing percentages between us and Bluerock over the four most recently-completed calendar quarters immediately preceding the change in control date (or shall be the average cost-sharing percentages over such shorter period, if the change in control occurs earlier than the completion of four calendar quarters) and (ii) the entity for which the change in control occurs shall be responsible, at its own cost and expense, to obtain the approval of the landlord and refit the Current NY
Premises into physically separated workspaces, one for Bluerock and one for us, with the percentage of space for each approximately equal to the average of the historical cost-sharing percentages discussed immediately above. Under the Current NY Premises Sublease, an affiliate of Bluerock has arranged for the posting of a $750,000 letter of credit as a security deposit, and we and Bluerock are obligated under the Leasehold Cost-Sharing Agreement to indemnify and hold such affiliate harmless from loss if there is a claim under such letter of credit. Payment by us of any amounts payable under the Leasehold Cost- Sharing Agreement to Bluerock will be made in cash or, in the sole discretion of the Board, in the form of fully-vested LTIP Units.
The amounts paid or payable to Bluerock for the year ended December 31, 2019 are as reflected in the following table (amounts in thousands):
Stockholders Agreement
In connection with the closing of the Internalization, we and the Contributors entered into a Stockholders Agreement (the “Stockholders Agreement”), pursuant to which we may grant certain registration rights for the benefit of the Contributors and impose certain limitations on the voting rights of the Class C Common Stock, in each case as a condition to the consummation of the transactions contemplated by the Contribution Agreement.
Pursuant to the Stockholders Agreement, each Contributor, in respect of any Class A common stock that they may receive in connection with any redemption or conversion, as applicable, of any OP Units or Class C Common Stock received as a result of the Internalization (“Registrable Shares”), may require us from time to time to register the resale of their Registrable Shares under the Securities Act on a registration statement filed with the SEC. The Stockholders Agreement grants each Contributor certain rights to demand a registration of some or all of their Registrable Shares (a “Demand Registration”) or to request the inclusion of some or all of their Registrable Shares in a registration being effected by us for itself or on behalf of another person (a “Piggyback Registration”), in each case subject to certain customary restrictions, limitations, registration procedures and indemnity provisions. We are obligated to use commercially reasonable efforts to prepare and file a registration statement within specified time periods and to cause that registration statement to be declared effective by the SEC as soon as reasonably practicable thereafter.
The ability to cause us to effect a Demand Registration is subject to certain conditions. We are not required to effect such registration within 180 days of the effective date of any prior registration statement with respect to our Class A Common Stock and may delay the filing for up to 60 days under certain circumstances.
If, pursuant to an underwritten Demand Registration or Piggyback Registration, the managing underwriter advises that the number of Registrable Shares requested to be included in such registration exceeds a maximum number (the “Maximum Number”) that the underwriter believes can be sold without delaying or jeopardizing the success of the proposed offering, the Stockholders Agreement specifies the priority in which Registrable Shares are to be included.
Pursuant to the Stockholders Agreement, the Contributors have agreed to limit certain of their voting rights with respect to the Class C Common Stock. If, as of the record date for determining our stockholders that are entitled to vote at any annual or special meeting of our stockholders or for determining our
stockholders that are entitled to consent to any corporate action by written consent, the holders of the Class C Common Stock own shares of Class C Common Stock (the “Subject Shares”) representing in the aggregate more than 9.9% of the voting rights of the then-outstanding shares of our capital stock that have voting rights on the matters being voted upon at such meeting (such number of Subject Shares representing in the aggregate more than 9.9% of the voting rights of the then-outstanding shares of our capital stock with voting rights being referred to as the “Excess Shares”), then at each such meeting or in each such action by written consent the holders of the Subject Shares will vote or furnish a written consent in respect of the Excess Shares, or cause the Excess Shares to be voted or consented, in each case, in such manner as directed by a majority of the members of our Board. All Subject Shares other than the Excess Shares may be voted for or against any matter in the Class C Common Stock Holder’s sole and absolute discretion.
Dealer Manager Agreement for Series B Preferred Offering
In conjunction with the offering of the Series B Preferred Stock, we entered into a dealer manager agreement (the “Series B Dealer Manager Agreement”) with Bluerock Capital Markets, LLC (“Bluerock Capital Markets”), our affiliate, pursuant to which it assumed dealer manager responsibilities for our Series B Preferred Offering. Pursuant to the Series B Dealer Manager Agreement, Bluerock Capital Markets will receive up to 7.0% and 3.0% of the gross offering proceeds from the offering as selling commissions and dealer manager fees, respectively. The dealer manager re-allows the substantial majority of the selling commissions and dealer manager fees to participating broker-dealers and incurs costs in excess of the 10.0%, which costs are borne by the dealer manager without reimbursement by the Company.
Dealer Manager Agreement for Series T Preferred Offering
In conjunction with the offering of the Series T Preferred Stock, we entered into a dealer manager agreement (the “Series T Dealer Manager Agreement”) with Bluerock Capital Markets, LLC (“Bluerock Capital Markets”), our affiliate, pursuant to which it assumed dealer manager responsibilities for our Series T Preferred Offering. Pursuant to the Series T Dealer Manager Agreement, Bluerock Capital Markets will receive up to 7.0% and 3.0% of the gross offering proceeds from the offering as selling commissions and dealer manager fees, respectively. The dealer manager re-allows the substantial majority of the selling commissions and dealer manager fees to participating broker-dealers and incurs costs in excess of the 10.0%, which costs are borne by the dealer manager without reimbursement by the Company.
Summary of Fees and Reimbursements to Dealer Manager
Summarized below are the fees earned and expenses reimbursable to Bluerock Capital Markets, our affiliated dealer manager, and any related amounts payable for the year ended December 31, 2019 (amounts in thousands):
The dealer manager re-allows the substantial majority of the selling commissions and dealer manager fees to participating broker-dealers, and incurs costs in excess of the 10.0%, which costs are borne by the dealer manager bearing the loss from the excess above the 10.0% without reimbursement by the Company.
Transactions with Affiliates of Our Former Manager
We have entered into several transactions with four private real estate funds that are affiliates of Bluerock, an affiliate of our former Manager, in connection with our investments. Bluerock Special Opportunity + Income Fund, LLC (“Fund I”), Bluerock Growth Fund (“BGF”) and Bluerock Growth
Fund II (“BGF II”) are managed and controlled by Bluerock. Bluerock Special Opportunity + Income Fund II, LLC (“Fund II”) and Bluerock Special Opportunity + Income Fund III, LLC (“Fund III”, together with Fund I, BGF, BGF II and Fund II, the “Bluerock Funds”) are managed and controlled by a wholly owned subsidiary of Bluerock. Mr. Kamfar and a family owned limited liability company are the indirect owners of 100% of the membership interests of Bluerock, and certain of our and our former Manager’s officers are also officers of Bluerock.
Arlo Mezzanine Financing
We have provided a $27.5 million mezzanine loan (the “Arlo Mezz Loan”), of which $27.3 million has been funded as of December 31, 2019, to BR Morehead JV Member, LLC (the “Arlo JV Member”). The Arlo Mezz Loan is secured by the Arlo JV Member’s approximate 95.0% interest in a multi-tiered joint venture along with Fund II, an affiliate of the former Manager, and an unaffiliated third party (the “Arlo JV”), which developed a 286-unit Class A apartment community located in Charlotte, North Carolina. The Arlo Mezz Loan matures on the earliest to occur of: (i) the latest to occur of  (a) September 26, 2022 and (b) the applicable maturity date under any extension granted under any construction financing, or (ii) the date of sale or transfer of property, or (iii) such earlier date, by declaration of acceleration or otherwise, on which the final payment of principal becomes due. The Arlo Mezz Loan bears interest at a fixed rate of 15% with regular monthly payments being interest only and can be prepaid without penalty.
In conjunction with the Arlo development, the Arlo property owner, which is owned by an entity in which we have an equity interest, entered into a $34.5 million construction loan (the “Arlo Construction Loan”) with an unaffiliated party, of which $33.8 million is outstanding at December 31, 2019, and which is secured by the Arlo property. The Arlo Construction Loan matures on June 29, 2020 and has a one-year extension option, subject to certain conditions. The Arlo Construction Loan bears interest on a floating basis on the amount drawn based on LIBOR plus 3.75%, subject to a minimum of 4.25%.
In addition, the Arlo property owner entered into a $7.3 million mezzanine loan with an unaffiliated party, of which $7.3 million is outstanding at December 31, 2019, and which is secured by the membership interest in the joint venture developing the Arlo property. The mezzanine loan matures on June 29, 2020 and has two one-year extension options, subject to certain conditions. The loan bears interest at a fixed rate of 11.5%.
Cade Boca Raton Mezzanine Financing
We provided a $14.0 million mezzanine loan (the “Boca Mezz Loan”) to BRG Boca JV Member, LLC (the “Boca JV Member”), an affiliate of the former Manager. The Boca Mezz Loan was secured by the Boca JV Member’s approximate 90.0% interest in a multi-tiered joint venture along with Fund II, an affiliate of the former Manager, and an unaffiliated third party (the “Boca JV”), which developed a 90-unit Class A apartment community located in Boca Raton, Florida known as Cade Boca Raton. The Boca Mezz Loan bore interest at a fixed rate of 15.0% with regular monthly payments being interest-only. The Boca Mezz Loan was to mature on March 11, 2022 and could be prepaid without penalty.
On December 19, 2019, we received a paydown of  $3.6 million on the Boca Mezz Loan, reducing the outstanding principal balance to $10.1 million. Additionally, we negotiated with Fund II to contribute the remaining balance of the Boca Mezz Loan Promissory Note in exchange for 89.25% of the common membership interest in Boca JV Member and sole management control of Boca JV Member. At December 31, 2019, we consolidated the Boca JV Member.
Domain at The One Forty Mezzanine Financing
We have provided a $24.5 million mezzanine loan (the “Domain Mezz Loan”), of which $23.1 million has been funded as of December 31, 2019, to BR Member Domain Phase 1, LLC (the “Domain JV Member”), an affiliate of the former Manager. The Domain Mezz Loan is secured by the Domain JV Member’s approximate 95% interest in a multi-tiered joint venture along with Fund II, an affiliate of the former Manager, and an unaffiliated third party (the “Domain JV”), which developed a 299-unit Class A apartment community located in Garland, Texas known as Domain at The One Forty. The Domain Mezz Loan matures on the earliest to occur of: (i) the latest to occur of  (a) March 11, 2022 and (b) the applicable
maturity date under any extension granted under any construction financing, or (ii) the date of sale or transfer of property, or (iii) such earlier date, by declaration of acceleration or otherwise, on which the final payment of principal becomes due. The Domain Mezz Loan bears interest at 15% in 2019, 5.5% in 2020, 4.0% in 2021 and 3.0% thereafter, and has regular monthly payments that are interest-only. The Domain Mezz Loan can be prepaid without penalty. We have a 50.0% participation in any profits achieved in a sale after repayment of the Domain Mezz Loan and we and Fund II each receive full return of their respective capital contributions.
In conjunction with the Domain at The One Forty development, the Domain at The One Forty property owner, which is owned by an entity in which we have an equity interest: (i) entered into a $30.3 million construction loan (the “Domain Construction Loan”) secured by the Domain at The One Forty property, and (ii) entered into a $6.4 million mezzanine loan secured by the membership interest in the joint-venture developing the Domain at The One Forty property. Both the Domain Construction Loan and the mezzanine loan were entered into with unaffiliated parties and had maturity dates of March 3, 2020. The Domain Construction Loan could be prepaid without penalty, whereas the mezzanine loan could be prepaid provided the lender received a minimum profit and 1.0% exit fee. On December 12, 2019, the Domain at The One Forty property owner refinanced the Domain Construction Loan and entered into a $39.2 million senior mortgage loan (the “Domain Senior Loan”) secured by the Domain at The One Forty property and used the proceeds in part to pay off the outstanding balances, in full, of the Domain Construction Loan and mezzanine loan. The Domain Senior Loan matures on January 5, 2023 and bears interest at a floating basis of LIBOR plus 2.20%, but no less than 3.95%, with interest-only payments through the initial term of the loan. The Domain Senior Loan contains two one-year extension options, and if extended, payments during the extension period shall be based on thirty-year amortization. On or after July 5, 2021, the senior loan may be prepaid without penalty.
Motif Mezzanine Financing, formerly Flagler Village
We have provided a $74.6 million mezzanine loan (the “Flagler Mezz Loan”), of which all has been funded as of December 31, 2019, to BR Flagler JV Member, LLC (the “Flagler JV Member”), an affiliate of the former Manager. The Flagler Mezz Loan is secured by the Flagler JV Member’s 97% interest in a multi-tiered joint venture along with Fund II and Fund III, affiliates of the former Manager, and an unaffiliated third party (the “Flagler JV”), which is developing a 385-unit Class A apartment community located in Fort Lauderdale, Florida known as Motif. The Flagler Mezz Loan bears interest at 12.9% and has regular monthly payments that are interest-only. The Flagler Mezz Loan has a maturity date of March 28, 2023 and can be prepaid without penalty.
We have the right of first offer to purchase the member’s ownership interests in the Flagler JV Member, or, if applicable, to purchase Motif if the Flagler JV Member exercises its rights under the Flagler JV to cause the sale of Motif.
In conjunction with the Motif development, the Motif property owner, which is owned by an entity in which we have an equity interest, entered into an approximately $70.4 million construction loan (the “Motif Construction Loan”) with an unaffiliated party, of which $48.2 million is outstanding as of December 31, 2019, and which is secured by the Motif development. The Motif Construction Loan matures on March 28, 2022, contains a one-year extension option, subject to certain conditions, and can be prepaid subject to payment of a make-whole premium and exit fee. The Motif Construction Loan bears interest at the greater of 5.0% or a rate of LIBOR plus 3.85%, with interest only payments until March 28, 2022 and future payments after extension based on thirty-year amortization.
Novel Perimeter Mezzanine Financing
We have provided a $20.6 million mezzanine loan (the “Perimeter Mezz Loan”), of which all has been funded as of December 31, 2019, to BR Perimeter JV Member, LLC (the “Perimeter JV Member”), an affiliate of the former Manager. The Perimeter Mezz Loan is secured by the Perimeter JV Member’s approximate 60% interest in a multi-tiered joint venture along with Fund III, an affiliate of the former Manager, and an unaffiliated third party, which developed a 320-unit Class A apartment community located in Atlanta, Georgia known as Novel Perimeter. The Perimeter Mezz Loan matures on the later of December 29, 2021 or the maturity date of the Novel Perimeter Construction Loan, as defined below, as
extended, and bears interest at a fixed rate of 15.0%. Regular monthly payments are interest-only during the initial term. The Perimeter Mezz Loan can be prepaid without penalty.
In conjunction with the Novel Perimeter development, the Novel Perimeter property owner, which is owned by an entity in which we have an equity interest, entered into an approximately $44.7 million construction loan (the “Novel Perimeter Construction Loan”) with an unaffiliated party, of which $44.7 million is outstanding at December 31, 2019, and which is secured by the Novel Perimeter development. The Novel Perimeter Construction Loan matures December 12, 2020, contains a one-year extension option, subject to certain conditions, and can be prepaid without penalty. The Novel Perimeter Construction Loan bears interest at a rate of LIBOR plus 3.00%, with interest only payments until December 12, 2020 and future payments based on thirty-year amortization.
The Park at Chapel Hill Financing
On November 1, 2019, we entered into an agreement to provide a mezzanine loan (“the Chapel Hill Mezz Loan”) in an amount up to $40.0 million to BR Chapel Hill JV, LLC (“BR Chapel Hill JV”), of which $29.5 million was funded upon execution of the agreement. BR Chapel Hill JV owns a 100% interest in BR Chapel Hill, LLC (“BR Chapel Hill”) and is a joint venture with common interests held by Fund I, Fund II, and BR Chapel Hill Investment, LLC, all managed by affiliates of the former Manager. The Chapel Hill Mezz Loan bears interest at a fixed rate of 11.0% per annum with regular monthly payments being interest-only during the initial term. The Chapel Hill Mezz Loan matures on the earliest to occur of: (i) the latest to occur of  (a) March 31, 2024 and (b) the applicable maturity date under any extension granted under any construction financing, or (ii) the date of sale or transfer of property, or (iii) such earlier date, by declaration of acceleration or otherwise, on which the final payment of principal becomes due. The Chapel Hill Mezz Loan is secured by the Chapel Hill property and can be prepaid without penalty.
In conjunction with the Chapel Hill Mezz Loan, we provided a $5.0 million senior loan to BR Chapel Hill. The senior loan is secured by BR Chapel Hill’s fee simple interest in the Chapel Hill property. The senior loan matures on March 31, 2024 and bears interest at a fixed rate of 10.0% per annum. Regular monthly payments are interest-only during the initial term. The senior loan can be prepaid without penalty.
Vickers Historic Roswell Mezzanine Financing
We have provided an $11.8 million mezzanine loan (the “Vickers Mezz Loan”), of which $11.5 million has been funded as of December 31, 2019, to BR Vickers Roswell JV Member, LLC (the “Vickers JV Member”), an affiliate of the former Manager. The Vickers Mezz Loan is secured by the Vickers JV Member’s approximate 80% interest in a multi-tiered joint venture along with Fund III, an affiliate of the former Manager, and an unaffiliated third party (the “Vickers JV”), which developed a 79-unit Class A apartment community located in Roswell, Georgia known as Vickers Historic Roswell. The Vickers Mezz Loan bears interest at a fixed rate of 15.0% and regular monthly payments are interest-only. The Vickers Mezz Loan matures on the earliest to occur of: (i) the latest to occur of  (a) February 26, 2022 and (b) the applicable maturity date under any extension granted under any construction financing, or (ii) the date of sale or transfer of property, or (iii) such earlier date, by declaration of acceleration or otherwise, on which the final payment of principal becomes due. The Vickers Mezz Loan can be prepaid without penalty.
In conjunction with the Vickers Historic Roswell development, the Vickers Historic Roswell property owner, which is owned by an entity in which we have an equity interest, entered into an approximately $18.0 million construction loan (the “Vickers Construction Loan”) with an unaffiliated party, which was secured by the Vickers Historic Roswell development. The Vickers Construction Loan was to mature on December 1, 2020 and could be prepaid without penalty. On December 13, 2019, the Vickers Historic Roswell property owner refinanced the Vickers Construction Loan and entered into a $22.0 million senior mortgage loan (the “Vickers Senior Loan”) secured by the Vickers Historic Roswell property and used the proceeds in part to pay off the outstanding balance, in full, of the Vickers Construction Loan. The Vickers Senior Loan matures on January 1, 2030 and bears interest at a floating basis of LIBOR plus 1.99%, with interest-only payments through the term of the loan. On or after September 28, 2029, the loan may be prepaid without penalty.
Alexan CityCentre Interests
We have made a $12.8 million preferred equity investment in a multi-tiered joint venture along with BGF, BGF II, Fund II and Fund III, all affiliates of the former Manager, and an unaffiliated third party (the “Alexan CityCentre JV”), which developed a 340-unit Class A apartment community located in Houston, Texas, known as Alexan CityCentre. We earn a preferred return of 15.0% and 20.0% on our $6.5 million and $6.3 million preferred equity investments, respectively. The Alexan CityCentre JV is required to redeem our preferred membership interest plus any accrued but unpaid return on the earlier date which is six months following the maturity of the construction loan, detailed below, including extension and refinancing, or any earlier acceleration or due date.
The Alexan CityCentre property owner, which is owned by an entity in which we have an equity interest, entered into a $55.1 million construction loan modification agreement, which was secured by its interest in the Alexan CityCentre property (the “Alexan Development”). The loan was to mature on January 1, 2020 and bore interest per annum equal to the prime rate plus 0.5% or LIBOR plus 3.0%, at the borrower’s option. On April 26, 2019, the Alexan CityCentre owner: (i) entered into a $46.0 million senior mortgage loan, (ii) entered into a $11.5 million mezzanine loan with an unaffiliated party, and (iii) used the proceeds from the senior loan and mezzanine loan to pay off the outstanding balance, in full, of the construction loan. The senior loan and mezzanine loan both provide for earnout advances, subject to certain restrictions, of $2.0 million and $0.5 million, respectively, for total loan commitments of  $48.0 million and $12.0 million, respectively. The loans bear interest at a floating basis of the greater of LIBOR plus 1.50% or 3.99% on the senior loan, and the greater of LIBOR plus 6.00% or 8.49% on the mezzanine loan. The senior loan and mezzanine loan both: (i) have regular monthly payments that are interest-only during the initial term, (ii) have initial maturity dates of May 9, 2022, (iii) contain two one-year extension options, and (iv) can be prepaid in whole prior to maturity provided the lender receives a stated spread maintenance premium.
Alexan Southside Place Interests
We have made a $24.9 million preferred equity investment in a multi-tiered joint venture along with Fund II and Fund III, affiliates of the former Manager, and an unaffiliated third party (the “Alexan Southside JV”), which developed a 270-unit Class A apartment community located in Houston, Texas, known as Alexan Southside Place. Alexan Southside Place is developed upon a tract of land under an 85-year ground lease. The joint venture adopted ASU No. 2016-02 as of January 1, 2019, and as such, has recorded a right-of-use asset and lease liability of  $17.1 million as of December 31, 2019. The Alexan Southside JV is required to redeem our preferred membership interest plus any accrued but unpaid return on the earlier date which is six months following the maturity of the loan, detailed below, including extension and refinancing, or any earlier acceleration or due date.
In conjunction with the Alexan Southside development, the joint venture, which is owned by an entity in which we have an equity interest, entered into a $31.8 million construction loan secured by its interest in the Alexan Southside Place property. The loan was to mature in April 2019 and bore interest on a floating basis on the amount drawn based on the base rate plus 1.25% or LIBOR plus 2.25%, at the borrower’s option. On April 12, 2019, the joint venture: (i) entered into a $26.4 million senior mortgage loan, (ii) entered into a $6.6 million mezzanine loan with an unaffiliated party, and (iii) used the proceeds from the senior loan and mezzanine loan to pay off the outstanding balance, in full, of the construction loan. The senior loan and mezzanine loan both provide for earnout advances, subject to certain restrictions, of  $2.4 million and $0.6 million, respectively, for total loan commitments of  $28.8 million and $7.2 million, respectively. The loans bear interest at a floating basis of the greater of LIBOR plus 1.50% or 3.99% on the senior loan, and the greater of LIBOR plus 6.00% or 8.49% on the mezzanine loan. The senior loan and mezzanine loan both: (i) have regular monthly payments that are interest-only during the initial term, (ii) have initial maturity dates of May 9, 2022, (iii) contain two one-year extension options, and (iv) can be prepaid in whole prior to maturity provided the lender receives a stated spread maintenance premium.
On November 9, 2018, we entered into an amended agreement with Fund II and Fund III (together “the Funds”) that reduced our preferred return in exchange for certain grants made by the Funds. Our previous per annum preferred return of 15.0% was reduced as follows: 6.5% in 2019, 5.0% in 2020 and 3.5% thereafter. The Funds agreed to (i) grant us a right to compel a sale of the project beginning November 1, 2021 and (ii) grant us a 50.0% participation in any profits achieved in a sale after we receive our full preferred
return and repayment of principal, and the Funds receive full return of their capital contributions. The Funds are obligated to fund their prorata share of future capital calls, absent a default event. If a default event shall occur and is continuing at the time of a sale, we would be entitled to 100.0% of the profits after the Funds receive full return of their capital contributions. Additionally, we agreed to extend the mandatory redemption date of our preferred equity to be reflective of any changes in the construction loan maturity date as a result of refinancing.
Helios Interests
We made a $19.2 million preferred equity investment in a multi-tiered joint venture along with Fund III, an affiliate of the former Manager, and an unaffiliated third party (the “Helios JV”), which developed a 282-unit Class A apartment community located in Atlanta, Georgia known as Helios.
On December 28, 2018, the Helios property owner entered into a $39.5 million senior mortgage loan (“senior loan”) secured by the Helios property. The senior loan matures on January 1, 2029 and bears interest at a floating basis of LIBOR plus 1.75%, with interest only payments through January 2023, and then monthly payments based on thirty-year amortization. On or after September 29, 2028, the loan may be prepaid without prepayment fee or yield maintenance.
On November 9, 2018, we entered into an amended agreement with Fund III that reduced our preferred return in exchange for certain grants made by Fund III. Our previous per annum preferred return of 15.0% was reduced as follows: 7.0% in 2019, 6.0% in 2020 and 4.5% thereafter. Fund III agreed to (i) grant us a right to compel a sale of the project beginning November 1, 2021 and (ii) grant us a 50.0% participation in any profits achieved in a sale after we receive our full preferred return and repayment of principal, and Fund III receives full return of its capital contribution. Fund III is obligated to fund its prorata share of future capital calls, absent a default event. If a default event shall occur and is continuing at the time of a sale, we would be entitled to 100.0% of the profits after Fund III receives full return of its capital contribution. Additionally, we agreed to extend the mandatory redemption date of its preferred equity to be reflective of any changes in the loan maturity date as a result of refinancing.
On December 10, 2019, the Company entered into a membership interest purchase agreement to purchase 100% of the common membership interest in the joint venture from Fund III and the Helios JV for $2.5 million and $1.8 million, respectively, based on fair market value after consideration of the $19.2 million preferred equity investment previously funded by the Company. As ownership in the Helios real property is in the form of undivided interests, we continued to account for the Helios property under the equity method as of December 31, 2019. We closed on the sale of our Helios investment in January 2020. Refer to Note 16 for further information.
Leigh House Interests
We made a $14.2 million preferred equity investment in a multi-tiered joint venture along with Fund II, an affiliate of the former Manager, and an unaffiliated third party (the “Leigh House JV”), which developed a 245-unit Class A apartment community located in Raleigh, North Carolina known as Leigh House. We earned a preferred return of 15.0% and 20.0% on our $11.9 million and $2.3 million preferred equity investments, respectively. The Leigh House JV was required to redeem our preferred membership interest plus any accrued but unpaid return on the earlier date which was six months following the maturity of the construction loan, detailed below, including extension, or any earlier acceleration or due date.
The Leigh House investment was sold on July 15, 2019 as part of the Topaz Portfolio sale. Please refer to Note 3 for further information.
Whetstone Apartments Interests
We made a $12.9 million preferred equity investment in a multi-tiered joint venture along with Fund III, an affiliate of the former Manager, and an unaffiliated third party, to acquire a 204-unit Class A apartment community located in Durham, North Carolina known as Whetstone Apartments. We earn a 6.5% preferred return on our investment. Effective April 1, 2017, Whetstone Apartments ceased paying its preferred return on a current basis. The preferred return is being accrued, except for payments totaling
$0.5 million received in 2019. The accrued preferred return of  $2.6 million and $2.2 million as of December 31, 2019 and December 31, 2018, respectively, is included in due from affiliates in the consolidated balance sheets. We have evaluated the preferred equity investment and accrued preferred return and determined that the investment is fully recoverable.
On October 6, 2016, the Whetstone Apartments property owner, which is owned by an entity in which we have an equity interest, entered into a mortgage loan of approximately $26.5 million, of which $25.5 million is outstanding as of December 31, 2019. The loan matures on November 1, 2023 and is secured by the Whetstone Apartments property. The loan bears interest at a fixed rate of 3.81% and regular monthly payments are based on thirty-year amortization. The loan may be prepaid with the greater of 1.0% prepayment fee or yield maintenance until October 31, 2021, and thereafter at par. The loan is nonrecourse us and its joint venture partners with certain standard scope non-recourse carve-outs for certain deeds, acts or failures to act on our part and that of the joint venture partners.
We closed on the sale of Whetstone Apartments in January 2020 and recovered our preferred equity investment and accrued preferred return. Refer to Note 16 for further information.
See Note 12 - Related Party Transactions of our consolidated financial statements for additional related party disclosures.
Item 14.
Item 14.
Principal Accounting Fees and Services.
Independent Auditors
Grant Thornton LLP (“Grant Thornton”) has served as our independent auditors since March 11, 2019. The appointment of Grant Thornton as our independent registered public accountants was unanimously approved by our Board. Prior to Grant Thornton’s appointment, BDO USA, LLP (“BDO”) served as our independent auditors.
In order to ensure that the provision of such services does not impair the auditors’ independence, the audit committee approved, on March 26, 2014, the Amended and Restated Audit Committee Charter, which includes an Audit Committee Pre-Approval Policy for Audit and Non-audit Services. In establishing this policy, the audit committee considered whether the service is a permissible service under the rules and regulations promulgated by the SEC. In addition, the audit committee, may, in its discretion, delegate to one or more of its members the authority to pre-approve any audit or non-audit services to be performed by the independent auditors, provided any such approval is presented to and approved by the full audit committee at its next scheduled meeting.
Since October 15, 2009, when we became a reporting company under Section 15(d) of the Exchange Act, all services rendered by our independent auditors have been pre-approved in accordance with the policies and procedures described above.
The aggregate fees billed to us for professional accounting services by BDO, our independent auditors for the year ended December 31, 2018, and by Grant Thornton, our independent auditors for the year ended December 31, 2019, for the audit of financial statements, quarterly reviews of our interim financial statements and services normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for these periods (including the audit of our annual financial statements by BDO for the year ended December 31, 2018 and the audit of our annual financial statements by Grant Thornton for the year ended December 31, 2019) are set forth in the table below (amounts in thousands):
For purposes of the preceding table professional fees are classified as follows:
•
Audit fees - These are fees for professional services performed for the audit of our annual financial statements and the required review of quarterly financial statements and other procedures performed by the independent auditors in order for them to be able to form an opinion on our consolidated financial statements. These fees also cover services that are normally provided by independent auditors in connection with statutory and regulatory filings or engagements.
•
Audit-related fees - These are fees for assurance and related services that traditionally are performed by independent auditors that are reasonably related to the performance of the audit or review of the financial statements, such as due diligence related to acquisitions and dispositions, attestation services that are not required by statute or regulation, internal control reviews and consultation concerning financial accounting and reporting standards.
•
Tax fees - These are fees for all professional services performed by professional staff in our independent auditor’s tax division, except those services related to the audit of our financial statements. These include fees for tax compliance, tax planning and tax advice, including federal, state and local issues. Services may also include assistance with tax audits and appeals before the IRS and similar state and local agencies, as well as federal, state and local tax issues related to due diligence.
•
All other fees - These are fees for any services not included in the above-described categories.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules.
(a)
List of Documents Filed.
1.
Financial Statements
The list of the financial statements filed as part of this Annual Report on Form 10-K is set forth on page herein.
(b)
Exhibits.
The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.
(c)
Financial Statement Schedules.
Our consolidated financial statements and supplementary data are included as a separate section in this Annual Report on Form 10-K commencing on page and are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
Date: February 24, 2020
/s/ R. Ramin Kamfar
R. Ramin Kamfar
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
Date: February 24, 2020
/s/ R. Ramin Kamfar
R. Ramin Kamfar
Chief Executive Officer
(Principal Executive Officer)
Date: February 24, 2020
/s/ Christopher J. Vohs
Christopher J. Vohs
Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
Date: February 24, 2020
/s/ Elizabeth Harrison
Elizabeth Harrison
Director
Date: February 24, 2020
/s/ Kamal Jafarnia
Kamal Jafarnia
Director
Date: February 24, 2020
/s/ I. Bobby Majumder
I. Bobby Majumder
Director
Date: February 24, 2020
/s/ Romano Tio
Romano Tio
Director
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Bluerock Residential Growth REIT, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Bluerock Residential Growth REIT, Inc. (a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2019, and the related notes and financial statement schedule included under Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 24, 2020 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2019.
Southfield, Michigan
February 24, 2020
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Bluerock Residential Growth REIT, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Bluerock Residential Growth REIT, Inc.(a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control - Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019, and our report dated February 24, 2020 expressed an unqualified opinion on those financial statements
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Southfield, Michigan
February 24, 2020
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Bluerock Residential Growth REIT, Inc.
New York, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Bluerock Residential Growth REIT, Inc. (the “Company”) and subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We served as the Company’s auditor from 2012 to 2019.
Troy, Michigan
February 26, 2019
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
See Notes to Consolidated Financial Statements
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
See Notes to Consolidated Financial Statements
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share and per share amounts)
See Notes to Consolidated Financial Statements
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
(In thousands, except share and per share amounts)
See Notes to Consolidated Financial Statements
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
(In thousands, except share and per share amounts)
See Notes to Consolidated Financial Statements
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
See Notes to Consolidated Financial Statements
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year Ended December 31,
See Notes to Consolidated Financial Statements
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Nature of Business
Bluerock Residential Growth REIT, Inc. (the “Company”) was incorporated as a Maryland corporation on July 25, 2008. The Company’s objective is to maximize long-term stockholder value by acquiring and developing well-located institutional-quality apartment properties in knowledge economy growth markets across the United States. The Company seeks to maximize returns through investments where it believes it can drive substantial growth in its core funds from operations and net asset value primarily through its Value-Add and Invest-to-Own investment strategies.
The Company has elected to be treated, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes. As a REIT, the Company generally is not subject to corporate-level income taxes. To maintain its REIT status, the Company is required, among other requirements, to distribute annually at least 90% of its “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to the Company’s stockholders. If the Company fails to qualify as a REIT in any taxable year, it would be subject to federal income tax on its taxable income at regular corporate tax rates.
On October 31, 2017, the Company became an internally-managed REIT as a result of the completion of the management internalization (the “Internalization”), and it is no longer externally managed by BRG Manager, LLC (the “former Manager”). The owners of the former Manager are referred to as the Contributors.
As of December 31, 2019, the Company held investments in fifty-three real estate properties, consisting of thirty-five consolidated operating properties and eighteen properties through preferred equity or mezzanine loan investments. Of the property interests held through preferred equity and mezzanine loan investments, five are under development, four are in lease-up and nine properties are stabilized. The fifty-three properties contain an aggregate of 15,627 units, comprised of 11,746 consolidated operating units and 3,881 units through preferred equity and mezzanine loan investments. As of December 31, 2019, the Company’s consolidated operating properties were approximately 94.0% occupied.
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The Company operates as an umbrella partnership REIT in which Bluerock Residential Holdings, L.P. (its “Operating Partnership”), or the Operating Partnership’s wholly-owned subsidiaries, owns substantially all of the property interests acquired and investments made on the Company’s behalf. As of December 31, 2019, limited partners other than the Company owned approximately 27.66% of the common units of the Operating Partnership (19.66% is held by holders of limited partnership interest in the Operating Partnership (“OP Units”) and 8.00% is held by holders of the Operating Partnership’s long-term incentive plan units (“LTIP Units”), including 3.95% which are not vested at December 31, 2019).
Because the Company is the sole general partner of the Operating Partnership and has unilateral control over its management and major operating decisions (even if additional limited partners are admitted to the Operating Partnership), the accounts of the Operating Partnership are consolidated in its consolidated financial statements.
The Company also consolidates entities in which it controls more than 50% of the voting equity and in which control does not rest with other investors. Investments in real estate joint ventures in which the Company has the ability to exercise significant influence, but does not have financial or operating control, are accounted for using the equity method of accounting. These entities are included in the Company’s consolidated financial statements as “Preferred equity investments and investments in unconsolidated real estate joint ventures.” All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. The Company will consider future investments for consolidation in
accordance with the provisions required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810: Consolidation.
In accordance with adoption of the lease accounting update issued in July 2018, the Company reflects all income earned pursuant to tenant leases in a single line item, “Rental and other property revenues”, in the 2019 consolidated statements of operations. See New Accounting Pronouncements below. To facilitate comparability, the Company has reclassified lease and non-lease income for prior periods to conform to the current period presentation.
Summary of Significant Accounting Policies
Preferred Equity Investments and Investments in Unconsolidated Real Estate Joint Ventures
The Company first analyzes an investment to determine if it is a variable interest entity (“VIE”) in accordance with Topic ASC 810 and, if so, whether the Company is the primary beneficiary requiring consolidation. A VIE is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership, or other financial interests in a VIE that change in value with changes in the fair value of the VIE’s net assets. The Company continuously re-assesses at each level of the investment whether the entity is (i) a VIE, and (ii) if the Company is the primary beneficiary of the VIE. If it was determined that an entity in which the Company holds an interest qualified as a VIE and the Company was the primary beneficiary, the entity would be consolidated.
If, after consideration of the VIE accounting literature, the Company has determined that an entity is not a VIE, the Company assesses the need for consolidation under all other provisions of ASC 810. These provisions provide for consolidation of majority-owned entities through a majority voting interest held by the Company providing control.
In assessing whether the Company is in control of and requiring consolidation of the limited liability company and partnership venture structures, the Company evaluates the respective rights and privileges afforded each member or partner (collectively referred to as “member”). The Company’s member would not be deemed to control the entity if any of the other members have either (i) substantive kickout rights providing the ability to dissolve (liquidate) the entity or otherwise remove the managing member or general partner without cause or (ii) has substantive participating rights in the entity. Substantive participating rights (whether granted by contract or law) provide for the ability to effectively participate in significant decisions of the entity that would be expected to be made in the ordinary course of business.
If it has been determined that the Company does not have control but does have the ability to exercise significant influence over the entity, the Company accounts for these unconsolidated investments under the equity method of accounting. The equity method of accounting requires these investments to be initially recorded at cost and subsequently increased (decreased) for the Company’s share of net income (loss), including eliminations for the Company’s share of intercompany transactions, and increased (decreased) for contributions (distributions). The Company’s proportionate share of the results of operations of these investments is reflected in the Company’s earnings or losses.
Financial Instrument Fair Value Disclosures
As of December 31, 2019 and 2018, the carrying values of cash and cash equivalents, accounts receivable, due to and due from affiliates, accounts payable, accrued liabilities, and distributions payable approximate their fair value based on their highly-liquid nature and/or short-term maturities. The carrying values of notes receivable from related parties approximate fair value because stated interest rate terms are consistent with interest rate terms on new deals with similar leverage and risk profiles. The fair values of notes receivable are classified in Level 3 of the fair value hierarchy due to the significant unobservable inputs that are utilized in their respective valuations.
Real Estate Assets
Capital Additions, Depreciation and Amortization
The Company capitalizes costs, including certain indirect costs, incurred in connection with its capital additions activities, including redevelopment, development and construction projects, other tangible apartment community improvements, and replacements of existing apartment community components. Included in these capitalized costs are payroll costs associated with time spent by employees in connection with capital additions activities at the apartment community level. The Company characterizes as “indirect costs” an allocation of certain department costs, including payroll, at the corporate levels that clearly relate to capital additions activities. The Company also capitalizes interest, property taxes and insurance during periods in which redevelopment, development and construction projects are in progress. Cost capitalization begins once the development or construction activity commences and ceases when the asset is ready for its intended use. Repair and maintenance and tenant turnover costs are expensed as incurred. Repair and maintenance and tenant turnover costs include all costs that do not extend the useful life of the real estate asset. Depreciation and amortization expense are computed on the straight-line method over the asset’s estimated useful life. The Company considers the period of future benefit of an asset to determine its appropriate useful life and anticipates the estimated useful lives of assets by class to be generally as follows:
Buildings
30 - 40 years
Building improvements
5 - 15 years
Land improvements
5 - 15 years
Furniture, fixtures and equipment
3 - 7 years
In-place leases
6 months
Real Estate Purchase Price Allocations
Upon the acquisition of real estate properties which do not constitute the definition of a business, the Company recognizes the assets acquired, the liabilities assumed, and any noncontrolling interest as of the acquisition date, measured at their relative fair values. Acquisition-related costs are capitalized in the period incurred and are recorded to the components of the real estate assets acquired. Prior to the adoption of Financial Accounting Standards Board ASU 2017-01, “Business Combinations; Clarifying the Definition of a Business” in January 2017, acquisition-related costs were expensed in the period incurred. The Company assesses the acquisition-date fair values of all tangible assets, identifiable intangible assets and assumed liabilities using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis) and that utilize appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on several factors including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it was vacant.
Intangible assets include the value of in-place leases, which represents the estimated fair value of the net cash flows of leases in place at the time of acquisition, as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease-up. The Company amortizes the value of in-place leases to expense over the remaining non-cancelable term of the respective leases, which is on average six months.
Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require the Company to make significant assumptions to estimate market lease rates, property operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, prevailing interest rates and the number of years the property will be held for investment. The use of inappropriate assumptions could result in an incorrect valuation of acquired tangible assets, identifiable intangible assets and assumed liabilities, which could impact the amount of the Company’s net income (loss). Differences in the amount attributed to the fair value estimate of the various assets acquired can be significant based upon the assumptions made in calculating these estimates.
Impairment of Real Estate Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of the Company’s real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets may not be recoverable, the Company assesses the recoverability of the assets by estimating whether the Company will recover the carrying value of the asset through its undiscounted future cash flows and its eventual disposition. Based on this analysis, if the Company does not believe that it will be able to recover the carrying value of the real estate and related intangible assets and liabilities, the Company will record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate and related intangible assets. No impairment charges were recorded in 2019, 2018 or 2017.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value.
Restricted Cash
Restricted cash is comprised of the following: (i) lender-imposed escrow accounts for replacement reserves, real estate taxes and insurance, and (ii) amounts set aside for reinvestment in accordance with Internal Revenue Service Code Section 1031 related to like-kind exchanges.
Concentration of Credit Risk
The Company maintains cash balances with high quality financial institutions and periodically evaluates the creditworthiness of such institutions and believes that the Company is not exposed to significant credit risk. Cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation.
Rents and Other Receivables
The Company will periodically evaluate the collectability of amounts due from tenants and maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under lease agreements. The Company exercises judgment in establishing these allowances and considers payment history and current credit status of tenants in developing these estimates.
Deferred Financing Fees
Deferred financing fees represent commitment fees, legal fees and other third-party costs associated with obtaining financing. Deferred financing fees paid by the Company on behalf of its consolidated joint ventures are capitalized and reflected as a reduction of mortgages payable, and fees associated with the Company’s lines of credit are recorded within accounts receivable, prepaids and other assets on the consolidated balances sheets. Deferred financing fees paid by the Company on behalf of its consolidated joint ventures and fees associated with its lines of credit are amortized to interest expense over the terms of the financing agreements using the straight-line method, which approximates the effective interest method.
Noncontrolling Interests
Noncontrolling interests are comprised of the Company’s joint venture partners’ interests in consolidated joint ventures, as well as interests held by LTIP Unit holders and OP Unit holders. The Company reports its joint venture partners’ interest in its consolidated real estate joint ventures and other subsidiary interests held by third parties as noncontrolling interests. The Company records these noncontrolling interests at their initial fair value, adjusting the basis prospectively for their share of the respective consolidated investments’ net income or loss and equity contributions and distributions. These noncontrolling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are allocated to the noncontrolling interest holder pursuant to each joint venture’s operating agreement.
Revenue Recognition
Rental income related to tenant leases is recognized on an accrual basis over the terms of the related leases on a straight-line basis. Amounts received in advance are recorded as a liability within other accrued liabilities.
Other property revenues are recognized in the period earned.
The Company recognizes a gain or loss on the sale of real estate assets when the criteria for an asset to be derecognized are met, which include when (i) a contract exists and (ii) the buyer obtains control.
Stock-Based Compensation
The Company expenses the fair value of share awards in accordance with the fair value recognition requirements of ASC Topic 718 “Compensation-Stock Compensation.” ASC Topic 718 requires companies to measure the cost of the recipient services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. The cost of the share award is expensed over the requisite service period (usually the vesting period).
Distribution Policy
The Company expects to authorize and declare regular cash distributions to its stockholders in order to maintain its REIT status. Distributions to stockholders will be determined by the Company’s board of directors (the “Board”) and will be dependent upon a number of factors, including funds available for the payment of distributions, financial condition, the timing of property acquisitions, capital expenditure requirements, and annual distribution requirements in order to maintain the Company’s status as a REIT, and other considerations as the Board may deem relevant. Distributions are recorded as a reduction of stockholders’ equity in the period in which they are declared.
Related Party Transactions
On April 2, 2014, upon the completion of the initial public offering (the “IPO”), the Company entered into a management agreement with the former Manager, an affiliate of Bluerock, to be the Company’s external manager (the “Management Agreement”). Under the Management Agreement the Company paid the former Manager a base management fee and incentive fee. The Company records all related party fees as incurred.
Following the Internalization on October 31, 2017, the Company, as an internally managed company, no longer pays the former Manager any fees or expense reimbursements arising from the Management Agreement.
Selling Commissions and Dealer Manager Fees
In conjunction with the offering of the Series B Preferred Stock and the Series T Preferred Stock, the Company engaged a related party as dealer manager and pays selling commissions and dealer manager fees of 7% and 3%, respectively, of the gross offering proceeds from the offering. The dealer manager re-allows the substantial majority of the selling commissions and dealer manager fees to participating broker-dealers, and incurs costs in excess of the 10%, which costs are borne by the dealer manager without reimbursement by the Company. Offering costs related to each closing are recorded as a reduction of proceeds raised on the date of issue.
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and has qualified since the taxable year ended December 31, 2010. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of its annual REIT taxable income to stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject
to federal income tax to the extent it distributes qualifying dividends to its stockholders. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants it relief under certain statutory provisions. Such an event could materially adversely affect the Company’s net income (loss) and net cash available for distribution to stockholders. However, the Company intends to continue to organize and operate in such a manner as to remain qualified for treatment as a REIT.
For the year ended December 31, 2019, 100% of the distributions received by the common stockholders were classified as return of capital for income tax purposes and none were ordinary income. In addition, for the year ended December 31, 2019, approximately 1.33% of the distributions received by the preferred stockholders were classified as ordinary income for income tax purposes, 93.15% were return of capital, and 5.52% were capital gains, with 87.49% of the capital gains qualifying as Section 1250 gains. For the year ended December 31, 2018, 100% of the distributions received by the common stockholders were classified as return of capital for income tax purposes and none were ordinary income. In addition, for the year ended December 31, 2018, approximately 34.00% of the distributions received by the preferred stockholders were classified as ordinary income for income tax purposes and 66.00% were return of capital. For the year ended December 31, 2017, 64.21% of the distributions received by the common stockholders were classified as return of capital for income tax purposes, 4.00% were ordinary income, 31.79% were capital gains, with 21.29% of the capital gains qualifying as Section 1250 gains. In addition, for the year ended December 31, 2017, 11.19% of the distributions received by the preferred stockholders were classified as ordinary income for income tax purposes and 88.81% were capital gains, with 21.29% of the capital gains qualifying as Section 1250 gains.
ASC Topic 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. It requires a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken, or expected to be taken, in an income tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Management has considered all positions taken on the 2014 through 2018 tax returns (where applicable), and those positions expected to be taken on the 2019 tax returns, and concluded that tax positions taken will more likely than not be sustained at the full amount upon examination. Accordingly, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its consolidated financial statements. The Company expects no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of December 31, 2019. If any income tax exposure was identified, the Company would recognize an estimated liability for income tax items that meet the criteria for accrual. Neither the Company nor its subsidiaries have been assessed interest or penalties by any major tax jurisdictions. If any interest and penalties related to income tax assessments arose, the Company would record them as income tax expense. As of December 31, 2019, tax returns for the calendar years 2016 and subsequent remain subject to examination by the Internal Revenue Service and various state tax jurisdictions. The Internal Revenue Service is currently conducting a routine examination of the Company’s Operating Partnership 2017 tax return. The results of such examination and impact on the Company’s results of operations are not known at this time. The Company has not been notified of any state tax examinations.
Reportable Segment
The Company’s current business consists of investing in and operating multifamily communities. Substantially all its consolidated net income (loss) is from investments in real estate properties that the Company owns through co-investment ventures which it either consolidates or accounts for under the equity method of accounting. The Company evaluates operating performance on an individual property level and based on the properties’ similar economic characteristics, the Company’s properties are aggregated into one reportable segment.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Other than the adoption of new accounting pronouncements as described below, there have been no significant changes to the Company’s accounting policies since it filed its audited consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2018.
New Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 will require more timely recognition of credit losses associated with financial assets. While current GAAP includes multiple credit impairment objectives for instruments, the previous objectives generally delayed recognition of the full amount of credit losses until the loss was probable of occurring. The amendments in ASU 2016-13, whose scope is asset-based and not restricted to financial institutions, eliminate the probable initial recognition threshold in current GAAP and, instead, reflect an entity’s current estimate of all expected credit losses. The amendments in ASU 2016-13 broaden the information that the Company must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss that will be more useful to users of the financial statements. In November 2018, the FASB issued ASU No. 2018-19 “Codification Improvements to Topic 326, Financial Instruments-Credit Losses” (“ASU 2018-19”). ASU 2018-19 clarifies that operating lease receivables are excluded from the scope of ASU 2016-13 and instead, impairment of operating lease receivables is to be accounted for under ASC 842. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As of December 31, 2019, the Company has evaluated the impacts of ASU 2016-13, with a focus on the Company’s investments in mezzanine loans, on its consolidated financial statements and expects the allowance to be immaterial to the Company.
In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. The Company adopted ASU 2016-02 as of January 1, 2019 and elected the package of practical expedients provided by the standard which includes: (i) an entity need not reassess whether any expired or existing contract is a lease or contains a lease, (ii) an entity need not reassess the lease classification of any expired or existing leases, and (iii) and entity need not reassess initial direct costs for any existing leases. The adoption of ASU 2016-02 did not have a material impact to the Company’s consolidated financial statements. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”). ASU 2018-11 provides lessors with a practical expedient to not separate lease and non-lease components if both (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Company adopted the practical expedient as of January 1, 2019 to account for lease and non-lease components as a single component in lease contracts where the Company is the lessor.
Lessor Accounting
The Company’s current portfolio is focused predominately on apartment properties whereby the Company generates rental revenue by leasing apartments to residents in its communities. As lease revenues for apartments fall under the scope of Topic 842, such lease revenues are classified as operating leases with straight-line recognition over the terms of the relevant lease agreement and inclusion within rental revenue. Resident leases are generally for one-year or month-to-month terms and are renewable by mutual agreement
between the Company and the resident. Non-lease components of the Company’s apartment leases are combined with the related lease component and accounted for as a single lease component under Topic 842. The balances of net real estate investments and related depreciation on the Company’s consolidated financial statements relate to assets for which the Company is the lessor.
Lessee Accounting
The Company determines if an arrangement is a lease at inception. The Company is currently engaged in operating lease agreements that primarily relate to certain equipment leases. The Company determined that the lessee operating lease commitments have no material impact on its consolidated financial statements with the adoption of Topic 842. The Company will continue to assess any modification of existing lease agreements and execution of any new lease agreements for the potential requirement of recording a right-of-use-asset or liability in the future.
In August 2017, the FASB issued ASU No. 2017-12 “Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), which, among other things, requires entities to present the earnings effect of hedging instruments in the same income statement line item in which the earnings effect of the hedged item is reported. The new standard also adds new disclosure requirements. ASU 2017-12 is effective for annual periods beginning after December 15, 2018, though early adoption, including interim periods, is permissible. The Company adopted ASU 2017-12 as of January 1, 2019 and there has been no material impact to the Company’s consolidated financial statements as a result of its adoption.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Under the new standard, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. Revenue is generally recognized net of allowances. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers-Deferral of the Effective Date” which deferred the effective date of the new revenue recognition standard until the first quarter of 2018. Therefore, ASU 2014-09 became effective for the Company in the first quarter of the fiscal year ending December 31, 2018. The ASU allows for either full retrospective or modified retrospective adoption. The majority of the Company’s revenue is derived from rental income, which is scoped out from this standard and will be accounted for under ASU 2016-02, discussed above. The Company’s other revenue streams, including interest income from related parties, were determined not to be within the scope of ASU 2014-09, gains and losses from real estate dispositions as defined in Subtopic 610-20 discussed below, and notes and accrued interest receivable from related parties, which the ASU provides to follow established guidance in Topic 310. The adoption by the Company of ASU 2014-09 as of January 1, 2018 did not result in a cumulative adjustment and did not have a material impact on the Company’s consolidated financial statements.
In addition to the comprehensive new revenue guidance, ASU 2014-09 also introduced new standards for accounting for gains and losses from derecognition of nonfinancial assets, which was codified into ASC Topic 610-20, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets”. The scope of ASC Topic 610-20 was further clarified in ASU 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”), noting that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. ASU 2017-05 also defines the term “in substance nonfinancial asset” and provides guidance on the recognition of gains and losses on sale of real estate investments. The Company recognizes the sale, and associated gain or loss from the disposition, provided that the earnings process is complete. Subsequent to the adoption of the new standard, a gain or loss is recognized when the criteria for an asset to be derecognized are met, which include when (i) a contract exists and (ii) the buyer obtained control of the nonfinancial asset when sold. As a result, the Company may recognize a gain on a real estate disposition transaction that previously did not qualify as a sale or for full profit recognition due to the timing of the transfer of control or certain forms of continuing involvement. ASC Topic 610-20 is effective for annual periods beginning after December 15, 2017. The Company adopted ASC Topic 610-20 as of January 1, 2018 using the modified retrospective approach. The adoption of ASC Topic 610-20 did not impact the accounting of the Company’s historical property sales or sales of joint venture interests and its adoption had no impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods (including interim periods within those periods) beginning after December 15, 2019, though early adoption, including adoption in interim periods, is permissible. The Company early adopted ASU 2018-15 as of July 1, 2018 and there has been no material impact to the Company’s consolidated financial statements as a result of its adoption.
Note 3 - Sale of Real Estate Assets and Joint Venture Equity Interests and Abandonment of Development Project
Sale of Village Green Ann Arbor
On February 22, 2017, the Company closed on the sale of the Village Green Ann Arbor property, located in Ann Arbor, Michigan. The property was sold for approximately $71.4 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for the payoff of the existing mortgage indebtedness encumbering the Village Green Ann Arbor property in the amount of $41.4 million and payment of closing costs and fees of  $1.3 million, the sale of the property generated net proceeds of approximately $28.6 million and a gain on sale of approximately $16.7 million, of which the Company’s pro rata share of proceeds was approximately $13.6 million and pro rata share of the gain was approximately $7.8 million.
Sale of Lansbrook Village
On April 26, 2017, the Company closed on the sale of Lansbrook Village, located in Palm Harbor, Florida. The 90% owned property was sold for approximately $82.4 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for assumption of the existing mortgage indebtedness encumbering Lansbrook Village in the amount of  $57.2 million and payment of closing costs and fees of  $1.2 million, the sale of the property generated net proceeds of approximately $24.1 million and a gain on sale of approximately $22.8 million, of which the Company’s pro rata share of proceeds was approximately $19.1 million and pro rata share of the gain was approximately $16.1 million.
Sale of Fox Hill
On May 24, 2017, the Company closed on the sale of the Fox Hill property, located in Austin, Texas. The property was sold for approximately $46.5 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for the payoff of the existing mortgage indebtedness encumbering the Fox Hill property in the amount of  $26.7 million, the payment of early extinguishment of debt costs of  $1.6 million and payment of closing costs and fees of  $0.5 million, the sale of the property generated net proceeds of approximately $19.2 million and a gain on sale of approximately $10.7 million, of which the Company’s pro rata share of proceeds was approximately $16.4 million and pro rata share of the gain was approximately $10.3 million.
Sale of MDA Apartments
On June 30, 2017, the Company closed on the sale of its interest in MDA Apartments, located in Chicago, Illinois. The Company’s 35% interest in the property was sold for approximately $18.3 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for the payment of closing costs and fees of  $0.7 million, the sale of the joint venture interest in the property generated net proceeds of approximately $17.6 million and gain on sale of  $10.2 million, of which the Company’s pro rata share of proceeds was approximately $11.0 million and pro rata share of the gain was approximately $6.4 million.
Election to Abandon East San Marco Development
On November 24, 2015, the Company entered into a cost-sharing agreement to pursue the acquisition of a tract of real property located in Jacksonville, Florida for the development of a 266-unit, Class A
multifamily apartment community with 44,276 square feet of retail space, or the East San Marco Property. In 2017 the Company elected to abandon pursuit of the development of the East San Marco Property due to significant cost escalations arising from scope changes imposed on the project after the start and from both general and market specific labor and material inflation, which negatively impacted the risk and return profile of the project. The Company had invested approximately $2.9 million in a controlling equity position in the East San Marco Property prior to abandonment, all of which was recorded within acquisition and pursuit costs on the consolidated statements of operations.
Sale of Wesley Village II
On March 1, 2019, the Company closed on the sale of an undeveloped parcel of land known as Wesley Village II located in Charlotte, North Carolina. The parcel was sold for approximately $1.0 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for closing costs and fees, the sale of the parcel generated net proceeds of approximately $1.0 million, resulting in a gain on sale of approximately $0.7 million.
Sale of ARIUM Palms, Leigh House, Preston View, Sorrel and Sovereign (the “Topaz Portfolio”)
On July 15, 2019, the Company closed on the sale of three of the five properties in the Topaz Portfolio: Preston View, Sorrel and Sovereign. The properties are located in Morrisville, North Carolina, Frisco, Texas and Fort Worth, Texas, respectively. The three properties were sold for approximately $174.9 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for the payoff of existing mortgage indebtedness encumbering the properties in the amount of  $108.0 million, the payment of early extinguishment of debt costs of  $1.8 million and payment of closing costs and fees of $2.0 million, the sale of the properties generated net proceeds of approximately $63.0 million and a gain on sale of approximately $30.9 million. The Company recorded a loss on extinguishment of debt of $2.3 million related to the sale.
Additionally, the Company held a preferred equity investment in Leigh House, the fourth property in the Topaz Portfolio, located in Raleigh, North Carolina. Prior to the sale, the Company purchased additional interests in Leigh House from Bluerock Special Opportunity + Income Fund II, LLC (“Fund II”) for approximately $3.2 million in accordance with the agreement governing its investment. The Company sold its interests as part of the Topaz Portfolio for net proceeds of approximately $17.4 million, which included payment for its original preferred investment of  $14.2 million and its additional investment of approximately $3.2 million.
On August 29, 2019, the Company closed on the sale of the fifth property in the Topaz Portfolio, ARIUM Palms, located in Orlando, Florida. The property was sold for approximately $46.8 million, subject to certain prorations and adjustments typical in such real estate transactions. After deductions for the payoff of the existing mortgage indebtedness encumbering the ARIUM Palms property in the amount of $30.3 million, the payment of early extinguishment of debt costs of  $0.3 million and payment of closing costs and fees of  $1.0 million, the sale of the property generated net proceeds of approximately $15.3 million and a gain on sale of approximately $13.4 million. The Company recorded a loss on extinguishment of debt of  $0.9 million related to the sale.
Sale of Marquis at Crown Ridge and Marquis at Stone Oak
On September 20, 2019, the Company closed on the sale of its interests in two properties located in San Antonio, Texas: Marquis at Crown Ridge and Marquis at Stone Oak. The properties were sold for approximately $95.0 million, subject to certain prorations and adjustments typical in such real estate transactions. After deductions for the payoff of the existing mortgage indebtedness encumbering the properties in the amount of  $70.3 million and payment of closing costs and fees of  $0.2 million, the sale of the properties generated net proceeds of approximately $24.5 million and a gain on sale of approximately $5.1 million, of which the Company’s pro rata share of the proceeds was approximately $22.2 million and pro rata share of the gain was approximately $4.6 million. The Company recorded a loss on extinguishment of debt of  $0.6 million related to the sale.
Note 4 - Investments in Real Estate
As of December 31, 2019, the Company held investments in thirty-five consolidated operating properties and eighteen properties through preferred equity or mezzanine loan investments. The following tables provide summary information regarding the Company’s consolidated operating properties and preferred equity and mezzanine loan investments, which are either consolidated or accounted for under the equity method of accounting.
Consolidated Operating Properties
(1)
Represents date of last significant renovation or year built if there were no renovations.
Depreciation expense was $63.7 million, $53.9 million and $35.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Intangibles related to the Company’s consolidated investments in real estate consist of the value of in-place leases. In-place leases are amortized over the remaining term of the in-place leases, which is approximately six months. Amortization expense related to the in-place leases was $6.8 million, $8.8 million and $13.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The Company’s real estate assets are leased to tenants under operating leases for which the terms and expirations vary. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty and other terms and conditions as negotiated. The Company retains substantially all the risks and benefits of ownership of the consolidated real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit. Amounts required as a security deposit vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not individually significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of their security deposit. Security deposits received in cash related to tenant leases are included in other accrued liabilities in the accompanying consolidated balance sheets and totaled $2.6 million and $2.4 million as of December 31, 2019 and 2018, respectively, for the Company’s consolidated real estate properties. No individual tenant represents over 10% of the Company’s annualized base rent for the consolidated real estate properties.
Preferred Equity and Mezzanine Loan Investments
(1)
The development is in the planning phase; project specifications are in process.
(2)
Stabilized operating properties in which the Company has a preferred equity investment. Refer to Note 7 for further information.
(3)
Belmont Crossing, Sierra Terrace and Sierra Village are collectively known as the Strategic Portfolio. Refer to Note 7 for further information.
(4)
Helios was a preferred equity investment through December 10, 2019, the date the Company redeemed its preferred interest into common interest. The Company accounted for Helios under the equity method at December 31, 2019. Helios property was subsequently sold on January 8, 2020.
Note 5 - Acquisition of Real Estate
The following describes the Company’s significant acquisition activity and related financing during the years ended December 31, 2019 and 2018 (dollars in thousands):
(1)
Funded, in part, with the Company’s Senior Credit Facility secured by the property. Refer to Note 8 for further information about the Company’s Secured Credit Facility.
Purchase Price Allocation
The real estate acquisitions above have been accounted for as asset acquisitions. The purchase prices were allocated to the acquired assets and assumed liabilities based on their estimated fair values at the dates of acquisition.
The following table summarizes the assets acquired and liabilities assumed at the acquisition date for acquisitions made during the year ended December 31, 2019 (amounts in thousands):
Acquisition of Additional Interests in Properties
In addition to the property acquisitions discussed above, the Company also acquired the noncontrolling partner’s interest in the following properties (dollars in thousands):
(1)
ARIUM Palms, Sorrel and Sovereign were subsequently disposed of in 2019 as part of the Topaz Portfolio sale. Refer to Note 3 for further information.
Note 6 - Notes and Interest Receivable due from Related Parties
Following is a summary of the notes and accrued interest receivable due from related parties as of December 31, 2019 and 2018 (amounts in thousands):
Following is a summary of the interest income from related parties for the years ended December 31, 2019 and 2018 (amounts in thousands):
The occupancy percentages of the Company’s related party properties at December 31, 2019 and 2018 are as follows:
(1)
The Company consolidated Cade Boca Raton as of December 31, 2019. Refer to below for further information.
(2)
The development has not commenced lease-up.
(3)
The development is in the planning phase; project specifications are in process.
Arlo Mezzanine Financing
The Company has provided a $27.5 million mezzanine loan (the “Arlo Mezz Loan”), of which $27.3 million has been funded as of December 31, 2019, to BR Morehead JV Member, LLC (the “Arlo JV Member”). The Arlo Mezz Loan is secured by the Arlo JV Member’s approximate 95.0% interest in a multi-tiered joint venture along with Fund II, an affiliate of the former Manager, and an unaffiliated third party (the “Arlo JV”), which developed a 286-unit Class A apartment community located in Charlotte, North Carolina. The Arlo Mezz Loan matures on the earliest to occur of: (i) the latest to occur of  (a) September 26, 2022 and (b) the applicable maturity date under any extension granted under any construction financing, or (ii) the date of sale or transfer of property, or (iii) such earlier date, by declaration of acceleration or otherwise, on which the final payment of principal becomes due. The Arlo Mezz Loan bears interest at a fixed rate of 15% with regular monthly payments being interest only and can be prepaid without penalty.
In conjunction with the Arlo development, the Arlo property owner, which is owned by an entity in which the Company has an equity interest, entered into a $34.5 million construction loan (the “Arlo Construction Loan”) with an unaffiliated party, of which $33.8 million is outstanding at December 31, 2019, and which is secured by the Arlo property. The Arlo Construction Loan matures on June 29, 2020 and has a one-year extension option, subject to certain conditions. The Arlo Construction Loan bears interest on a floating basis on the amount drawn based on LIBOR plus 3.75%, subject to a minimum of 4.25%.
In addition, the Arlo property owner entered into a $7.3 million mezzanine loan with an unaffiliated party, of which $7.3 million is outstanding at December 31, 2019, and which is secured by the membership
interest in the joint venture developing the Arlo property. The mezzanine loan matures on June 29, 2020 and has two one-year extension options, subject to certain conditions. The loan bears interest at a fixed rate of 11.5%.
Cade Boca Raton Mezzanine Financing
The Company provided a $14.0 million mezzanine loan (the “Boca Mezz Loan”) to BRG Boca JV Member, LLC (the “Boca JV Member”), an affiliate of the former Manager. The Boca Mezz Loan was secured by the Boca JV Member’s approximate 90.0% interest in a multi-tiered joint venture along with Fund II, an affiliate of the former Manager, and an unaffiliated third party (the “Boca JV”), which developed a 90-unit Class A apartment community located in Boca Raton, Florida known as Cade Boca Raton. The Boca Mezz Loan bore interest at a fixed rate of 15.0% with regular monthly payments being interest-only. The Boca Mezz Loan was to mature on March 11, 2022 and could be prepaid without penalty.
On December 19, 2019, the Company received a paydown of  $3.6 million on the Boca Mezz Loan, reducing the outstanding principal balance to $10.1 million. Additionally, the Company negotiated with Fund II to contribute the remaining balance of the Boca Mezz Loan in exchange for 89.25% of the common membership interest in Boca JV Member and sole management control of Boca JV Member. At December 31, 2019, the Company consolidated the Boca JV Member.
Domain at The One Forty Mezzanine Financing
The Company has provided a $24.5 million mezzanine loan (the “Domain Mezz Loan”), of which $23.1 million has been funded as of December 31, 2019, to BR Member Domain Phase 1, LLC (the “Domain JV Member”), an affiliate of the former Manager. The Domain Mezz Loan is secured by the Domain JV Member’s approximate 95% interest in a multi-tiered joint venture along with Fund II, an affiliate of the former Manager, and an unaffiliated third party (the “Domain JV”), which developed a 299-unit Class A apartment community located in Garland, Texas known as Domain at The One Forty. The Domain Mezz Loan matures on the earliest to occur of: (i) the latest to occur of  (a) March 11, 2022 and (b) the applicable maturity date under any extension granted under any construction financing, or (ii) the date of sale or transfer of property, or (iii) such earlier date, by declaration of acceleration or otherwise, on which the final payment of principal becomes due. The Domain Mezz Loan bears interest at 15% in 2019, 5.5% in 2020, 4.0% in 2021 and 3.0% thereafter, and has regular monthly payments that are interest-only. The Domain Mezz Loan can be prepaid without penalty. The Company has a 50.0% participation in any profits achieved in a sale after repayment of the Domain Mezz Loan and the Company and Fund II each receive full return of their respective capital contributions.
In conjunction with the Domain at The One Forty development, the Domain at The One Forty property owner, which is owned by an entity in which the Company has an equity interest: (i) entered into a $30.3 million construction loan (the “Domain Construction Loan”) secured by the Domain at The One Forty property, and (ii) entered into a $6.4 million mezzanine loan secured by the membership interest in the joint-venture developing the Domain at The One Forty property. Both the Domain Construction Loan and the mezzanine loan were entered into with unaffiliated parties and had maturity dates of March 3, 2020. The Domain Construction Loan could be prepaid without penalty, whereas the mezzanine loan could be prepaid provided the lender received a minimum profit and 1.0% exit fee. On December 12, 2019, the Domain at The One Forty property owner refinanced the Domain Construction Loan and entered into a $39.2 million senior mortgage loan (the “Domain Senior Loan”) secured by the Domain at The One Forty property and used the proceeds in part to pay off the outstanding balances, in full, of the Domain Construction Loan and mezzanine loan. The Domain Senior Loan matures on January 5, 2023 and bears interest at a floating basis of LIBOR plus 2.20%, but no less than 3.95%, with interest-only payments through the initial term of the loan. The Domain Senior Loan contains two one-year extension options, and if extended, payments during the extension period shall be based on thirty-year amortization. On or after July 5, 2021, the senior loan may be prepaid without penalty.
Motif Mezzanine Financing, formerly Flagler Village
The Company has provided a $74.6 million mezzanine loan (the “Flagler Mezz Loan”), of which all has been funded as of December 31, 2019, to BR Flagler JV Member, LLC (the “Flagler JV Member”), an
affiliate of the former Manager. The Flagler Mezz Loan is secured by the Flagler JV Member’s 97% interest in a multi-tiered joint venture along with Fund II and Bluerock Special Opportunity + Income Fund III, LLC (“Fund III”), affiliates of the former Manager, and an unaffiliated third party (the “Flagler JV”), which is developing a 385-unit Class A apartment community located in Fort Lauderdale, Florida known as Motif. The Flagler Mezz Loan bears interest at 12.9% and has regular monthly payments that are interest-only. The Flagler Mezz Loan has a maturity date of March 28, 2023 and can be prepaid without penalty.
The Company has the right of first offer to purchase the member’s ownership interests in the Flagler JV Member, or, if applicable, to purchase Motif if the Flagler JV Member exercises its rights under the Flagler JV to cause the sale of Motif.
In conjunction with the Motif development, the Motif property owner, which is owned by an entity in which the Company has an equity interest, entered into an approximately $70.4 million construction loan (the “Motif Construction Loan”) with an unaffiliated party, of which $48.2 million is outstanding as of December 31, 2019, and which is secured by the Motif development. The Motif Construction Loan matures on March 28, 2022, contains a one-year extension option, subject to certain conditions, and can be prepaid subject to payment of a make-whole premium and exit fee. The Motif Construction Loan bears interest at the greater of 5.0% or a rate of LIBOR plus 3.85%, with interest only payments until March 28, 2022 and future payments after extension based on thirty-year amortization.
Novel Perimeter Mezzanine Financing
The Company has provided a $20.6 million mezzanine loan (the “Perimeter Mezz Loan”), of which all has been funded as of December 31, 2019, to BR Perimeter JV Member, LLC (the “Perimeter JV Member”), an affiliate of the former Manager. The Perimeter Mezz Loan is secured by the Perimeter JV Member’s approximate 60% interest in a multi-tiered joint venture along with Fund III, an affiliate of the former Manager, and an unaffiliated third party, which developed a 320-unit Class A apartment community located in Atlanta, Georgia known as Novel Perimeter. The Perimeter Mezz Loan matures on the later of December 29, 2021 or the maturity date of the Novel Perimeter Construction Loan, as defined below, as extended, and bears interest at a fixed rate of 15.0%. Regular monthly payments are interest-only during the initial term. The Perimeter Mezz Loan can be prepaid without penalty.
In conjunction with the Novel Perimeter development, the Novel Perimeter property owner, which is owned by an entity in which the Company has an equity interest, entered into an approximately $44.7 million construction loan (the “Novel Perimeter Construction Loan”) with an unaffiliated party, of which $44.7 million is outstanding at December 31, 2019, and which is secured by the Novel Perimeter development. The Novel Perimeter Construction Loan matures December 12, 2020, contains a one-year extension option, subject to certain conditions, and can be prepaid without penalty. The Novel Perimeter Construction Loan bears interest at a rate of LIBOR plus 3.00%, with interest only payments until December 12, 2020 and future payments based on thirty-year amortization.
The Park at Chapel Hill Financing
On November 1, 2019, the Company entered into an agreement to provide a mezzanine loan (“the Chapel Hill Mezz Loan”) in an amount up to $40.0 million to BR Chapel Hill JV, LLC (“BR Chapel Hill JV”), of which $29.5 million was funded upon execution of the agreement. BR Chapel Hill JV owns a 100% interest in BR Chapel Hill, LLC (“BR Chapel Hill”) and is a joint venture with common interests held by Bluerock Special Opportunity + Income Fund, Fund II, and BR Chapel Hill Investment, LLC, all managed by affiliates of the former Manager. The Chapel Hill Mezz Loan bears interest at a fixed rate of 11.0% per annum with regular monthly payments being interest-only during the initial term. The Chapel Hill Mezz Loan matures on the earliest to occur of: (i) the latest to occur of  (a) March 31, 2024 and (b) the applicable maturity date under any extension granted under any construction financing, or (ii) the date of sale or transfer of property, or (iii) such earlier date, by declaration of acceleration or otherwise, on which the final payment of principal becomes due. The Chapel Hill Mezz Loan is secured by the Chapel Hill property and can be prepaid without penalty.
In conjunction with the Chapel Hill Mezz Loan, the Company provided a $5.0 million senior loan to BR Chapel Hill. The senior loan is secured by BR Chapel Hill’s fee simple interest in the Chapel Hill property.
The senior loan matures on March 31, 2024 and bears interest at a fixed rate of 10.0% per annum. Regular monthly payments are interest-only during the initial term. The senior loan can be prepaid without penalty.
Vickers Historic Roswell Mezzanine Financing
The Company has provided an $11.8 million mezzanine loan (the “Vickers Mezz Loan”), of which $11.5 million has been funded as of December 31, 2019, to BR Vickers Roswell JV Member, LLC (the “Vickers JV Member”), an affiliate of the former Manager. The Vickers Mezz Loan is secured by the Vickers JV Member’s approximate 80% interest in a multi-tiered joint venture along with Fund III, an affiliate of the former Manager, and an unaffiliated third party (the “Vickers JV”), which developed a 79-unit Class A apartment community located in Roswell, Georgia known as Vickers Historic Roswell. The Vickers Mezz Loan bears interest at a fixed rate of 15.0% and regular monthly payments are interest-only. The Vickers Mezz Loan matures on the earliest to occur of: (i) the latest to occur of  (a) February 26, 2022 and (b) the applicable maturity date under any extension granted under any construction financing, or (ii) the date of sale or transfer of property, or (iii) such earlier date, by declaration of acceleration or otherwise, on which the final payment of principal becomes due. The Vickers Mezz Loan can be prepaid without penalty.
In conjunction with the Vickers Historic Roswell development, the Vickers Historic Roswell property owner, which is owned by an entity in which the Company has an equity interest, entered into an approximately $18.0 million construction loan (the “Vickers Construction Loan”) with an unaffiliated party, which was secured by the Vickers Historic Roswell development. The Vickers Construction Loan was to mature on December 1, 2020 and could be prepaid without penalty. On December 13, 2019, the Vickers Historic Roswell property owner refinanced the Vickers Construction Loan and entered into a $22.0 million senior mortgage loan (the “Vickers Senior Loan”) secured by the Vickers Historic Roswell property and used the proceeds in part to pay off the outstanding balance, in full, of the Vickers Construction Loan. The Vickers Senior Loan matures on January 1, 2030 and bears interest at a floating basis of LIBOR plus 1.99%, with interest-only payments through the term of the loan. On or after September 28, 2029, the loan may be prepaid without penalty.
Note 7 - Preferred Equity Investments and Investments in Unconsolidated Real Estate Joint Ventures
The carrying amount of the Company’s preferred equity investments and investments in unconsolidated real estate joint ventures as of December 31, 2019 and 2018 is summarized in the table below (amounts in thousands):
(1)
Belmont Crossing, Sierra Terrace and Sierra Village are collectively known as the Strategic Portfolio.
As of December 31, 2019, the Company, through wholly-owned subsidiaries of the Operating Partnership, had outstanding equity investments in fifteen joint ventures.
Nine of the fifteen equity investments, Alexan CityCentre, Alexan Southside Place, Mira Vista, North Creek Apartments, Riverside Apartments, Strategic Portfolio, Thornton Flats, Wayforth at Concord and Whetstone Apartments, are preferred investments, generate a stated preferred return on outstanding capital contributions, and the Company is not allocated any of the income or loss in the joint ventures. The joint venture is the controlling member in an entity whose purpose is to develop or operate a multifamily property.
Six of the fifteen equity investments, Arlo, Cade Boca Raton, Domain at The One Forty, Motif (formerly known as Flagler Village), Novel Perimeter and Vickers Historic Roswell, represent a remaining 0.5% common interest in joint ventures where the Company has previously redeemed its preferred equity investment in the joint ventures and provided a mezzanine loan. Refer to Note 6 for further information.
The preferred returns on the Company’s unconsolidated real estate joint ventures for the years ended December 31, 2019, 2018 and 2017 is summarized below (amounts in thousands):
The occupancy percentages of the Company’s unconsolidated real estate joint ventures at December 31, 2019 and 2018 are as follows:
(1)
The development has not commenced lease-up.
Summary combined financial information for the Company’s investments in unconsolidated real estate joint ventures as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017 is as follows (amounts in thousands):
Alexan CityCentre Interests
The Company has made a $12.8 million preferred equity investment in a multi-tiered joint venture along with Bluerock Growth Fund, LLC (“BGF”), Bluerock Growth Fund II, LLC (“BGF II”), Fund II and Fund III, all affiliates of the former Manager, and an unaffiliated third party (the “Alexan CityCentre JV”), which developed a 340-unit Class A apartment community located in Houston, Texas, known as Alexan CityCentre. The Company earns a preferred return of 15.0% and 20.0% on its $6.5 million and $6.3 million preferred equity investments, respectively. The Alexan CityCentre JV is required to redeem the Company’s preferred membership interest plus any accrued but unpaid return on the earlier date which is six months following the maturity of the construction loan, detailed below, including extension and refinancing, or any earlier acceleration or due date.
The Alexan CityCentre property owner, which is owned by an entity in which the Company has an equity interest, entered into a $55.1 million construction loan modification agreement, which was secured by its interest in the Alexan CityCentre property (the “Alexan Development”). The loan was to mature on January 1, 2020 and bore interest per annum equal to the prime rate plus 0.5% or LIBOR plus 3.0%, at the borrower’s option. On April 26, 2019, the Alexan CityCentre owner: (i) entered into a $46.0 million senior mortgage loan, (ii) entered into a $11.5 million mezzanine loan with an unaffiliated party, and (iii) used the proceeds from the senior loan and mezzanine loan to pay off the outstanding balance, in full, of the construction loan. The senior loan and mezzanine loan both provide for earnout advances, subject to certain restrictions, of  $2.0 million and $0.5 million, respectively, for total loan commitments of  $48.0 million and $12.0 million, respectively. The loans bear interest at a floating basis of the greater of LIBOR plus 1.50% or 3.99% on the senior loan, and the greater of LIBOR plus 6.00% or 8.49% on the mezzanine loan. The senior loan and mezzanine loan both: (i) have regular monthly payments that are interest-only during the
initial term, (ii) have initial maturity dates of May 9, 2022, (iii) contain two one-year extension options, and (iv) can be prepaid in whole prior to maturity provided the lender receives a stated spread maintenance premium.
Alexan Southside Place Interests
The Company has made a $24.9 million preferred equity investment in a multi-tiered joint venture along with Fund II and Fund III, affiliates of the former Manager, and an unaffiliated third party (the “Alexan Southside JV”), which developed a 270-unit Class A apartment community located in Houston, Texas, known as Alexan Southside Place. Alexan Southside Place is developed upon a tract of land under an 85-year ground lease. The joint venture adopted ASU No. 2016-02 as of January 1, 2019, and as such, has recorded a right-of-use asset and lease liability of  $17.1 million as of December 31, 2019. The Alexan Southside JV is required to redeem the Company’s preferred membership interest plus any accrued but unpaid return on the earlier date which is six months following the maturity of the loan, detailed below, including extension and refinancing, or any earlier acceleration or due date.
In conjunction with the Alexan Southside development, the joint venture, which is owned by an entity in which the Company has an equity interest, entered into a $31.8 million construction loan secured by its interest in the Alexan Southside Place property. The loan was to mature in April 2019 and bore interest on a floating basis on the amount drawn based on the base rate plus 1.25% or LIBOR plus 2.25%, at the borrower’s option. On April 12, 2019, the joint venture: (i) entered into a $26.4 million senior mortgage loan, (ii) entered into a $6.6 million mezzanine loan with an unaffiliated party, and (iii) used the proceeds from the senior loan and mezzanine loan to pay off the outstanding balance, in full, of the construction loan. The senior loan and mezzanine loan both provide for earnout advances, subject to certain restrictions, of $2.4 million and $0.6 million, respectively, for total loan commitments of  $28.8 million and $7.2 million, respectively. The loans bear interest at a floating basis of the greater of LIBOR plus 1.50% or 3.99% on the senior loan, and the greater of LIBOR plus 6.00% or 8.49% on the mezzanine loan. The senior loan and mezzanine loan both: (i) have regular monthly payments that are interest-only during the initial term, (ii) have initial maturity dates of May 9, 2022, (iii) contain two one-year extension options, and (iv) can be prepaid in whole prior to maturity provided the lender receives a stated spread maintenance premium.
On November 9, 2018, the Company entered into an amended agreement with Fund II and Fund III (together “the Funds”) that reduced the Company’s preferred return in exchange for certain grants made by the Funds. The Company’s previous per annum preferred return of 15.0% was reduced as follows: 6.5% in 2019, 5.0% in 2020 and 3.5% thereafter. The Funds agreed to (i) grant the Company a right to compel a sale of the project beginning November 1, 2021 and (ii) grant the Company a 50.0% participation in any profits achieved in a sale after the Company receives its full preferred return and repayment of principal, and the Funds receive full return of their capital contributions. The Funds are obligated to fund their prorata share of future capital calls, absent a default event. If a default event shall occur and is continuing at the time of a sale, the Company would be entitled to 100.0% of the profits after the Funds receive full return of their capital contributions. Additionally, the Company agreed to extend the mandatory redemption date of its preferred equity to be reflective of any changes in the construction loan maturity date as a result of refinancing.
Helios Interests
The Company made a $19.2 million preferred equity investment in a multi-tiered joint venture along with Fund III, an affiliate of the former Manager, and an unaffiliated third party (the “Helios JV”), which developed a 282-unit Class A apartment community located in Atlanta, Georgia known as Helios.
On December 28, 2018, the Helios property owner entered into a $39.5 million senior mortgage loan (“senior loan”) secured by the Helios property. The senior loan matures on January 1, 2029 and bears interest at a floating basis of LIBOR plus 1.75%, with interest only payments through January 2023, and then monthly payments based on thirty-year amortization. On or after September 29, 2028, the loan may be prepaid without prepayment fee or yield maintenance.
On November 9, 2018, the Company entered into an amended agreement with Fund III that reduced the Company’s preferred return in exchange for certain grants made by Fund III. The Company’s previous
per annum preferred return of 15.0% was reduced as follows: 7.0% in 2019, 6.0% in 2020 and 4.5% thereafter. Fund III agreed to (i) grant the Company a right to compel a sale of the project beginning November 1, 2021 and (ii) grant the Company a 50.0% participation in any profits achieved in a sale after the Company receives its full preferred return and repayment of principal, and Fund III receives full return of its capital contribution. Fund III is obligated to fund its prorata share of future capital calls, absent a default event. If a default event shall occur and is continuing at the time of a sale, the Company would be entitled to 100.0% of the profits after Fund III receives full return of its capital contribution. Additionally, the Company agreed to extend the mandatory redemption date of its preferred equity to be reflective of any changes in the loan maturity date as a result of refinancing.
On December 10, 2019, the Company entered into a membership interest purchase agreement to purchase 100% of the common membership interest in the joint venture from Fund III and the Helios JV for $2.5 million and $1.8 million, respectively, based on fair market value after consideration of the $19.2 million preferred equity investment previously funded by the Company. As ownership in the Helios real property is in the form of undivided interests, the Company continued to account for the Helios property under the equity method as of December 31, 2019. The Company closed on the sale of the Helios investment in January 2020. Refer to Note 16 for further information.
Leigh House Interests
The Company made a $14.2 million preferred equity investment in a multi-tiered joint venture along with Fund II, an affiliate of the former Manager, and an unaffiliated third party (the “Leigh House JV”), which developed a 245-unit Class A apartment community located in Raleigh, North Carolina known as Leigh House. The Company earned a preferred return of 15.0% and 20.0% on its $11.9 million and $2.3 million preferred equity investments, respectively. The Leigh House JV was required to redeem the Company’s preferred membership interest plus any accrued but unpaid return on the earlier date which was six months following the maturity of the construction loan, detailed below, including extension, or any earlier acceleration or due date.
The Leigh House investment was sold on July 15, 2019 as part of the Topaz Portfolio sale. Refer to Note 3 for further information.
Mira Vista Interests
On September 17, 2019, the Company made a $5.3 million preferred equity investment in a joint venture (the “Mira Vista JV”) with an unaffiliated third party for a stabilized property in Austin, Texas known as Mira Vista. Through September 17, 2026, the Company will earn a 7.0% current return and a 3.1% accrued return, for a total preferred return of 10.1%. After September 17, 2026, the Company will earn a 7.0% current return and a 4.0% accrued return for a total preferred return of 11.0%. The Mira Vista JV is required to redeem the Company’s preferred membership interest plus any accrued but unpaid preferred return on January 1, 2030 or earlier upon the occurrence of certain events.
North Creek Apartments Interests
The Company made a $17.9 million preferred equity investment, of which $15.0 million has been funded as of December 31, 2019, in a multi-tiered joint venture (the “North Creek JV”) with an unaffiliated third party to develop an approximately 259-unit Class A apartment community located in Leander, Texas to be known as North Creek Apartments. The Company will earn an 8.5% current return and a 4.0% accrued return for a total preferred return of 12.5%. The North Creek JV is required to redeem the Company’s preferred membership interest plus any accrued but unpaid preferred return on October 29, 2023 (extended by one year if the property has not yet reached stabilization) or earlier upon the occurrence of certain events.
In conjunction with the North Creek Apartments development, the North Creek Apartments property owner, which is owned by an entity in which the Company has an equity interest, entered into a $23.6 million construction loan, of which $7.3 million is outstanding as of December 31, 2019. The loan matures on October 29, 2021 and is secured by the fee simple interest in the North Creek Apartments property. The loan contains two one-year extension options, subject to certain conditions. The loan bears interest on a
floating basis on the amount drawn based on the greater of 6.06% or one-month LIBOR plus 3.75%. Regular monthly payments are interest-only through April 2021, and future monthly payments are based on thirty-year amortization. The loan can be prepaid without penalty, subject to a make-whole provision.
Riverside Apartments Interests
The Company made a $15.6 million preferred equity investment, of which $12.3 million has been funded as of December 31, 2019, in a multi-tiered joint venture (the “Riverside JV”) with an unaffiliated third party to develop an approximately 222-unit Class A apartment community located in Austin, Texas to be known as Riverside Apartments. The Company will earn an 8.5% current return and a 4.0% accrued return for a total preferred return of 12.5%. The Riverside JV is required to redeem the Company’s preferred membership interest plus any accrued but unpaid preferred return on November 21, 2023 (extended by one year if the property has not yet reached stabilization) or earlier upon the occurrence of certain events.
In conjunction with the Riverside Apartments development, the Riverside Apartments property owner, which is owned by an entity in which the Company has an equity interest, entered into a $20.2 million construction loan, of which $6,308 is outstanding as of December 31, 2019. The loan matures on December 6, 2021 and is secured by the fee simple interest in the Riverside Apartments property. The loan contains two one-year extension options, subject to certain conditions. The loan bears interest on a floating basis on the amount drawn based on the greater of 6.14% or one-month LIBOR plus 3.75%. Regular monthly payments are interest-only through June 2021, and future monthly payments are based on thirty-year amortization. The loan can be prepaid without penalty, subject to a make-whole provision.
Strategic Portfolio
On December 20, 2019, the Company made a $10.2 million preferred equity investment in a joint venture (the “Strategic JV”) with an unaffiliated third party for the following three stabilized properties: Belmont Crossing, located in Smyrna, Georgia, and Sierra Terrace and Sierra Village, both located in Atlanta, Georgia. The three properties are collectively known as the Strategic Portfolio. As part of the agreement, the Company intends to make additional preferred equity investments in the Strategic JV for additional properties to be included in the Strategic Portfolio. The Company will earn a 7.5% current return and a 3.0% accrued return for a total preferred return of 10.5%. The Strategic JV is required to redeem the Company’s preferred membership interest plus any accrued but unpaid preferred return in each property on the earlier date which is: (i) the sale of the property, (ii) the refinancing of the loan related to the property, or (iii) the maturity date of the property loan.
Thornton Flats Interests
On September 25, 2019, the Company made a $4.6 million preferred equity investment in a joint venture (the “Thornton JV”) with an unaffiliated third party for a stabilized property in Austin, Texas known as Thornton Flats. The Company may fund additional capital contributions totaling $1.5 million after January 1, 2020, subject to certain debt yield and gross revenue conditions being satisfied. The Company will earn an 8.0% current return and a 1.0% accrued return for a total preferred return of 9.0%. The Thornton JV is required to redeem the Company’s preferred membership interest plus any accrued but unpaid preferred return on September 25, 2024 or earlier upon the occurrence of certain events.
Wayforth at Concord Interests
The Company made a $6.5 million preferred equity investment, of which $4.7 million has been funded as of December 31, 2019, in a joint venture (the “Wayforth JV”) with an unaffiliated third party to develop an approximately 150-unit Class A apartment community located in Concord, North Carolina to be known as Wayforth at Concord. In accordance with the Wayforth operating agreement, the Company began funding its capital once the unaffiliated third party had contributed its full common equity commitment. The Company will earn a 9.0% current return and a 4.0% accrued return for a total preferred return of 13.0%. The Wayforth JV is required to redeem the Company’s preferred membership interest plus any accrued but unpaid preferred return on November 9, 2023 (extended one year if the property has not yet reached stabilization) or earlier upon the occurrence of certain events.
In conjunction with the Wayforth at Concord development, the Wayforth at Concord property owner, which is owned by an entity in which the Company has an equity interest, entered into a $22.3 million construction loan, of which none is outstanding as of December 31, 2019. The loan matures on November 9, 2021 and is secured by the fee simple interest in the Wayforth at Concord property. The loan contains two one-year extension options, subject to certain conditions. The loan bears interest on a floating basis on the amount drawn based on one-month LIBOR plus 2.5%. Regular monthly payments are interest-only during the initial term, with payments during the extension period based on thirty-year amortization. The loan can be prepaid without penalty.
Whetstone Apartments Interests
The Company made a $12.9 million preferred equity investment in a multi-tiered joint venture along with Fund III, an affiliate of the former Manager, and an unaffiliated third party, to acquire a 204-unit Class A apartment community located in Durham, North Carolina known as Whetstone Apartments. The Company earns a 6.5% preferred return on its investment. Effective April 1, 2017, Whetstone Apartments ceased paying its preferred return on a current basis. The preferred return is being accrued, except for payments totaling $0.5 million received in 2019. The accrued preferred return of  $2.6 million and $2.2 million as of December 31, 2019 and December 31, 2018, respectively, is included in due from affiliates in the consolidated balance sheets. The Company has evaluated the preferred equity investment and accrued preferred return and determined that the investment is fully recoverable.
On October 6, 2016, the Whetstone Apartments property owner, which is owned by an entity in which the Company has an equity interest, entered into a mortgage loan of approximately $26.5 million, of which $25.5 million is outstanding as of December 31, 2019. The loan matures on November 1, 2023 and is secured by the Whetstone Apartments property. The loan bears interest at a fixed rate of 3.81% and regular monthly payments are based on thirty-year amortization. The loan may be prepaid with the greater of 1.0% prepayment fee or yield maintenance until October 31, 2021, and thereafter at par. The loan is nonrecourse to the Company and its joint venture partners with certain standard scope non-recourse carve-outs for certain deeds, acts or failures to act on the part of the Company and the joint venture partners.
The Company closed on the sale of Whetstone Apartments in January 2020 and recovered its preferred equity investment and accrued preferred return. Refer to Note 16 for further information.
Note 8 - Revolving credit facility
The outstanding balances on the revolving credit facilities as of December 31, 2019 and 2018 are as follows (amounts in thousands):
Senior Credit Facility
On October 4, 2017, the Company, through its Operating Partnership, entered into a credit agreement (the “Senior Credit Facility”) with KeyBank National Association (“KeyBank”) and a syndicate of other lenders. The Senior Credit Facility provides for a loan commitment amount of  $75 million, which commitment contained an accordion feature to a maximum commitment of up to $175 million.
The Senior Credit Facility matures on October 4, 2020 and contains a one-year extension option, subject to certain conditions and the payment of an extension fee. Borrowings under the Senior Credit Facility bear interest, at the Company’s option, at LIBOR plus 1.80% to 2.45% or the base rate plus 0.80% to 1.45%, depending on the Company’s leverage ratio. The weighted average interest rate was 3.99% at December 31, 2019. The Company pays an unused fee at an annual rate of 0.20% to 0.25% of the unused portion of the Senior Credit Facility, depending on the amount of borrowings outstanding. The Senior Credit Facility contains certain financial and operating covenants, including a maximum leverage ratio, minimum
liquidity, minimum debt service coverage ratio, and minimum tangible net worth. At December 31, 2019, the Company was in compliance with all covenants under the Senior Credit Facility. The Company has guaranteed the obligations under the Senior Credit Facility and provided certain properties as collateral.
Second Amended Junior Credit Facility
On March 20, 2018, the Company, through a subsidiary of its Operating Partnership, entered into a credit agreement (the “Junior Credit Facility”) with KeyBank and other lenders. The Junior Credit Facility provided for a maximum loan commitment amount of  $50 million and had a maturity date of March 20, 2019. Borrowings under the Junior Credit Facility bore interest, at the Company’s option, at LIBOR plus 4.0% or the base rate plus 3.0%. The Company paid an unused fee at an annual rate of 0.35% to 0.40% of the unused portion of the Junior Credit Facility, depending on the amount of borrowings outstanding.
On December 21, 2018, the Company, through a subsidiary of its Operating Partnership, entered into an amended and restated, in its entirety, Junior Credit Facility (the “Amended Junior Credit Facility”). The Amended Junior Credit Facility provided for a revolving loan facility and a term loan facility with maximum commitment amounts of  $50 million and $25 million, respectively. The revolving loan facility had a maturity date of December 21, 2019, with borrowings thereunder bearing interest, at the Company’s option, at LIBOR plus 3.5% or the base rate plus 2.5%. The Company paid an unused fee at an annual rate of 0.35% to 0.40% of the unused portion of the revolving loan facility, depending on the amount of borrowings outstanding. The term loan facility matured on July 19, 2019, the date on which the Company paid off the outstanding borrowings.
On November 6, 2019, the Company, through a subsidiary of its Operating Partnership, entered into a second amended and restated, in its entirety, Junior Credit Facility (the “Second Amended Junior Credit Facility”). The Second Amended Junior Credit Facility provides for a revolving loan facility with a maximum commitment amount of  $72.5 million with a maturity date of December 21, 2021. Borrowings under the Second Amended Junior Credit Facility bear interest, at the Company’s option, at LIBOR plus 2.75% to 3.25% or the base rate plus 1.75% to 2.25%, depending on the Company’s leverage ratio. The Company pays an unused fee at an annual rate of 0.35% to 0.40% of the unused portion of the Second Amended Junior Credit Facility, depending on the borrowings outstanding. The Second Amended Junior Credit Facility contains certain financial and operating covenants, including a maximum leverage ratio, minimum liquidity, minimum debt service coverage ratio, minimum tangible net worth and minimum equity raise and collateral values. At December 31, 2019, the Company was in compliance with all covenants under the Second Amended Junior Credit Facility. The Company has guaranteed the obligations under the Second Amended Junior Credit Facility and has pledged certain assets as collateral.
The availability of borrowings under the revolving credit facilities at December 31, 2019 is based on the assets pledged as collateral and compliance with various ratios related to those assets and was approximately $83.0 million.
Note 9 - Mortgages Payable
The following table summarizes certain information as of December 31, 2019 and 2018, with respect to the Company’s senior mortgage indebtedness (amounts in thousands):
(1)
ARIUM Grandewood has a fixed rate loan and a floating rate loan.
(2)
The loan requires monthly payments of principal and interest.
(3)
The principal balance includes a $15.8 million loan at a fixed rate of 3.97% and a $7.5 million supplemental loan at a fixed rate of 5.01%.
(4)
Gulfshore Apartment Homes, formerly ARIUM Gulfshore
(5)
The principal balance includes a $14.8 million loan at a fixed rate of 4.31% and a $5.7 million supplemental loan at a fixed rate of 5.23%.
(6)
Pine Lakes Preserve, formerly ARIUM Pine Lakes
(7)
The Reserve at Palmer Ranch, formerly ARIUM at Palmer Ranch
(8)
The loan has two one-year extension options subject to certain conditions.
(9)
Other than The District at Scottsdale, all the Company’s floating rate loans bear interest at one-month LIBOR + margin. In December 2019, one-month LIBOR in effect was 1.70%. LIBOR rate is subject to a rate cap. Please refer to Note 11 for further information.
(10)
The loan can be extended, subject to certain conditions, in connection with an election to convert to a fixed interest rate loan.
(11)
The loan bears interest at a floating rate of one or three-month LIBOR + margin, at the Company’s discretion. The loan is not subject to a rate cap.
(12)
The loan has a six-month extension option, subject to certain conditions.
Deferred financing costs
Costs incurred in obtaining long-term financing are amortized on a straight-line basis to interest expense over the terms of the related financing agreements, as applicable, which approximates the effective
interest method. Amortization of deferred financing costs, including the amounts related to the Revolving credit facilities, was $3.6 million, $4.3 million and $2.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Fair value adjustments of debt
The Company records a fair value adjustment based upon the fair value of the loans on the date they were assumed in conjunction with acquisitions. The fair value adjustments are being amortized to interest expense over the remaining life of the loans. Amortization of fair value adjustments was $0.3 million, $0.4 million and $0.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Loss on Extinguishment of Debt and Modification Costs
Upon repayment of or in conjunction with a material change (i.e. a 10% or greater difference in the cash flows between instruments) in the terms of an underlying debt agreement, the Company writes-off any unamortized deferred financing costs and fair market value adjustments related to the original debt that was extinguished. Prepayment penalties incurred on the early repayment of debt and costs incurred in a debt modification that are not capitalized are also included in loss on extinguishment of debt and debt modification costs on the consolidated statements of operations.
Refinancing of The Preserve at Henderson Beach
On August 14, 2019, the Company, through an indirect subsidiary, entered into a $48.5 million loan, which is secured by The Preserve at Henderson Beach, and paid off the previous loan of  $35.1 million. The Company accounted for the refinancing as an extinguishment of debt and recorded a loss on extinguishment of debt of  $3.1 million.
Refinancing of Gulfshore Apartment Homes
On August 21, 2019, the Company, through an indirect subsidiary, entered into a $46.3 million loan, which is secured by Gulfshore Apartment Homes, and paid off borrowings of  $40.5 million on the Senior Credit Facility. The Company accounted for the refinancing as an extinguishment of debt.
Refinancing of Park & Kingston
On October 24, 2019, the Company, through an indirect subsidiary, entered into a $19.6 million loan, which is secured by Park & Kingston, and paid off the previous loans totaling $18.4 million. The Company accounted for the refinancing as an extinguishment of debt and recorded a loss on extinguishment of debt of  $0.2 million.
Master Credit Facility with Fannie Mae
On April 30, 2018, the Company, through certain subsidiaries of the Operating Partnership, entered into a Master Credit Facility Agreement (the “Fannie Facility”), which was issued through Fannie Mae’s Multifamily Delegated Underwriting and Servicing Program. The Fannie Facility includes certain restrictive covenants, including indebtedness, liens, investments, mergers and asset sales, and distributions. The Fannie Facility also contains events of default, including payment defaults, covenant defaults, bankruptcy events, and change of control events. Each note under the Fannie Facility is cross-defaulted and cross-collateralized and the Company has guaranteed the obligations under the Fannie Facility. As of December 31, 2019, the mortgage loans secured by ARIUM Grandewood, ARIUM Metrowest, Ashton Reserve II and Outlook at Greystone were issued under the Fannie Facility.
The Company may request future fixed rate advances or floating rate advances under the Fannie Facility either by borrowing against the value of the mortgaged properties (based on the valuation methodology established in the Fannie Facility) or adding eligible properties to the collateral pool, subject to customary conditions, including satisfaction of minimum debt service coverage and maximum loan-to-value tests. The proceeds of any future advances made under the Fannie Facility may be used, among other things, for the acquisition and refinancing of additional properties to be identified in the future.
Debt maturities
As of December 31, 2019, contractual principal payments for the five subsequent years and thereafter are as follows (amounts in thousands):
The net book value of real estate assets providing collateral for these above borrowings, including the Senior Credit Facility, Second Amended Junior Credit Facility and Fannie Facility, was $1,946.5 million as of December 31, 2019.
The mortgage loans encumbering the Company’s properties are generally nonrecourse, subject to certain exceptions for which the Company would be liable for any resulting losses incurred by the lender. These exceptions vary from loan to loan but generally include fraud or a material misrepresentation, misstatement or omission by the borrower, intentional or grossly negligent conduct by the borrower that harms the property or results in a loss to the lender, filing of a bankruptcy petition by the borrower, either directly or indirectly, and certain environmental liabilities. In addition, upon the occurrence of certain events, such as fraud or filing of a bankruptcy petition by the borrower, the Company or our joint ventures would be liable for the entire outstanding balance of the loan, all interest accrued thereon and certain other costs, including penalties and expenses. The mortgage loans generally have a period where a prepayment fee or yield maintenance would be required.
Note 10 - Fair Value of Financial Instruments
Fair Value Measurements
For financial assets and liabilities recorded at fair value on a recurring or non-recurring basis, fair value is the price the Company would expect to receive to sell an asset, or pay to transfer a liability, in an orderly transaction with a market participant at the measurement date under current market conditions. In the absence of such data, fair value is estimated using internal information consistent with what market participants would use in a hypothetical transaction.
In determining fair value, observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions; preference is given to observable inputs. In accordance with accounting principles generally accepted in the Unites States of America (“GAAP”) and as defined in ASC Topic 820, “Fair Value Measurement”, these two types of inputs create the following fair value hierarchy:
•
Level 1:
Quoted prices for identical instruments in active markets
•
Level 2:
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable
•
Level 3:
Significant inputs to the valuation model are unobservable
If the inputs used to measure the fair value fall within different levels of the hierarchy, the fair value is determined based upon the lowest level input that is significant to the fair value measurement. Whenever possible, the Company uses quoted market prices to determine fair value. In the absence of quoted market prices, the Company uses independent sources and data to determine fair value.
Financial Instrument Fair Value Disclosures
As of December 31, 2019 and 2018, the carrying values of cash and cash equivalents, accounts receivable, due to and due from affiliates, accounts payable, accrued liabilities, and distributions payable approximate their fair value based on their highly-liquid nature and/or short-term maturities. The carrying values of notes receivable from related parties approximate fair value because stated interest rate terms are consistent with interest rate terms on new deals with similar leverage and risk profiles. The fair values of notes receivable are classified in Level 3 of the fair value hierarchy due to the significant unobservable inputs that are utilized in their respective valuations.
Derivative Financial Instruments
The estimated fair values of derivative financial instruments are valued using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and volatility. The fair value of interest rate caps is determined using the market-standard methodology of discounting the future expected cash receipts which would occur if floating interest rates rise above the strike rate of the caps. The floating interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The inputs used in the valuation of interest rate caps fall within Level 2 of the fair value hierarchy.
Notes and Accrued Interest Receivable from Related Parties
The Company recognizes interest income on notes receivable on the accrual method unless a significant uncertainty of collection exists. If a significant uncertainty exists, interest income is recognized as collected. Costs incurred to originate notes receivable are deferred and amortized using the effective interest method over the term of the related notes receivable. The Company evaluates the collectability of both interest and principal on each of its notes receivable to determine whether the loans are impaired. A note receivable is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a note receivable is considered impaired, the amount of loss is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the loan’s effective interest rate or to the fair value of the underlying collateral (if the note receivable is collateralized) less costs to sell. During 2019, there was no significant uncertainty of collection; therefore, interest income was recognized. As of December 31, 2019, the Company determined that no allowance for collectability on the notes receivable was necessary.
As of December 31, 2019 and December 31, 2018, based on the discounted amount of future cash flows using rates currently available to the Company for similar liabilities, the fair value of the Company’s mortgages payable is estimated at $1,436.2 million and $1,205.0 million, respectively, compared to the carrying amounts, before adjustments for deferred financing costs, net, of  $1,436.8 million and $1,217.6 million, respectively. The fair value of mortgages payable is estimated based on the Company’s current interest rates (Level 3 inputs, as defined in ASC Topic 820, “Fair Value Measurement”) for similar types of borrowing arrangements.
Note 11 - Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk 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 assets
and liabilities 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 payments principally related to the Company’s borrowings.
The Company’s objectives in using interest rate derivative financial instruments are to add stability to interest expense and to manage the Company’s exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate caps as part of its interest rate risk management strategy. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
The Company has not designated any of the interest rate derivatives as hedges. Although these derivative financial instruments were not designated or did not qualify for hedge accounting, the Company believes the derivative financial instruments are effective economic hedges against increases in interest rates. The Company does not use derivative financial instruments for trading or speculative purposes.
As of December 31, 2019, the Company had interest rate caps which effectively limit the Company’s exposure to interest rate risk by providing a ceiling on the underlying floating interest rate for $205.3 million of the Company’s floating rate mortgage debt. The Company also has an interest rate cap of  $50.0 million covering its credit facilities which currently have $18.0 million outstanding as of December 31, 2019.
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of December 31, 2019 and 2018 (amounts in thousands):
The table below presents the effect of Company’s derivative financial instruments as well as their classification on the consolidated statements of operations for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands):
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness.
Note 12 - Related Party Transactions
Management Agreement
While the Company was externally managed prior to the Internalization, the Management Agreement required the former Manager to manage the Company’s business affairs in conformity with the investment guidelines and other policies that were approved and monitored by the Company’s Board. The former Manager acted under the supervision and direction of the Board. Specifically, the former Manager was responsible for: (i) the selection, purchase and sale of the Company’s investment portfolio, (ii) the Company’s financing activities, and (iii) providing the Company with advisory and management services. The former Manager provided the Company with a management team, including a chief executive officer, president, chief accounting officer and chief operating officer, along with appropriate support personnel.
The Company paid the former Manager a base management fee calculated quarterly based on the Company’s stockholders’ existing and contributed equity for the most recently completed calendar quarter and payable in quarterly installments in arrears. The base management fee was payable independent of the performance of the Company’s investments. The Company amended the Management Agreement to provide that the base management fee could be payable in cash or LTIP Units, at the election of the Board. The number of LTIP Units issued for the base management fee or incentive fee was based on the fees earned divided by the 5-day trailing average Class A common stock price prior to issuance. For the year ended December 31, 2017, base management fees for the former Manager of  $8.7 million were expensed and paid through the issuance of 783,881 LTIP Units.
The Company also paid the former Manager an incentive fee with respect to each calendar quarter in arrears. For the year ended December 31, 2017, incentive fees of  $4.0 million were expensed and paid through the issuance of 333,848 LTIP Units.
In 2017, management fee expense was recorded related to the vesting of 179,562 LTIP Units granted in connection with the IPO and was based on the Class A common stock closing price at the vesting date or end of the period, as applicable. These LTIP Units vested over a three-year period that began in April 2014. For the year ended December 31, 2017, the management fee expense related to the vesting of these LTIP Units and recorded as part of general and administrative expenses was $0.01 million.
In 2015 and 2016, the Company issued grants of LTIP Units under the 2014 Incentive Plans to the former Manager. These LTIP Units would vest ratably over a three-year period that began in the month of issuance, subject to certain terms and conditions. In conjunction with the Internalization, 212,203 outstanding LTIP Units (consisting of 94,463 LTIP Units and 117,740 LTIP Units issued in 2015 and 2016, respectively) issued as incentive equity to our former Manager became vested in accordance with their original terms. These LTIP Units may be convertible into OP Units under certain conditions and then may be settled in shares of the Company’s Class A common stock. LTIP expense of  $2.2 million was recorded as part of general and administrative expenses for the year ended December 31, 2017 related to these LTIP Units. The expense recognized during 2017 was based on the Class A common stock closing price at the vesting date or the end of the period, as applicable.
The Company was also required to reimburse the former Manager for certain expenses and pay all operating expenses, except those specifically required to be borne by the former Manager under the Management Agreement. Reimbursements of  $1.5 million were expensed during the year ended December 31, 2017 and were recorded as part of general and administrative expenses.
The initial term of the Management Agreement expired on April 2, 2017 (the third anniversary of the closing of the IPO) and automatically renewed for a one-year term expiring April 2, 2018.
On August 4, 2017, the Company and the former Manager announced that the parties had entered into a Contribution Agreement (as amended by that certain Amendment No. 1 thereto, dated August 9, 2017) and other definitive agreements providing for the acquisition of a newly-formed entity to own the assets used by the former Manager in its performance of the management functions then provided to the Company pursuant to the Management Agreement. A special committee comprised entirely of independent and disinterested members of the Board, (the “Special Committee”), which retained independent legal and financial advisors, unanimously determined that the entry into the Contribution Agreement and the completion of the Internalization were in the best interests of the Company. The Board, by unanimous vote, made a similar determination, and on October 26, 2017, the Company held its annual meeting of stockholders, at which the Company’s stockholders approved the proposals necessary for the completion of the Internalization.
On October 31, 2017, the Company completed the Internalization pursuant to the Contribution Agreement for total consideration of approximately $41.2 million (which was recorded as management internalization expense for the year ended December 31, 2017) as determined pursuant to a formula established in the Management Agreement at the time of the IPO in April 2014. Upon completion of the Internalization, the current management and investment teams, who were previously employed by an affiliate of the former Manager, became employed by the Company’s indirect subsidiary, and the Company became an internally managed real estate investment trust. In order to further align the interests of management with
those of the Company’s stockholders, payment of the aggregate Internalization consideration was paid 99.9% in equity. The Company caused the Operating Partnership to issue an aggregate of 3,753,593 OP Units, and the Company issued an aggregate of 76,603 shares of a newly reclassified Class C common stock and paid an aggregate of approximately $40,794 in cash to the applicable Contributors and its affiliates and related persons in connection with the Internalization.
The former Manager retained, at its sole cost and expense, the services of such persons and firms as the former Manager deemed necessary in connection with the Company’s management and operations (including accountants, legal counsel and other professional service providers), provided that such expenses were in amounts no greater than those that would be payable to third-party professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s-length basis.
All the Company’s executive officers and one of its directors are also executive officers, managers and/or holders of a direct or indirect controlling interest in the former Manager and other Bluerock-affiliated entities. As a result, they owe fiduciary duties to each of these entities, their members, limited partners and investors, which fiduciary duties may from time to time conflict with the fiduciary duties that they owe to the Company and its stockholders.
Administrative Services Agreement
In connection with the closing of the Internalization, the Company entered into an Administrative Services Agreement (the “Administrative Services Agreement”) with Bluerock Real Estate, LLC and its affiliate, Bluerock Real Estate Holdings, LLC (together “BRE”). Pursuant to the Administrative Services Agreement, BRE provides the Company with certain human resources, investor relations, marketing, legal and other administrative services (the “Services”) that facilitate a smooth transition in the Company’s management of its operations, enable the Company to benefit from operational efficiencies created by access to such services, and give the Company time to develop such services in-house or to hire other third-party service providers for such services. The Services are provided on an at-cost basis, generally allocated based on the use of such Services for the benefit of the Company’s business, and are invoiced on a quarterly basis. In addition, the Administrative Services Agreement permits, from time to time, certain employees of the Company to provide or cause to be provided services to BRE, on an at-cost basis, generally allocated based on the use of such services for the benefit of the business of BRE, and otherwise subject to the terms of the Services provided by BRE to the Company under the Administrative Services Agreement. Payment by the Company of invoices and other amounts payable under the Administrative Services Agreement will be made in cash or, at the sole discretion of the Board, in the form of fully-vested LTIP Units.
The initial term of the Administrative Services Agreement was one year from the date of execution and was to expire on October 31, 2018, subject to the Company’s right to renew for successive one-year terms upon sixty (60) days written notice prior to expiration. The Company renewed the Administrative Services Agreement for a one-year term in 2018, and on August 2, 2019, the Company delivered written notice to BRE of the Company’s intention to renew the Administrative Services Agreement for an additional one-year term, to expire on October 31, 2020. The Administrative Services Agreement will automatically terminate (i) upon termination by the Company of all Services, or (ii) in the event of non-renewal by the Company. Any Company party will also be able to terminate the Administrative Services Agreement with respect to any individual Service upon written notice to the applicable BRE entity, in which case the specified Service will discontinue as of the date stated in such notice, which date must be at least ninety (90) days from the date of such notice. Further, either BRE entity may terminate the Administrative Services Agreement at any time upon the occurrence of a “Change of Control Event” (as defined therein) upon at least one hundred eighty (180) days prior written notice to the Company.
Pursuant to the Administrative Services Agreement, BRE is responsible for the payment of all employee benefits and any other direct and indirect compensation for the employees of BRE (or their affiliates or permitted subcontractors) assigned to perform the Services, as well as such employees’ worker’s compensation insurance, employment taxes, and other applicable employer liabilities relating to such employees.
Recorded as part of general and administrative expenses, operating expense reimbursements of $1.7 million and $2.2 million were expensed during the years ended December 31, 2019 and 2018, respectively.
Operating expense reimbursements of  $0.4 million were expensed for November and December 2017, the period after the Internalization.
In connection with the closing of the Internalization, BRE and the former Manager entered into a use and occupancy agreement (the “NY Agreement”) for certain corporate space located in New York, NY and for certain space located in Southfield, MI (the “MI Premises”). On December 1, 2017, BRE and Bluerock REIT Operator, LLC (the “Manager Sub”) entered into a sublease for the MI Premises (“MI Sublease”). Pursuant to the NY Agreement and MI Sublease, collectively, BRE permits the Manager Sub and certain of its subsidiaries and/or affiliates to share occupancy of the Premises. Expense reimbursements paid by the Company related to its shared occupancy under the MI Sublease are included in amounts presented in the table below. For expense reimbursements related to the NY Agreement, please refer to the Leasehold-Cost Sharing Agreement noted below.
In connection with the Company moving its New York (Manhattan) headquarters, effective on February 15, 2019, BRE and the Company jointly and severally, on the one hand, and an unaffiliated third party landlord, on the other hand, entered into a sublease for separate corporate space (the “Current NY Premises Sublease”) located at 1345 Avenue of the Americas, New York, New York (the “Current NY Premises”). The Current NY Premises Sublease became effective upon the date of the landlord’s consent thereto, which occurred on March 18, 2019. BRE and the Company have also entered into a Leasehold Cost-Sharing Agreement dated as of February 15, 2019 (the “Leasehold Cost-Sharing Agreement”) with respect to the Current NY Premises, to provide for the allocation and sharing between BRE and the Company of the costs under the Current NY Premises Sublease, including costs associated with tenant improvements. The Current NY Premises Sublease permit the Company and certain of their respective subsidiaries and/or affiliates to share occupancy of the Current NY Premises with BRE. Under the Leasehold Cost-Sharing Agreement, if there is a change in control of either BRE or the Company: (i) the allocation of costs under the Current NY Premises Sublease shall be modified to thereafter allocate such costs based on the average of the cost-sharing percentages between BRE and the Company over the four most recently-completed calendar quarters immediately preceding the change in control date (or shall be the average cost-sharing percentages over such shorter period, if the change in control occurs earlier than the completion of four calendar quarters) and (ii) the entity for which the change in control occurs shall be responsible, at its own cost and expense, to obtain the approval of the landlord and refit the Current NY Premises into physically separated workspaces, one for BRE and one for the Company, with the percentage of space for each approximately equal to the average of the historical cost-sharing percentages discussed immediately above. Under the Current NY Premises Sublease, an affiliate of BRE has arranged for the posting of a $750,000 letter of credit as a security deposit, and BRE and the Company are obligated under the Leasehold Cost-Sharing Agreement to indemnify and hold such affiliate harmless from loss if there is a claim under such letter of credit. Payment by the Company of any amounts payable under the Leasehold Cost-Sharing Agreement to BRE will be made in cash or, in the sole discretion of the Board, in the form of fully-vested LTIP Units.
Pursuant to the terms of the Administrative Services Agreement and the Leasehold Cost-Sharing Agreement, summarized below are the related party amounts payable to BRE as of December 31, 2019 and 2018 (amounts in thousands):
As of December 31, 2019, the Company had $0.1 million in payables due to related parties other than BRE. The Company did not have any payables due to related parties other than BRE as of December 31, 2018.
As of December 31, 2019 and 2018, the Company had $4.1 million and $2.9 million, respectively, in receivables due from related parties other than from BRE, primarily for accrued preferred returns on unconsolidated real estate investments for the most recent month.
Stockholders Agreement
In connection with the closing of the Internalization, the Company and the Contributors entered into a Stockholders Agreement, (the “Stockholders Agreement”), pursuant to which the Company may grant certain registration rights for the benefit of the Contributors and impose certain limitations on the voting rights of the Class C Common Stock.
Pursuant to the Stockholders Agreement, each Contributor, in respect of any Class A Common Stock that they may receive in connection with any redemption or conversion, as applicable, of any OP Units or Class C Common Stock received as a result of the Internalization (“Registrable Shares”), may require the Company from time to time to register the resale of their Registrable Shares under the Securities Act on a registration statement filed with the SEC. The Stockholders Agreement grants each Contributor certain rights to demand a registration of some or all of their Registrable Shares (a “Demand Registration”) or to request the inclusion of some or all of their Registrable Shares in a registration being effected by the Company for itself or on behalf of another person (a “Piggyback Registration”), in each case subject to certain customary restrictions, limitations, registration procedures and indemnity provisions. The Company is obligated to use commercially reasonable efforts to prepare and file a registration statement within specified time periods and to cause that registration statement to be declared effective by the SEC as soon as reasonably practicable thereafter.
The ability to cause the Company to affect a Demand Registration is subject to certain conditions. The Company is not required to effect such registration within 180 days of the effective date of any prior registration statement with respect to the Company’s Class A Common Stock and may delay the filing for up to 60 days under certain circumstances.
If, pursuant to an underwritten Demand Registration or Piggyback Registration, the managing underwriter advises that the number of Registrable Shares requested to be included in such registration exceeds a maximum number that the underwriter believes can be sold without delaying or jeopardizing the success of the proposed offering, the Stockholders Agreement specifies the priority in which Registrable Shares are to be included.
Pursuant to the Stockholders Agreement, the Contributors have agreed to limit certain of their voting rights with respect to the Class C Common Stock. If, as of the record date for determining the stockholders of the Company entitled to vote at any annual or special meeting of the stockholders of the Company or for determining the stockholders of the Company entitled to consent to any corporate action by written consent, the holders of the Class C Common Stock own shares of Class C Common Stock (the “Subject Shares”) representing in the aggregate more than 9.9% of the voting rights of the then-outstanding shares of capital stock of the Company that have voting rights on the matters being voted upon at such meeting (such number of Subject Shares representing in the aggregate more than 9.9% of the voting rights of the then-outstanding shares of capital stock of the Company with voting rights being referred to as the “Excess Shares”), then at each such meeting or in each such action by written consent the holders of the Subject Shares will vote or furnish a written consent in respect of the Excess Shares, or cause the Excess Shares to be voted or consented, in each case, in such manner as directed by a majority of the members of our Board. All Subject Shares other than the Excess Shares may be voted for or against any matter in the Class C Common Stock Holder’s sole and absolute discretion.
Selling Commissions and Dealer Manager Fees
In conjunction with the offering of the Series B Preferred Stock and Series T Preferred Stock, the Company engaged a related party, as dealer manager, and pays up to 10% of the gross offering proceeds from the offering as selling commissions and dealer manager fees. The dealer manager re-allows the substantial majority of the selling commissions and dealer manager fees to participating broker-dealers and incurs
costs in excess of the 10%, which costs are borne by the dealer manager without reimbursement by the Company. For the years ended December 31, 2019 and 2018, the Company has incurred $16.9 million and $8.7 million in selling commissions and discounts, respectively, and $7.2 million and $3.7 million in dealer manager fees and discounts, respectively. In addition, BRE was reimbursed for offering costs in conjunction with the Series B Preferred and Series T Preferred Offerings of  $1.0 million and $1.3 million for the years ended December 31, 2019 and 2018, respectively. The selling commissions, dealer manager fees, discounts and reimbursements for offering costs were recorded as a reduction to the proceeds of the offering.
Notes and interest receivable from related parties
The Company provides mezzanine loans to related parties in conjunction with the developments of multifamily communities. Please refer to Notes 6 and 7 for further information.
Preferred Equity Investments and Investments in Unconsolidated Real Estate Joint Ventures
The Company invests with related parties in various joint ventures in which the Company owns either preferred or common interests. Please refer to Note 7 for further information.
Note 13 - Stockholders’ Equity
Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss attributable to common stockholders, less dividends on restricted stock and LTIP Units expected to vest, by the weighted average number of common shares outstanding for the period. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the sum of the weighted average number of common shares outstanding and any potential dilutive shares for the period. Net loss attributable to common stockholders is computed by adjusting net loss for the non-forfeitable dividends paid on restricted stock and non-vested LTIP Units.
The Company considers the requirements of the two-class method when preparing earnings per share. The Company has two classes of common stock outstanding: Class A common stock, $0.01 par value per share, and Class C common stock, $0.01 par value per share. Earnings per share is not affected by the two-class method because the Company’s Class A and C common stock participate in dividends on a one-for-one basis.
The following table reconciles the components of basic and diluted net loss per common share for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands, except share and per share amounts):
(1)
For 2019 and 2018, amounts relate to shares of the Company’s Class A and Class C common stock outstanding. For 2017, amounts relate to shares of Class A and Class C common stock and LTIP Units outstanding.
(2)
For the year ended December 31, 2019, the following are excluded from the diluted shares calculation as the effect is antidilutive: a) warrants outstanding from issuances in conjunction with the Company’s Series B Preferred Stock offerings that are potentially exercisable for 140,334 shares of Class A common stock, and b) potential vesting of restricted stock to employees for 22,807 shares of Class A common stock. Excludes no shares and 391 shares for the years ended December 31, 2018 and 2017, respectively.
The effect of the conversion of OP Units is not reflected in the computation of basic and diluted earnings per share, as they are exchangeable for Class A Common Stock on a one-for-one basis. The income allocable to such OP Units is allocated on this same basis and reflected as noncontrolling interests in the accompanying consolidated financial statements. As such, the assumed conversion of these OP Units would have no net impact on the determination of diluted earnings per share.
Series B Preferred Stock Offering
During the year ended December 31, 2019, the Company issued 240,876 shares of Series B Preferred Stock under a continuous registered offering with net proceeds of approximately $216.8 million after commissions, dealer manager fees and discounts of approximately $24.1 million. As of December 31, 2019, the Company has sold 549,154 shares of Series B Preferred Stock and 549,154 Warrants to purchase 10,983,080 shares of Class A common stock for net proceeds of approximately $494.2 million after commissions, dealer manager fees and discounts. During the year ended December 31, 2019, the Company redeemed 9,923 Series B Preferred shares through the issuance of 832,481 Class A common shares and redeemed 267 Series B Preferred shares for $0.25 million in cash.
Series T Preferred Stock Offering
During the year ended December 31, 2019, the Company issued 17,400 shares of Series T Preferred Stock under a continuous registered offering with net proceeds of approximately $0.39 million after commissions, dealer manager fees and discounts of approximately $0.04 million. The Company did not redeem any shares of Series T Preferred Stock during the year.
At-the-Market Offerings
On August 8, 2016, the Company, its Operating Partnership and its former Manager entered into an At Market Issuance Sales Agreement (the “Original Sales Agreement”) with FBR Capital Markets & Co. (“FBR”). Pursuant to the Original Sales Agreement, FBR acted as distribution agent with respect to the offering and sale of up to $100,000,000 in shares of Class A common stock in “at the market offerings” as defined in Rule 415 under the Securities Act, including without limitation sales made directly on or through the NYSE American, or on any other existing trading market for Class A common stock or through a market maker (the “Original Class A Common Stock ATM Offering”). The Company did not commence any sales through the Original Class A Common Stock ATM Offering before it expired on January 29, 2019.
On September 13, 2019, the Company and its Operating Partnership entered into an At Market Issuance Sales Agreement with B. Riley FBR, Inc. (“FBR”, formerly FBR Capital Markets & Co.) as sales agent. On November 20, 2019, and again on December 18, 2019, the At Market Issuance Sales Agreement (the “Sales Agreement”) was amended to add Robert W. Baird & Co. Incorporated, Compass Point Research & Trading, LLC, JMP Securities LLC and Morgan Stanley & Co. LLC with FBR (collectively, the “Sales Agents”) as sales agents. Pursuant to the Sales Agreement, the Sales Agents will act as distribution agents with respect to the offering and sale of up to $100,000,000 in shares of Class A common stock in “at the market offerings” as defined in Rule 415 under the Securities Act, including without limitation sales made directly on or through the NYSE American, or on any other existing trading market for Class A common stock or through a market maker (the “Class A Common Stock ATM Offering”). As of December 31, 2019, the Company has issued 454,237 shares through the Class A Common Stock ATM Offering with net proceeds of  $5.3 million.
Class A common stock repurchase program
In February 2018, the Company authorized the repurchase of up to $25 million of the Company’s outstanding shares of Class A common stock over a period of one year pursuant to a stock repurchase
plan. In December 2018, the Company renewed the stock repurchase plan for a period of one year and announced a new plan for the repurchase of up to $5.0 million of the outstanding shares of Class A common stock in accordance with the guidelines specified under Rule 10b5-1 of the Exchange Act, which shares will be applied against the $25 million under the original stock repurchase plan. On December 20, 2019, the Company authorized new stock repurchase plans for the repurchase of up to an aggregate of  $50 million of the Company’s outstanding shares of Class A common stock, to be conducted in accordance with the Rules 10b5-1 and 10b-18 of the Exchange Act. The stock repurchase will terminate upon the earlier to occur of certain specified events as set forth therein. The extent to which the Company repurchases shares of its Class A common stock under the repurchase plans, and the timing of any such repurchases, depends on a variety of factors including general business and market conditions and other corporate considerations. Repurchases under the stock repurchase plans may be made in the open market or through privately negotiated transactions, subject to certain price limitations and other conditions established thereunder. Open market repurchases will be structured to occur within the method, timing, price and volume requirements of Rule 10b-18 of the Exchange Act. During the years ended December 31, 2019 and 2018, the Company purchased 1,313,328 shares and 1,055,057 shares, respectively, of Class A common stock for a total purchase price of approximately $23.1 million.
The following table is a summary of the Class A common stock repurchase activity for the years ended December 31, 2019 and 2018:
(1)
Shares repurchased in the fourth quarter were under the new stock repurchase plans authorized on December 20, 2019.
Class C Common Stock
The Class C Common Stock is equivalent in all material respects to, and ranks on parity with, the Class A Common Stock, except that each share of Class C Common Stock entitles the holder thereof to fifty (50) votes, which mirrors the aggregate number of OP Units (which are redeemable for cash or, at our sole option, for shares of our Class A Common Stock, on a one-to-one basis) and shares of Class C Common Stock issued as consideration in the Internalization. The Class C Common Stock provides its holders a right to vote that is proportionate to the outstanding non-voting economic interest in the Company attributable to such holders or their affiliates by virtue of the OP Units issued in the Internalization, as if all such OP Units were redeemed by us for shares of Class A Common Stock, but without providing any disproportionate voting rights. Shares of Class C Common Stock will only be issued (a) to the Contributors, (b) in conjunction with the issuance of OP Units as consideration in the Internalization, and (c) in a ratio of no more than one (1) share of Class C Common Stock for every forty-nine (49) OP Units so issued.
See Note 12 Related Party Transactions - Stockholders Agreement for limitations on voting rights of the Class C Common Stock.
8.250% Series A Cumulative Redeemable Preferred Stock
The Series A Preferred Stock ranks senior to common stock and on parity with the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series T Preferred Stock as to rights upon our liquidation, dissolution or winding up. The Series A Preferred Stock is entitled to priority cumulative dividends to be paid quarterly, in arrears, when, as and if authorized by the Board. Commencing October 21, 2022, the annual dividend rate will increase by 2.0% annually, up to a maximum of 14.0%, if not redeemed by the holder or not previously redeemed by the Company. Commencing on October 21, 2022, holders may, at their option, elect to have the Company redeem their shares at a redemption price of $25.00 per share, plus an amount equal to accrued but unpaid dividends, payable by the Company at its option in cash or shares of Class A common stock. The Company may not redeem the Series A Preferred Stock before October 21, 2020, except in limited circumstances related to its qualification as a REIT, complying with an asset coverage ratio or upon a change in control. After October 21, 2020, the Company can redeem for a redemption price of  $25.00 per share plus any accrued and unpaid dividends.
At the date of issuance, the carrying amount of the Series A Preferred Stock was less than the redemption value. As a result of the Company’s determination that redemption is probable, the carrying value will be increased by periodic accretions so that the carrying value will equal the redemption amount at the earliest redemption date without discount. Such accretion is recorded as a preferred stock dividend on the Statements of Stockholders’ Equity.
Series B Redeemable Preferred Stock
The Series B Preferred Stock ranks senior to common stock and on parity with the Series A Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series T Preferred Stock as to rights upon our liquidation, dissolution or winding up. The Series B Preferred Stock is entitled to priority cumulative dividends to be paid monthly, in arrears, when, as and if authorized by the Board. Holders may, at their option, elect to have the Company redeem their shares through the first year from issuance subject to a 13% redemption fee. After year one, the redemption fee decreases to 10%, after year three it decreases to 5%, after year four it decreases to 3%, and after year five there is no redemption fee. Any redeemed shares are entitled to any accrued but unpaid dividends at the time of the redemption, payable by the Company at its option in cash or shares of Class A common stock. The Company may redeem the Series B Preferred Stock beginning two years from the original issuance for the liquidation preference per share plus any accrued and unpaid dividends in either cash or shares of Class A common stock. At the Company’s annual meeting of stockholders on September 30, 2019, the Company’s common stockholders approved the Articles of Amendment (the “Articles of Amendment”) to the Articles Supplementary dated February 26, 2016 for the Company’s Series B Redeemable Preferred Stock. Under the Articles of Amendment, and effective October 28, 2019, the calculation to determine the number of Class A common shares issued for redemptions of Series B Preferred Stock will be based on the closing price of the Class A common stock on the single trading day prior to the redemption date, replacing the previous calculation based on the volume weighted average price for the Class A common shares for the 20 trading days prior to the redemption. On December 20, 2019, the Company made the final issuance of Series B Preferred Stock pursuant to the Series B Preferred Offering, and on February 11, 2020, the Board formally approved the termination of the Series B Preferred Offering.
On November 12, 2019, the Company began initiating redemptions of the Series B Preferred Stock, and as of December 31, 2019, redemptions initiated by the Company have resulted in 7,300 shares of Series B Preferred Stock redeemed through the issuance of 613,153 Class A common shares.
At the date of issuance, the carrying amount of the Series B Preferred Stock was less than the redemption value. As a result of the Company’s determination that holder redemption is probable, the carrying value will be increased by periodic accretions so that the carrying value will equal the redemption amount at the earliest redemption date without discount. Such accretion is recorded as a preferred stock dividend on the Statements of Stockholders’ Equity.
7.625% Series C Cumulative Redeemable Preferred Stock
The Series C Preferred Stock ranks senior to common stock and on parity with the Series A Preferred Stock, the Series B Preferred Stock, the Series D Preferred Stock and the Series T Preferred Stock as to
rights upon liquidation, dissolution or winding up. The Series C Preferred Stock is entitled to priority cumulative dividends to be paid quarterly, in arrears, when, as and if authorized by the Board. Commencing July 19, 2023, the annual dividend rate will increase by 2.0% annually, up to a maximum of 14.0%, if not redeemed by the holder or not previously redeemed by the Company. Commencing on July 19, 2023, holders may, at their option, elect to have the Company redeem their shares at a redemption price of  $25.00 per share, plus an amount equal to accrued but unpaid dividends, payable by the Company at its option in cash or shares of Class A common stock. The Company may not redeem the Series C Preferred Stock before July 19, 2021, except in limited circumstances related to its qualification as a REIT, complying with an asset coverage ratio or upon a change in control. After July 19, 2021, the Company can redeem for a redemption price of  $25.00 per share plus any accrued and unpaid dividends.
At the date of issuance, the carrying amount of the Series C Preferred Stock was less than the redemption value. As a result of the Company’s determination that redemption is probable, the carrying value will be increased by periodic accretions so that the carrying value will equal the redemption amount at the earliest redemption date without discount. Such accretion is recorded as a preferred stock dividend on the Statements of Stockholders’ Equity.
7.125% Series D Cumulative Preferred Stock
The Series D Preferred Stock ranks senior to common stock and on parity with the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series T Preferred Stock as to rights upon liquidation, dissolution or winding up. The Series D Preferred Stock is entitled to priority cumulative dividends to be paid quarterly, in arrears, when, as and if authorized by the Board. After October 13, 2021, the Company can redeem for a redemption price of  $25.00 per share plus any accrued and unpaid dividends.
Series T Redeemable Preferred Stock
The Series T Preferred Stock ranks senior to common stock and on parity with the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock as to rights upon our liquidation, dissolution or winding up. The Series T Preferred Stock is entitled, when, as and if authorized by the Board, to: (i) priority cumulative cash dividends to be paid monthly in arrears, and (ii) a stock dividend to be paid annually. Holders may, at their option, elect to have the Company redeem their shares through the first year from issuance subject to a 12% redemption fee. After year one, the redemption fee decreases to 9%, after year two it decreases to 6%, after year three it decreases to 3%, and after year four there is no redemption fee. Any redeemed shares are entitled to any accrued but unpaid dividends at the time of the redemption, payable by the Company at its option in cash or shares of Class A common stock. The Company may redeem the Series T Preferred Stock beginning two years from the original issuance for the liquidation preference per share plus any accrued and unpaid dividends in either cash or shares of Class A common stock. The calculation to determine the number of Class A common shares issued for redemptions of Series T Preferred Stock is based on the closing price of the Class A common stock on the single trading day prior to the redemption date.
At the date of issuance, the carrying amount of the Series T Preferred Stock was less than the redemption value. As a result of the Company’s determination that holder redemption is probable, the carrying value will be increased by periodic accretions so that the carrying value will equal the redemption amount at the earliest redemption date without discount. Such accretion is recorded as a preferred stock dividend on the Statements of Stockholders’ Equity.
Operating Partnership and Long-Term Incentive Plan Units
On April 2, 2014, concurrently with the completion of the IPO, the Company entered into the Second Amended and Restated Agreement of Limited Partnership of its Operating Partnership, Bluerock Residential Holdings, L.P. (the “Partnership Agreement”). Pursuant to the amendment, the Company is the sole general partner of the Operating Partnership and may not be removed as general partner by the limited partners with or without cause.
The Partnership Agreement, as amended, provides, among other things, that the Operating Partnership initially has two classes of limited partnership interests: OP Units and LTIP Units. In calculating the percentage interests of the partners in the Operating Partnership, LTIP Units are treated as OP Units.
In general, LTIP Units will receive the same per-unit distributions as the OP Units. Initially, each LTIP Unit will have a capital account balance of zero and, therefore, will not have full parity with OP Units with respect to any liquidating distributions. However, the Partnership Agreement, as amended provides that “book gain,” or economic appreciation, in the Company’s assets realized by the Operating Partnership as a result of the actual sale of all or substantially all of the Operating Partnership’s assets, or the revaluation of the Operating Partnership’s assets as provided by applicable U.S. Department of Treasury regulations, will be allocated first to the holders of LTIP Units until their capital account per unit is equal to the average capital account per-unit of the Company’s OP Unit holders in the Operating Partnership. The Company expects that the Operating Partnership will issue OP Units to limited partners, and the Company, in exchange for capital contributions of cash or property, will issue LTIP Units pursuant to the Company’s Incentive Plans, as defined below, to persons who provide services to the Company, including the Company’s officers, directors and employees.
As of December 31, 2019, limited partners other than the Company owned approximately 27.66% of the common units of the Operating Partnership (6,384,467 OP Units, or 19.66%, is held by OP Unit holders, and 2,598,465 LTIP Units, or 8.00%, is held by LTIP Unit holders, including 3.95% which are not vested at December 31, 2019). Subject to certain restrictions set forth in the Operating Partnership’s Partnership Agreement, OP Units are exchangeable for Class A common stock on a one-for-one basis, or, at the Company’s election, redeemable for cash. LTIP Units may be convertible into OP Units under certain conditions and then may be settled in shares of the Company’s Class A common stock, or, at the Company’s election, cash.
The Operating Partnership, in conjunction with the issuance of preferred stock by the Company, has issued preferred OP Units which provide for similar rights as for each class of preferred stock.
Equity Incentive Plans
LTIP Unit Grants to the former Manager
On August 3, 2016, the Company issued a grant of LTIP Units under the 2014 Incentive Plans to the former Manager. The equity grant consisted of 176,610 LTIP Units (the “2016 LTIP Units”). The 2016 LTIP Units vest ratably over a three-year period that began in August 2016, subject to certain terms and conditions. In conjunction with the Internalization, 212,203 outstanding LTIP Units issued as incentive equity to our former Manager (of which, 117,740 were 2016 LTIP Units and 94,463 were 2015 LTIP Units) became vested in accordance with their original terms. These LTIP Units may be convertible into OP Units under certain conditions and then may be settled in shares of the Company’s Class A common stock. LTIP expense of  $2.2 million was recorded as part of general and administrative expenses for the year ended December 31, 2017 related to the 2015 LTIP Units and the 2016 LTIP Units. The expense recognized during 2017 was based on the Class A common stock closing price at the vesting date or the end of the period, as applicable.
LTIP Unit Grants
On January 1, 2018, the Company granted certain equity grants of LTIP Units of the Company’s Operating Partnership to various executive officers under the 2014 Incentive Plans pursuant to the executive officers’ employment and service agreements as time-based LTIP Units and performance-based LTIP Units. All such grants of LTIP Units require continuous employment for vesting. Due to a limitation on the number of LTIP Units then available for issuance under the 2014 Incentive Plans, the long-term performance awards were, in aggregate, approximately 81,000 LTIP Units (the “Shortfall LTIP Units”) lower than those to which the recipients were entitled pursuant to the terms of their respective employment and service agreements, with the Company planning to issue the remaining LTIP Units at such time as such LTIP Units became available under the Incentive Plans. The time-based LTIP Units were comprised of 770,854 LTIP Units that vest over approximately five years and 160,192 LTIP Units that vest over approximately three years. The performance-based LTIPs were comprised of 125,165 LTIP Units (the “Initial Long-Term Performance Award”), which are subject to a three-year performance period and will thereafter vest upon successful achievement of performance-based conditions. Performance criteria are primarily based on a mixture of objective internal achievement goals and relative performance against its industry peers, with a minimum, threshold, and maximum performance standard for performance criteria.
After the determination of the achievement of the performance criteria, any performance-based LTIP Units that were awarded but do not vest will be canceled.
In addition, on January 1, 2018, the Company granted 6,263 LTIP Units under the 2014 Incentive Plans to each independent member of the Board in payment of the equity portion of their respective annual retainers. Such LTIP Units were fully vested upon issuance and the Company recognized expense of $0.2 million immediately based on the fair value at the date of grant.
On September 28, 2018, the Company’s stockholders approved the amendment and restatement of each of the 2014 Individuals Plan (the “Third Amended 2014 Individuals Plan”) and the 2014 Entities Plan (the “Third Amended 2014 Entities Plan”, and together with the Third Amended 2014 Individuals Plan, the “Third Amended 2014 Incentive Plans,” and together with the 2014 Incentive Plans, the “Incentive Plans”). The Third Amended 2014 Incentive Plans, which superseded and replaced in their entirety the 2014 Incentive Plans, allow for the issuance of up to an aggregate of 2,250,000 additional shares of Class A common stock. The Third Amended 2014 Incentive Plans provide for the grant of options to purchase shares of the Company’s common stock, stock awards, stock appreciation rights, performance units, incentive awards and other equity-based awards.
On October 4, 2018, the Company granted an aggregate of 80,798 Shortfall LTIP Units to the executive officers pursuant to their employment and service agreements. The Shortfall LTIP Units vest over a period of three years from the date of grant of each Initial Long-Term Performance Award, followed by immediate vesting thereafter based on successful achievement of the performance conditions.
In addition, on October 4, 2018, the Company granted 3,165 LTIP Units pursuant to the Third Amended 2014 Incentive Plans to the newly appointed independent member of the Board in payment of the prorated portion of her annual retainer. Such LTIP Units were fully vested upon issuance and the Company recognized expense of  $0.03 million immediately based on the fair value at the date of grant.
On January 1, 2019, the Company granted certain equity grants of LTIP Units to various executive officers under the Third Amended 2014 Incentive Plans pursuant to the executive officers’ employment and service agreements as time-based LTIP Units and performance-based LTIP Units. All such LTIP Unit grants require continuous employment for vesting. The time-based LTIP Units were comprised of 196,023 LTIP Units that vest over approximately three years. The performance-based LTIP Units were comprised of 294,031 LTIP Units, which are subject to a three-year performance period and will thereafter vest upon successful achievement of performance-based conditions and any performance-based LTIP Units that were awarded but do not vest will be cancelled. On April 1, 2019, the Company appointed a new executive officer. On June 25, 2019, the Company, under the Third Amended 2014 Incentive Plans pursuant to the executive officer’s employment agreement, granted certain equity grants of LTIP Units as time-based LTIP Units and performance-based LTIP Units to the executive officer. The time-based LTIP Units were comprised of 10,518 LTIP Units and have a similar vesting period to those granted to the other executive officers. The performance-based LTIP Units were comprised of 15,776 LTIP Units, which are subject to a similar performance period to those granted to the other executive officers and will thereafter vest upon successful achievement of performance-based conditions.
In addition, on January 1, 2019, the Company granted 6,836 LTIP Units pursuant to the Third Amended 2014 Incentive Plans to each independent member of the Board in payment of the equity portion of their respective annual retainers. Such LTIP Units were fully vested upon issuance and the Company recognized expense of  $0.2 million immediately based on the fair value at the date of grant. On August 9, 2019, the Company granted 2,929 LTIP Units pursuant to the Third Amended 2014 Incentive Plans to a newly appointed independent member of the Board in payment of the prorated portion of his annual retainer. The LTIP Units vested immediately upon issuance.
A summary of the status of the Company’s non-vested shares/LTIP Units under the Incentive Plans for individuals as of December 31, 2019, 2018 and 2017 is as follows (dollars in thousands):
For time-based LTIP Units, the Company recognizes compensation expense ratably over the requisite service periods based on the fair value at the date of grant; thus, the Company recognized compensation expense of approximately $3.6 million, $4.6 million and $0.1 million during the years ended December 31, 2019, 2018 and 2017, respectively. For performance-based LTIP Units, the Company recognizes compensation expense based on the fair value at the date of grant and the probability of achievement of performance criteria over the performance period; thus, the Company recognized compensation expense of approximately $1.6 million, $0.5 million and none during the years ended December 31, 2019, 2018 and 2017, respectively.
As of December 31, 2019, there was $5.7 million of total unrecognized compensation cost related to unvested LTIP Units granted under the Incentive Plans. The remaining cost is expected to be recognized over a period of 2.1 years.
The Company currently uses authorized and unissued shares to satisfy share award grants.
Restricted Stock Grants
On April 1, 2019, the Company provided restricted stock grants (“RSGs”) to employees under the Incentive Plans. The RSGs vest in three equal consecutive one-year tranches from the date of grant. The RSGs were comprised of 90,694 shares of Class A common stock with a fair value of  $10.65 per RSG and a total fair value of  $1.0 million. The Company recognized compensation expense of approximately $0.4 million during the year ended December 31, 2019. The remaining compensation expense of  $0.5 million is expected to be recognized over the remaining 2.25 years.
Distributions
(1)
Shares of Series B Preferred Stock newly issued on or after October 28, 2019 and all newly issued shares of Series T Preferred Stock that are held only a portion of the applicable monthly dividend period
will receive a prorated dividend based on the actual number of days in the applicable dividend period during which each such share of Series B Preferred Stock and Series T Preferred Stock was outstanding.
A portion of each dividend may constitute a return of capital for tax purposes. There is no assurance that the Company will continue to declare dividends or at this rate. Holders of OP Units and LTIP Units are entitled to receive “distribution equivalents” at the same time as dividends are paid to holders of the Company’s Class A common stock.
The Company has a dividend reinvestment plan that allows for participating stockholders to have their Class A common stock dividend distributions automatically invested in additional Class A common shares based on the average price of the Class A common shares on the investment date. The Company plans to issue Class A common shares to cover shares required for investment.
Distributions declared and paid for the year ended December 31, 2019 were as follows (amounts in thousands):
Note 14 - Commitments and Contingencies
The Company is subject to various legal actions and claims arising in the ordinary course of business. Although the outcome of any legal matter cannot be predicted with certainty, management does not believe that any of these legal proceedings or matters will have a material adverse effect on the consolidated financial position or results of operations or liquidity of the Company.
Note 15 - Selected Quarterly Financial Data (Unaudited)
The following table sets forth summarized quarterly financial data for the year ended December 31, 2019:
(1)
Net income is due to gain on sale of real estate investments of  $48.7 million during the three months ended September 30, 2019.
(2)
EPS amounts are based on weighted average common shares outstanding during the quarter and, therefore, may not agree with the EPS calculated for the year ended December 31, 2019.
The following table sets forth summarized quarterly financial data for the year ended December 31, 2018:
(1)
EPS amounts are based on weighted average common shares outstanding during the quarter and, therefore, may not agree with the EPS calculated for the year ended December 31, 2018.
Note 16 - Subsequent Events
Issuance of LTIP Units under the Third Amended 2014 Incentive Plans
On January 1, 2020, the Company granted certain equity grants of LTIPs of the Company’s operating partnership to various executive officers under the Third Amended 2014 Incentive Plans pursuant to the executive officers’ employment and service agreements as time-based LTIP Units and performance-based LTIP Units. All such LTIP Unit grants require continuous employment for vesting. The time-based LTIP Units were comprised of 247,138 LTIPs that vest over approximately three years. The performance-based LTIP Units were comprised of 494,279 LTIP Units, which are subject to a three-year performance period and will thereafter vest upon successful achievement of performance-based conditions.
In addition, on January 1, 2020, the Company granted 7,126 LTIP Units pursuant to the Third Amended 2014 Incentive Plans to each independent member of the Board in payment of the equity portion of their respective annual retainers. Such LTIP Units were fully vested upon issuance.
Declaration of Dividends
(1)
Shares of newly issued Series T Preferred Stock that are held only a portion of the applicable monthly dividend period will receive a prorated dividend based on the actual number of days in the applicable dividend period during which each such share of Series T Preferred Stock was outstanding.
Distributions Paid
The following distributions were paid to the Company’s stockholders, as well as holders of OP and LTIP Units, subsequent to December 31, 2019 (amounts in thousands):
Stock Activity
Subsequent to December 31, 2019 and as of February 20, 2020, the Company has completed the following activity as it relates to its Class A common stock and Series B Preferred Stock (refer to Note 13 for further information):
•
sold 166,873 shares of Class A common stock through the Class A ATM Offering with net proceeds of  $2.0 million;
•
initiated the redemption of 15,822 shares of Series B Preferred Stock through the issuance of 1,334,501 Class A common shares; and
•
purchased 351,255 shares of Class A common stock under the stock repurchase plan for a total purchase price of approximately $4.1 million.
Sale of Helios
On January 8, 2020, an underlying asset of an unconsolidated joint venture located in Atlanta, Georgia known as Helios was sold for approximately $65.6 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for the payoff of existing mortgage indebtedness encumbering the property in the amount of  $39.5 million and the payment of early extinguishment of debt costs, closing costs and fees, the Company’s pro rata share of the net proceeds was $22.7 million, which included payment for its original investment of  $19.2 million and its additional investment of approximately $3.5 million.
Acquisition of Avenue 25
On January 23, 2020, the Company, through subsidiaries of its Operating Partnership, acquired a 100% interest in a 254-unit apartment community located in Phoenix, Arizona known as Avenue 25 for approximately $55.6 million. The purchase price of  $55.6 million was funded, in part, with a $29.7 million loan assumption and a $6.9 million supplemental loan secured by the Avenue 25 property.
Sale of Whetstone Apartments
On January 22, 2020, BRG Whetstone Durham, LLC entered into a membership interest purchase agreement to purchase 100% of the common membership interest in BR Whetstone Member, LLC from Fund III. In conjunction with this transaction, BR Whetstone Member, LLC, along with BRG Avenue 25 TRS, LLC, a wholly-owned subsidiary of the Company’s Operating Partnership, entered into a membership
purchase agreement to purchase the right to all the economic interest promote and the common membership interest of 7.5% held in the joint venture from an unaffiliated member of the joint venture.
On January 24, 2020, the Company, through a subsidiary of its Operating Partnership, closed on the sale of Whetstone Apartments located in Durham, North Carolina for approximately $46.5 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for the payoff of existing mortgage indebtedness encumbering the property in the amount of  $25.4 million and the payment of early extinguishment of debt costs, closing costs and fees, the Company’s net proceeds were $19.6 million, which included payment for its original investment of  $12.9 million, payment of its accrued preferred return of  $2.7 million, and its additional investment of approximately $4.0 million.
Bluerock Residential Growth REIT, Inc.
Schedule III - Real Estate and Accumulated Depreciation December 31, 2019
(1)
Sands Parc was funded, in part, by a secured credit facility. As of December 31, 2019, the outstanding credit facility balance is $18.0 million.
Bluerock Residential Growth REIT, Inc.
Notes to Schedule III
1. Reconciliation of Real Estate Properties
The following table reconciles the Real Estate Properties from January 1, 2017 to December 31, 2019.
2. Reconciliation of Accumulated Depreciation
The following table reconciles the Real Estate Properties from January 1, 2017 to December 31, 2019.
EXHIBIT INDEX
Effective February 22, 2013, Bluerock Enhanced Multifamily Trust, Inc. changed its name to Bluerock Multifamily Growth REIT, Inc. Effective November 19, 2013, Bluerock Multifamily Growth REIT, Inc. changed its name to Bluerock Residential Growth REIT, Inc. Effective February 27, 2013, Bluerock Enhanced Multifamily Advisor, LLC and Bluerock Enhanced Multifamily Holdings, L.P. changed their names to Bluerock Multifamily Advisor, LLC and Bluerock Multifamily Holdings, L.P., respectively. Effective November 19, 2013, Bluerock Multifamily Holdings, L.P. changed its name to Bluerock Residential Holdings, L.P. With respect to documents executed prior to the name change, the following Exhibit Index refers to the entity names used prior to the name changes in order to accurately reflect the names of the entities that appear on such documents.
Exhibit
Number
Description
2.1
Contribution and Sale Agreement, dated as of August 3, 2017, by and among Bluerock Residential Growth REIT, Inc., Bluerock Residential Holdings, L.P., and Bluerock TRS Holdings, LLC, BRG Manager, LLC, Bluerock REIT Operator, LLC, Bluerock Real Estate, L.L.C., Konig & Associates, LLC., Jenco Business Advisors, Inc., The Kachadurian Group LLC, James G. Babb, III, Jordan B. Ruddy, and Ryan S. MacDonald, incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on August 4, 2017.
2.2
Amendment No. 1 to Contribution and Sale Agreement, dated as of August 9, 2017, by and among Bluerock Residential Growth REIT, Inc., Bluerock Residential Holdings, L.P., and Bluerock TRS Holdings, LLC, BRG Manager, LLC, Bluerock REIT Operator, LLC, Bluerock Real Estate, L.L.C., Konig & Associates, LLC., Jenco Business Advisors, Inc., The Kachadurian Group LLC, James G. Babb, III, Jordan B. Ruddy, and Ryan S. MacDonald, incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on August 15, 2017.
3.1
Articles of Amendment and Restatement of the Company, incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-153135)
3.2
Articles of Amendment of the Company, incorporated by reference to Exhibit 3.3 to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-11 (No. 333-184006)
3.3
Second Articles of Amendment and Restatement of the Company, incorporated by reference to Exhibit 3.3 to Pre-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-192610)
3.4
Articles of Amendment to the Second Articles of Amendment and Restatement of the Company, dated March 26, 2014, incorporated by reference to Exhibit 3.6 to Pre-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-192610)
3.5
Articles of Amendment to the Second Articles of Amendment and Restatement of the Company, dated March 26, 2014, incorporated by reference to Exhibit 3.7 to Pre-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-192610)
3.6
Articles of Amendment to the Second Articles of Amendment and Restatement of the Company, dated March 31, 2014, incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed April 1, 2014
3.7
Articles of Amendment to the Second Articles of Amendment and Restatement of the Company, dated March 31, 2014, incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form 8-K filed April 1, 2014
3.8
Articles Supplementary of the Company, dated October 20, 2015, incorporated by reference to Exhibit 3.6 to the Company’s Current Report on Form 8-A filed October 20, 2015
3.9
Articles Supplementary of the Company, dated December 16. 2015, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed December 22, 2015
3.10
Articles Supplementary of the Company, dated February 26, 2016, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 1, 2016
Exhibit
Number
Description
3.11
Articles Supplementary of the Company, dated March 29, 2016, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 29, 2016
3.12
Articles Supplementary of the Company, dated July 15, 2016, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed July 18, 2016
3.13
Articles Supplementary of the Company, dated October 10, 2016, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 12, 2016
3.14
Second Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.5 to Pre-Effective Amendment No. 5 to the Company’s Registration Statement on Form S-11 (No. 333-192610)
3.15
Third Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 9, 2017
3.16
Articles Supplementary of the Company, dated July 20, 2017, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 21, 2017
3.17
Articles Supplementary of the Company, dated October 26, 2017, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 6, 2017
3.18
Articles Supplementary of the Company, dated November 14, 2017, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 20, 2017
3.19
Certificate of Correction to Articles Supplementary of the Company, dated May 11, 2018, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 14, 2018
3.20
Articles Supplementary of the Company, dated November 16, 2018, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 19, 2018
3.21
Articles of Amendment to the Second Articles of Amendment and Restatement of the Company, dated October 28, 2019, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 31, 2019
3.22
Articles Supplementary of the Company, dated November 13, 2019, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed November 19, 2019
4.1
Registration Rights Agreement by and among Bluerock Special Opportunity + Income Fund II, LLC, Bluerock Special Opportunity + Income Fund III, LLC, BR SOIF II Manager, LLC, BR SOIF III Manager, LLC and the Company, dated April 2, 2014, incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K filed on April 8, 2014
4.2
Tax Protection Agreement by and among the Company, Bluerock Residential Holdings, L.P. and BR-NPT Springing Entity, LLC, dated April 2, 2014, incorporated by reference to Exhibit 10.13 to the Company’s Current Report on Form 8-K filed on April 8, 2014
4.3
Indemnification Agreement by and among the Company, Bluerock Residential Holdings, L.P. and R. Ramin Kamfar, dated April 2, 2014, incorporated by reference to Exhibit 10.14 to the Company’s Current Report on Form 8-K filed April 8, 2014
4.4
Indemnification Agreement by and among the Company, Bluerock Residential Holdings, L.P. and Gary T. Kachadurian, dated April 2, 2014, incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed April 8, 2014
4.5
Indemnification Agreement by and among the Company, Bluerock Residential Holdings, L.P. and Michael L. Konig, dated April 2, 2014, incorporated by reference to Exhibit 10.16 to the Company’s Current Report on Form 8-K filed April 8, 2014
4.6
Indemnification Agreement by and among the Company, Bluerock Residential Holdings, L.P. and Christopher J. Vohs, dated April 2, 2014, incorporated by reference to Exhibit 10.17 to the Company’s Current Report on Form 8-K filed April 8, 2014
Exhibit
Number
Description
4.7
Indemnification Agreement by and among the Company, Bluerock Residential Holdings, L.P. and I. Bobby Majumder, dated April 2, 2014, incorporated by reference to Exhibit 10.18 to the Company’s Current Report on Form 8-K filed April 8, 2014
4.8
Indemnification Agreement by and among the Company, Bluerock Residential Holdings, L.P. and Brian D. Bailey, dated April 2, 2014, incorporated by reference to Exhibit 10.19 to the Company’s Current Report on Form 8-K filed April 8, 2014
4.9
Indemnification Agreement by and among the Company, Bluerock Residential Holdings, L.P. and Romano Tio, dated April 2, 2014, incorporated by reference to Exhibit 10.20 to the Company’s Current Report on Form 8-K filed April 8, 2014
4.10
Letter Agreement, by and between Bluerock Residential Growth REIT, Inc. and Cetera Financial Group, Inc., dated as of February 6, 2017, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 8, 2017
4(vi)
Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
10.1
Second Amended and Restated Agreement of Limited Partnership of Bluerock Residential Holdings, L.P., dated April 2, 2014, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 10-K filed on April 8, 2014
10.2
First Amendment to the Second Amended and Restated Agreement of Limited Partnership of Bluerock Residential Holdings, L.P., dated October 21, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 21, 2015
10.3
Second Amendment to the Second Amended and Restated Agreement of Limited Partnership of Bluerock Residential Holdings, L.P., dated December 21, 2015, incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed December 22, 2015
10.4
Third Amendment to the Second Amended and Restated Agreement of Limited Partnership of Bluerock Residential Holdings, L.P., dated March 1, 2016, incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed March 1, 2016
10.5
Fourth Amendment to the Second Amended and Restated Agreement of Limited Partnership of Bluerock Residential Holdings, L.P., dated March 29, 2016, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on April 19, 2016
10.6
Fifth Amendment to the Second Amended and Restated Agreement of Limited Partnership of Bluerock Residential Holdings, L.P., dated July 15, 2016, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 18, 2016
10.7
Sixth Amendment to the Second Amended and Restated Agreement of Limited Partnership of Bluerock Residential Holdings, L.P., dated October 11, 2016, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 12, 2016
10.8
Seventh Amendment to the Second Amended and Restated Agreement of Limited Partnership of Bluerock Residential Holdings, L.P., dated July 21, 2017, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on July 21, 2017
10.9
Eighth Amendment to the Second Amended and Restated Agreement of Limited Partnership of Bluerock Residential Holdings, L.P., dated October 31, 2017, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 6, 2017
10.10
Ninth Amendment to the Second Amended and Restated Agreement of Limited Partnership of Bluerock Residential Holdings, L.P., dated November 15, 2017, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on November 20, 2017
10.11
Tenth Amendment to the Second Amended and Restated Agreement of Limited Partnership of Bluerock Residential Holdings, L.P., dated August 6, 2018, incorporated by reference to Exhibit 10.6 to the Company’s quarterly report on Form 10-Q filed on August 8, 2018
Exhibit
Number
Description
10.12
Eleventh Amendment to the Second Amended and Restated Agreement of Limited Partnership of Bluerock Residential Holdings, L.P., dated November 16, 2018, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on November 19, 2018
10.13
Twelfth Amendment to the Second Amended and Restated Agreement of Limited Partnership of Bluerock Residential Holdings, L.P., dated November 19, 2019, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 19, 2019
10.14
Bluerock Residential Growth REIT, Inc. Amended and Restated 2014 Equity Incentive Plan for Individuals, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 29, 2015
10.15
Bluerock Residential Growth REIT, Inc. Amended and Restated 2014 Equity Incentive Plan for Entities, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed May 29, 2015
10.16
Bluerock Residential Growth REIT, Inc. Second Amended and Restated 2014 Equity Incentive Plan for Individuals, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 31, 2017
10.17
Bluerock Residential Growth REIT, Inc. Second Amended and Restated 2014 Equity Incentive Plan for Entities, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 31, 2017
10.18
Bluerock Residential Growth REIT, Inc. Third Amended and Restated 2014 Equity Incentive Plan for Individuals, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 2, 2018
10.19
Bluerock Residential Growth REIT, Inc. Third Amended and Restated 2014 Equity Incentive Plan for Entities, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 2, 2018
10.20
Management Agreement by and among the Company, Bluerock Residential Holdings, L.P. and BRG Manager, LLC, dated April 2, 2014, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 8, 2014
10.21
Second Amendment to Management Agreement, by and among Bluerock Residential Growth REIT, Inc., Bluerock Residential Holdings, L.P. and BRG Manager, LLC, dated August 6, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 12, 2015
10.22
Third Amendment to Management Agreement, by and among Bluerock Residential Growth REIT, Inc., Bluerock Residential Holdings, L.P. and BRG Manager, LLC, dated November 10, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on form 8-K filed on November 17, 2015
10.23
Warrant Agreement by and between Bluerock Residential Growth REIT, Inc. and American Stock Transfer & Trust Company, LLC, dated February 24, 2016, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 1, 2016
10.24
Amendment to Amended and Restated Warrant Agreement by and between Bluerock Residential Growth REIT, Inc., Computershare Inc. and Computershare Trust Company N.A., dated July 21, 2017, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 21, 2017
10.25
Warrant Agreement by and between Bluerock Residential Growth REIT, Inc., Computershare Inc. and Computershare Trust Company N.A., dated November 15, 2017, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 20, 2017
10.26
Warrant Agreement by and between Bluerock Residential Growth REIT, Inc., Computershare Inc. and Computershare Trust Company N.A., dated November 16, 2018, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 19, 2018
Exhibit
Number
Description
10.27
Dealer Manager Agreement by and among Bluerock Residential Growth REIT, Inc., Bluerock Residential Holdings, L.P. and Bluerock Capital Markets, LLC, dated November 13, 2019, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 19, 2019
10.28
Credit Agreement by and among Bluerock Residential Holdings, L.P. as Parent Borrower, the other borrowers from time to time party thereto, Bluerock Residential Growth REIT, Inc. as Guarantor, KeyBank National Association, and the other lenders party thereto, dated as of October 4, 2017, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 11, 2017
10.29
Guaranty by Bluerock Residential Growth REIT, Inc. to and for the benefit of KeyBank National Association, dated as of October 4, 2017, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 11, 2017
10.30
$50,000,000 Note by Bluerock Residential Holdings, L.P. to and for the benefit of KeyBank National Association, dated as of October 4, 2017, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 11, 2017
10.31
$50,000,000 Note by Bluerock Residential Holdings, L.P. to and for the benefit of JPMorgan Chase Bank, N.A., dated as of October 4, 2017, incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on October 11, 2017
10.32
$50,000,000 Note by Bluerock Residential Holdings, L.P. to and for the benefit of Bank of America, N.A., dated as of October 4, 2017, incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 11, 2017
10.33
Subordination of Advisory Contract by Bluerock Residential Holdings, L.P. and Bluerock Residential Growth REIT, Inc. to and for the benefit of KeyBank National Association, dated as of October 4, 2017, incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on October 11, 2017
10.34
Amended and Restated Employment Agreement, dated as of August 3, 2017, by and between Bluerock Residential Growth REIT, Inc., Bluerock Residential Holdings, L.P., Bluerock REIT Operator, LLC, and R. Ramin Kamfar, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 31, 2017
10.35
Amended and Restated Employment Agreement, dated as of August 3, 2017, by and between Bluerock Residential Growth REIT, Inc., Bluerock Residential Holdings, L.P., Bluerock REIT Operator, LLC, and James G. Babb, III, incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on October 31, 2017
10.36
Amended and Restated Employment Agreement, dated as of August 3, 2017, by and between Bluerock Residential Growth REIT, Inc., Bluerock Residential Holdings, L.P., Bluerock REIT Operator, LLC, and Ryan S. MacDonald, incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on October 31, 2017
10.37
Amended and Restated Employment Agreement, dated as of August 3, 2017, by and between Bluerock Residential Growth REIT, Inc., Bluerock Residential Holdings, L.P., Bluerock REIT Operator, LLC, and Jordan B. Ruddy, incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on October 31, 2017
10.38
Amended and Restated Employment Agreement, dated as of August 3, 2017, by and between Bluerock Residential Growth REIT, Inc., Bluerock Residential Holdings, L.P., Bluerock REIT Operator, LLC, and Christopher J. Vohs, incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on October 31, 2017
10.39
Amended and Restated Services Agreement, dated as of August 3, 2017, by and between Bluerock Residential Growth REIT, Inc., Bluerock Residential Holdings, L.P., Bluerock REIT Operator, LLC, Konig & Associates, LLC, and Michael L. Konig, incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on October 31, 2017
Exhibit
Number
Description
10.40
Employment Agreement, dated as of November 5, 2018, by and between Bluerock Residential Growth REIT, Inc., Bluerock Residential Holdings, L.P., Bluerock REIT Operator, LLC, and Michael DiFranco, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 5, 2019
10.41
Stockholders Agreement, dated October 31, 2017, by and among Bluerock Residential Growth REIT, Inc. and Bluerock Real Estate, L.L.C., The Kachadurian Group, LLC, Konig & Associates, LLC, Jenco Business Advisors, Inc., James G. Babb, III, Jordan B. Ruddy, and Ryan S. MacDonald, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 6, 2017
10.42
Administrative Services Agreement, dated October 31, 2017, by and among Bluerock Real Estate, L.L.C., Bluerock Real Estate Holdings, LLC, Bluerock Residential Growth REIT, Inc., Bluerock Residential Holdings, L.P., Bluerock TRS Holdings, LLC and Bluerock REIT Operator, LLC, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on November 6, 2017
10.43
Notice of Renewal, dated August 6, 2018, of Administrative Services Agreement dated October 31, 2018, incorporated by reference to Exhibit 10.7 to the Company’s quarterly report on Form 10-Q filed on August 8, 2018
10.44
Notice of Renewal, dated August 2, 2019, of Administrative Services Agreement dated October 31, 2017, by and among Bluerock Real Estate, L.L.C., Bluerock Real Estate Holdings, LLC, Bluerock Residential Growth REIT, Inc., Bluerock Residential Holdings, L.P., Bluerock TRS Holdings, LLC and Bluerock REIT Operator, LLC, incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2019
14.1
Amended and Restated Code of Business Conduct and Ethics, effective August 2, 2019, incorporated by reference to Exhibit 14.1 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2019
16.1
BDO Letter, incorporated by reference to Exhibit 16.1 to the Company’s Quarterly Report on Form 8-K filed March 13, 2019
21.1
List of Subsidiaries
23.1
Consent of Grant Thornton LLP
23.2
Consent of BDO USA LLP
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
99.1
Press Release dated November 5, 2019, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed November 5, 2019
99.2
Supplemental Financial Information, incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed November 5, 2019
99.3
Consent of Duff  & Phelps, LLC, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on November 5, 2019
99.4
Press Release dated December 30, 2019, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed December 30, 2019
101.1
The following information from the Company’s annual report on Form 10-K for the year ended December 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets; (ii) Statements of Operations; (iii) Statement of Stockholders’ Equity; (iv) Statements of Cash Flows