Item 1. Financial Statements.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2017 and December 31, 2016
|
|
2017
|
|
|
|
|
|
|
(unaudited)
|
|
|
2016
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in single-family residential properties:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
10,429,647
|
|
|
$
|
8,579,550
|
|
Buildings and improvements
|
|
|
45,612,136
|
|
|
|
39,419,038
|
|
|
|
|
56,041,783
|
|
|
|
47,998,588
|
|
Accumulated depreciation
|
|
|
(4,114,171
|
)
|
|
|
(2,853,049
|
)
|
Investments in single-family residential properties, net
|
|
|
51,927,612
|
|
|
|
45,145,539
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
6,980,464
|
|
|
|
10,044,977
|
|
Rent and other receivables
|
|
|
674,086
|
|
|
|
246,378
|
|
Escrow deposits
|
|
|
32,390
|
|
|
|
105,500
|
|
Lease origination costs, net
|
|
|
363,873
|
|
|
|
329,395
|
|
Deferred stock issuance costs
|
|
|
556,604
|
|
|
|
-
|
|
Other assets, net
|
|
|
1,338,868
|
|
|
|
195,020
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
61,873,897
|
|
|
$
|
56,066,809
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
1,475,643
|
|
|
$
|
1,283,235
|
|
Resident security deposits
|
|
|
679,409
|
|
|
|
552,698
|
|
Notes payable, net
|
|
|
26,904,604
|
|
|
|
19,454,377
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
29,059,656
|
|
|
|
21,290,310
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value; 25,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
No shares issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.001 par value; 100,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
10,734,025 shares issued and outstanding at September 30, 2017
|
|
|
|
|
|
|
|
|
and December 31, 2016, respectively
|
|
|
10,734
|
|
|
|
10,734
|
|
Additional paid-in capital
|
|
|
41,677,465
|
|
|
|
41,677,465
|
|
Accumulated deficit
|
|
|
(8,873,958
|
)
|
|
|
(6,911,700
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Equity
|
|
|
32,814,241
|
|
|
|
34,776,499
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
61,873,897
|
|
|
$
|
56,066,809
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three and Nine Months Ended September
30, 2017 and 2016
|
|
Three Months
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
2,043,322
|
|
|
$
|
1,381,080
|
|
|
$
|
5,814,135
|
|
|
$
|
4,153,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and maintenance
|
|
|
593,339
|
|
|
|
406,475
|
|
|
|
1,694,969
|
|
|
|
1,207,217
|
|
Real estate taxes
|
|
|
346,669
|
|
|
|
230,165
|
|
|
|
988,839
|
|
|
|
658,256
|
|
Depreciation and amortization
|
|
|
537,968
|
|
|
|
326,029
|
|
|
|
1,458,933
|
|
|
|
964,953
|
|
General and administration
|
|
|
558,074
|
|
|
|
486,379
|
|
|
|
1,860,473
|
|
|
|
1,466,865
|
|
Noncash share-based compensation
|
|
|
-
|
|
|
|
425,000
|
|
|
|
-
|
|
|
|
425,000
|
|
Acquisition costs
|
|
|
-
|
|
|
|
18,265
|
|
|
|
-
|
|
|
|
76,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2,036,050
|
|
|
|
1,892,313
|
|
|
|
6,003,214
|
|
|
|
4,798,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
7,272
|
|
|
|
(511,233
|
)
|
|
|
(189,079
|
)
|
|
|
(644,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty loss, net
|
|
|
(978,181
|
)
|
|
|
-
|
|
|
|
(895,194
|
)
|
|
|
-
|
|
Gain on sale of residential property, net
|
|
|
-
|
|
|
|
-
|
|
|
|
75,796
|
|
|
|
-
|
|
Other
|
|
|
5,466
|
|
|
|
496
|
|
|
|
13,628
|
|
|
|
805
|
|
Interest expense
|
|
|
(342,253
|
)
|
|
|
(260,506
|
)
|
|
|
(967,410
|
)
|
|
|
(775,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses), net
|
|
|
(1,314,968
|
)
|
|
|
(260,010
|
)
|
|
|
(1,773,180
|
)
|
|
|
(775,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,307,696
|
)
|
|
$
|
(771,243
|
)
|
|
$
|
(1,962,259
|
)
|
|
$
|
(1,419,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Basic and fully diluted)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
10,734,025
|
|
|
|
8,245,013
|
|
|
|
10,734,025
|
|
|
|
7,441,650
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS (unaudited)
For the Nine Months Ended September 30,
2017 and 2016
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,962,259
|
)
|
|
$
|
(1,419,485
|
)
|
Adjustments to reconcile net loss to net cash provided by
|
|
|
|
|
|
|
|
|
(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,458,933
|
|
|
|
964,953
|
|
Noncash share-based compensation
|
|
|
-
|
|
|
|
425,000
|
|
Amortization of deferred loan fees
|
|
|
108,117
|
|
|
|
90,981
|
|
Casualty loss, net
|
|
|
895,194
|
|
|
|
-
|
|
Gain on sale of residential properties, net
|
|
|
(75,796
|
)
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Rent and other receivables
|
|
|
(427,708
|
)
|
|
|
(5,872
|
)
|
Other assets
|
|
|
6,152
|
|
|
|
(44,734
|
)
|
Accounts payable and accrued liabilities
|
|
|
192,408
|
|
|
|
(99,689
|
)
|
Resident security deposits
|
|
|
126,711
|
|
|
|
3,925
|
|
Net cash provided by (used in) operating activities
|
|
|
321,752
|
|
|
|
(84,921
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Acquisitions of single-family residential properties
|
|
|
(10,117,039
|
)
|
|
|
-
|
|
Capital improvements for single-family residential properties
|
|
|
(668,268
|
)
|
|
|
(364,823
|
)
|
Proceeds from disposition of single-family residential property
|
|
|
205,027
|
|
|
|
-
|
|
Insurance proceeds received for property damages
|
|
|
554,806
|
|
|
|
-
|
|
Lease origination costs
|
|
|
(219,407
|
)
|
|
|
(76,080
|
)
|
Escrow deposits
|
|
|
73,110
|
|
|
|
51,401
|
|
Net cash used in investing activities
|
|
|
(10,171,771
|
)
|
|
|
(389,502
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of shares
|
|
|
-
|
|
|
|
15,415,100
|
|
Proceeds from note payable
|
|
|
7,968,633
|
|
|
|
-
|
|
Payments of notes payable
|
|
|
(405,750
|
)
|
|
|
(27,056
|
)
|
Payment of loan fees
|
|
|
(220,773
|
)
|
|
|
-
|
|
Payments of deferred stock issuance costs
|
|
|
(556,604
|
)
|
|
|
(971,716
|
)
|
Net cash provided by financing activities
|
|
|
6,785,506
|
|
|
|
14,416,328
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase In Cash
|
|
|
(3,064,513
|
)
|
|
|
13,941,905
|
|
Cash at the Beginning of the Period
|
|
|
10,044,977
|
|
|
|
2,140,298
|
|
|
|
|
|
|
|
|
|
|
Cash at the End of the Period
|
|
$
|
6,980,464
|
|
|
$
|
16,082,203
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
837,127
|
|
|
$
|
685,544
|
|
The accompanying notes are an integral part of these consolidated financial statements.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2017 and 2016
NOTE 1. ORGANIZATION AND OPERATION
Reven Housing REIT, Inc. is a Maryland
corporation (Reven Housing REIT, Inc., which along with its wholly-owned subsidiaries, are also referred to herein collectively
as the “Company”) which acquires portfolios of occupied and rented single-family residential properties throughout
the United States with the objective of receiving income from rental property activity and future profits from the sale of rental
property at appreciated values.
As of September 30, 2017, the Company owned
755 single-family homes located in the Houston, Jacksonville, Memphis, Birmingham, and Atlanta metropolitan areas.
NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial
statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”),
as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”),
and the rules and regulations of the Securities Exchange Commission (“SEC”).
Certain information and footnote disclosures
normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. It is suggested that
these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto
included in the 2016 Annual Report on Form 10-K filed with the SEC on March 24, 2017. The results of operations for the period
ended September 30, 2017 are not necessarily indicative of the operating results for the full year.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries, Reven Housing REIT OP, L.P., Reven Housing GP,
LLC, Reven Housing REIT TRS, LLC, Reven Housing Georgia, LLC, Reven Housing Texas, LLC, Reven Housing Texas 2, LLC, Reven Housing
Florida, LLC, Reven Housing Florida 2, LLC, Reven Housing Alabama, LLC and Reven Housing Tennessee, LLC. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial
statements in accordance 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 balance sheet dates and reported amounts of revenues
and expenses for the periods presented. Accordingly, actual results could differ from those estimates.
Financial Instruments
The carrying value of the Company’s
financial instruments, as reported in the accompanying consolidated balance sheets, approximates fair value due to their short
term nature. The Company’s short term financial instruments consist of cash, rents and other receivables, escrow deposits,
accounts payable and accrued liabilities, and resident security deposits.
The carrying value of the Company’s
notes payable, as reported in the accompanying consolidated balance sheets, approximates fair value due to the fact that their
interest rate, security, and payment terms are similar to other debt instruments currently being issued.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2017 and 2016
NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES (continued)
Investments in Single-Family Residential
Properties
Prior to January 1, 2017, the Company accounted
for its investments in single-family residential properties as business combinations under the guidance of ASC Topic 805,
Business
Combinations
(“ASC 805”) and these acquisitions were recorded at their estimated fair value. The purchase price
was allocated to land, building and the existing leases based upon their fair values at the date of acquisition, with acquisition
costs expensed as incurred.
In January 2017, the FASB issued ASU No.
2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, which changed the definition of a business
and now requires management to determine whether substantially all of the fair value of gross assets acquired is concentrated in
a single identifiable asset or a group of similar identifiable assets. When this is the case, the transferred assets and activities
are not considered to be a business. This determination is important as the accounting treatment for business combinations and
asset acquisitions differs since transactions costs are expensed in a business combination and capitalized in an asset acquisition.
The guidance is effective for public companies for annual reporting periods beginning after December 15, 2017, and for interim
periods within those annual periods, with early adoption permitted. The Company adopted this guidance as of January 1, 2017, on
a prospective basis, which results in our leased properties no longer meeting the definition of a business. Based on this guidance,
our current 2017 acquisitions are treated as asset acquisitions and are recorded at their purchase price, and the purchase price
is allocated between land, building, improvements and existing leases based upon their relative fair values at the date of acquisition.
The purchase price for purposes of this allocation is inclusive of acquisition costs which typically include legal fees, title
fees, property inspection and valuation fees, as well as other closing costs.
Building improvements and buildings are
depreciated over estimated useful lives of approximately 10 to 27.5 years, respectively, using the straight-line method. Lease
origination costs are amortized over the average remaining term of the in-place leases which is generally less than one year. Maintenance
and repair costs are charged to expenses as incurred.
The Company assesses its investments in
single-family residential properties for impairment whenever events or changes in business circumstances indicate that carrying
amounts of the assets may not be fully recoverable. When such events occur, management determines whether there has been impairment
by comparing the asset’s carrying value with its fair value. Should impairment exist, the asset is written down to its estimated
fair value. The Company did not recognize any impairment losses for the nine months ended September 30, 2017 and 2016.
Cash
The Company maintains its cash at quality
financial institutions. The combined account balances at one or more institutions typically exceed the federal insurance coverage
and thus there is a concentration of credit risk related to amounts on deposit in excess of available federal insurance coverage.
The Company believes that the risk is not significant, as the Company does not anticipate the financial institutions’ non-performance.
Rents and Other Receivables
Rents and other receivables primarily represent
the amount of security deposits and net rental funds which are held by the property managers on behalf of the Company.
Escrow Deposits
Escrow deposits include refundable and
non-refundable cash and earnest money on deposit with third parties for future property purchases. However, not all of these properties
are certain to be acquired because properties may fall out of escrow through the closing process for various reasons.
Deferred Loan Fees
Costs incurred in the placement of the
Company’s notes payable are deferred and amortized using the effective interest method over the term of the respective notes
as a component of interest expense on the consolidated statements of operations and presented as an offset to notes payable on
the consolidated balance sheets.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2017 and 2016
NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES (continued)
Deferred Stock Issuance Costs
Deferred stock issuance costs represent
amounts paid for legal, consulting, and other offering expenses in conjunction with the future raising of additional capital to
be completed. These costs are netted against additional paid-in capital as a cost of the stock issuance upon closing of the respective
stock placement.
Resident Security Deposits
Resident security deposits represent amounts
deposited by tenants at the inception of the lease. As of September 30, 2017 and December 31, 2016, the Company had $679,409 and
$552,698, respectively, in resident security deposits. Security deposits are refundable, net of any outstanding charges and fees,
upon expiration of the underlying lease.
Revenue Recognition
Residential properties are leased to tenants
under short term rental agreements of generally one year and revenue is recognized over the lease term on a straight-line basis.
Reclassifications
The Company has reclassified certain prior
period amounts to conform to the current period’s presentation.
Income Taxes
The Company intends to elect
to be taxed as a real estate investment trust (“REIT”), as defined in the Internal Revenue Code, commencing for the
year ending December 31, 2017. Accordingly, the Company does not expect to be subject to federal income tax, provided that it continues
to qualify as a REIT and distributions to the stockholders equal or exceed REIT taxable income.
Qualification and taxation as a
REIT depends upon the Company’s ability to meet the various qualification tests imposed under the Internal Revenue Code related
to the percentage of income that are earned from specified sources, the percentage of assets that fall within specified categories,
the diversity of capital stock ownership, and the percentage of earnings that are distributed. Accordingly, no assurance can be
given that the Company will be organized or be able to operate in a manner to qualify or remain qualified as a REIT. If the Company
fails to qualify as a REIT in any taxable year, it will be subject to federal and state income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate tax rates, and the Company may be ineligible to qualify as a REIT for four
subsequent tax years. Even if the Company qualifies as a REIT, it may be subject to certain state or local income taxes.
Incentive Compensation Plan
During 2012, the Company established the
2012 Incentive Compensation Plan, which was subsequently amended and restated in December 2013 (“2012 Plan”). The 2012
Plan allows for the grant of options and other awards representing up to 1,650,000 shares of the Company’s common stock.
Such awards may be granted to officers, directors, employees, consultants and other persons who provide services to the Company
or any related entity. Under the 2012 Plan, options may be granted at an exercise price greater than or equal to the market value
at the date of the grant, for owners of 10% or more of the voting shares, at an exercise price of not less than 110% of the market
value. Awards are exercisable over a period of time as determined by a committee designated by the Board of Directors, but in no
event, longer than ten years.
A total of 496,359 shares have been issued
under the 2012 plan as of September 30, 2017.
Net Loss Per Share
Net loss per share is computed by dividing
the net loss by the weighted average number of shares of common stock outstanding. Warrants, stock options, and common stock issuable
upon the conversion of the Company's preferred stock (if any) are not included in the computation if the effect would be anti-dilutive
and would increase earnings or decrease loss per share. For the nine months ended September 30, 2017 and 2016, potentially dilutive
securities excluded from the calculations were 263,588 shares issuable upon exercise of outstanding warrants granted in prior years.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2017 and 2016
NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES (continued)
New Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases
, a new lease standard which sets out the principles for the recognition, measurement, presentation and disclosure
of leases for both parties to a contract (i.e. lessees and lessors). Under ASU 2016-02, lessor accounting will be substantially
similar to the current model, but aligned with certain changes to the lessee model and ASU 2014-09. The new standard requires lessors
to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing
leases and operating leases. The Company’s rental revenue is primarily generated from short-term operating leases. The new
standard requires lessees to apply a dual approach, classifying leases as either finance or operating based on the principle of
whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine
whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the
lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than
12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing
guidance for operating leases today. The new standard is expected to impact the Company’s consolidated financial statements
as the Company has an operating office lease arrangement for which it is the lessee. The new standard will be effective for the
Company beginning on January 1, 2019, with early adoption permitted. The new standard must be adopted using a modified retrospective
transition, requiring application of the new guidance at the beginning of the earliest comparative period presented and provides
for certain practical expedients. The Company is currently evaluating the impact on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. The amendments in this ASU include multiple provisions intended
to simplify various aspects of the accounting for share-based payments. The guidance will be effective for annual reporting periods
beginning after December 15, 2016, and for interim reporting periods within those annual periods, with early adoption permitted.
The Company adopted this ASU effective January 1, 2017 and the adoption did not have a material impact on the Company’s consolidated
financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments
, which clarifies how certain cash receipts
and cash payments should be presented and classified on the statement of cash flows. The guidance will be effective for annual
periods beginning after December 15, 2017 and interim periods within that reporting period. The Company is currently evaluating
the impact the adoption of this ASU will have on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows, Restricted Cash
, which requires the statement of cash flows to explain the change during the period
in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Thus,
amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents
when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do
not provide a definition of restricted cash or restricted cash equivalents. The guidance will be effective for annual periods beginning
after December 15, 2017 and interim periods within that reporting period. The Company is currently evaluating the impact the adoption
of this ASU will have on its consolidated financial statements.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2017 and 2016
NOTE 3. INVESTMENTS IN SINGLE-FAMILY
RESIDENTIAL PROPERTIES
The following table summarizes the Company’s
investments in single-family residential properties. The homes are generally leased to individual tenants under leases with terms
of one year or less.
|
|
|
|
|
|
|
|
|
|
|
Investments in
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-Family
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
Number
of Homes
|
|
|
Land
|
|
|
Buildings and Improvements
|
|
|
Properties, Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2016
|
|
|
624
|
|
|
$
|
8,579,550
|
|
|
$
|
39,419,038
|
|
|
$
|
47,998,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
133
|
|
|
|
1,873,650
|
|
|
|
8,243,389
|
|
|
|
10,117,039
|
|
Improvements
|
|
|
-
|
|
|
|
-
|
|
|
|
668,268
|
|
|
|
668,268
|
|
Sales
|
|
|
(2
|
)
|
|
|
(23,553
|
)
|
|
|
(118,559
|
)
|
|
|
(142,112
|
)
|
Loss due to property damage
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,600,000
|
)
|
|
|
(2,600,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at September 30, 2017
|
|
|
755
|
|
|
$
|
10,429,647
|
|
|
$
|
45,612,136
|
|
|
$
|
56,041,783
|
|
Hurricane Harvey and Hurricane Irma
During the quarter ended September
30, 2017, a significant number of the Company’s properties in Houston, TX and Jacksonville, FL incurred storm related
damages from Hurricane Harvey and Hurricane Irma. The Company has estimated the damages to the properties to be approximately
$2.6 million and has reduced its carrying value of its homes by that amount. The Company has estimated that approximately
$1,650,000 of the damages will be reimbursed in accordance with the Company’s insurance policies. The remaining
$950,000 of repair costs represents amounts that will be paid by the Company from its available cash balances and are due to
applicable deductible costs and uninsured costs. This amount has been included in casualty losses, net in the statement of
operations and has been combined with the results from other minor pre-storm casualty gains and losses.
The Company received approximately $500,000 for
Hurricane Harvey and Hurricane Irma related damages from its insurers during the period ended September 30, 2017 and the
remaining $1,150,000 expected to be recovered has been included in other assets.
The Company is actively repairing all of its damaged homes
in both Houston, TX and Jacksonville, FL and anticipates that all properties will be restored to their original
operating condition or better.
NOTE 4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
At September 30, 2017 and December 31,
2016, accounts payable and accrued liabilities consisted of the following:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
107,459
|
|
|
$
|
248,456
|
|
Real estate taxes payable
|
|
|
898,590
|
|
|
|
667,811
|
|
Accrued compensation, board fees and other
|
|
|
380,960
|
|
|
|
300,500
|
|
Interest payable
|
|
|
88,634
|
|
|
|
66,468
|
|
|
|
$
|
1,475,643
|
|
|
$
|
1,283,235
|
|
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2017 and 2016
NOTE 5. NOTES PAYABLE
On January 31, 2017, Reven Housing Texas
2, LLC, a wholly-owned subsidiary of the Company, received loan proceeds and issued a promissory note in the principal amount of
$5,020,000 to a regional bank secured by 97 of the Company’s homes located in Texas. Principal and accrued interest are payable
in sixty consecutive monthly installments of $31,759 on the first day of the month until January 31, 2022 when the entire amount
of principal and interest remaining unpaid will be payable. Interest accrues and is payable monthly on the loan at the rate equal
to four and one-half percent (4.50%) per annum until maturity.
On April 4, 2017, the Company entered into
loan modification agreements with the regional bank on four notes mentioned in the summary below whereby the interest rate on all
four loans was modified from a rate of 1% over the prime rate to a fixed rate of 4.5% per annum. Principal and interest payments
will be made monthly based on a 25 year amortization period with the remaining unpaid principal on all four loans due on April
5, 2020. The loans have a prepayment penalty of 2% during the first year and 1% during the following year on amounts paid in excess
of the scheduled amortization. The loans are secured by deeds of trust encumbering homes in each specified area.
On August 1, 2017, Reven Housing Georgia,
LLC, a wholly owned subsidiary of the Company, received loan proceeds and issued a promissory note in the principal amount of $1,793,633
to a regional bank secured by the Company’s homes located in Georgia. Interest accrues at a fixed rate of 4.5% and monthly
principal and interest payments will be made based on a 25-year amortization period with the remaining unpaid principal due July
5, 2020.
On August 22, 2017, Reven Housing Tennessee,
LLC, a wholly owned subsidiary of the Company, received loan proceeds and issued an additional promissory note in the principal
amount of $1,155,000 to a regional bank secured by 28 of the Company’s homes located in Tennessee. Interest accrues at a
fixed rate of 4.5% and monthly principal and interest payments will be made based on a 25-year amortization period with the remaining
unpaid principal due September 5, 2020.
A summary of the Company’s notes
payable as of September 30, 2017 and December 31, 2016 is as follows:
|
|
2017
|
|
|
2016
|
|
|
Interest Rate
|
|
Maturity Date
|
Note
|
|
|
|
|
|
|
|
|
|
|
|
|
Reven Housing Texas, LLC
|
|
$
|
7,353,791
|
|
|
$
|
7,502,504
|
|
|
4.50%
|
|
April, 2020
|
Reven Housing Texas 2, LLC
|
|
|
4,930,318
|
|
|
|
-
|
|
|
4.50%
|
|
Jan, 2022
|
Reven Housing Tennessee, LLC
|
|
|
3,852,432
|
|
|
|
3,908,829
|
|
|
4.50%
|
|
April, 2020
|
Reven Housing Florida, LLC
|
|
|
3,462,437
|
|
|
|
3,526,794
|
|
|
4.50%
|
|
April, 2020
|
Reven Housing Florida 2, LLC
|
|
|
4,832,383
|
|
|
|
4,875,898
|
|
|
4.50%
|
|
April, 2020
|
Reven Housing Georgia, LLC
|
|
|
1,790,547
|
|
|
|
-
|
|
|
4.50%
|
|
July, 2020
|
Reven Housing Tennessee, LLC
|
|
|
1,155,000
|
|
|
|
-
|
|
|
4.50%
|
|
Sept, 2020
|
|
|
|
27,376,908
|
|
|
|
19,814,025
|
|
|
|
|
|
Less deferred loan fees, net
|
|
|
(472,304
|
)
|
|
|
(359,648
|
)
|
|
|
|
|
Notes payable, net
|
|
$
|
26,904,604
|
|
|
$
|
19,454,377
|
|
|
|
|
|
Costs incurred in the placement of the
Company’s debt are deferred and amortized using the effective interest method over the term of the loans as a component of
interest expense on the consolidated statements of operations. The amount of unamortized fees are deducted from the remaining principal
amount owed on the corresponding notes payable. Unamortized deferred loan costs and fees totaled $472,304 and $359,648 as of September
30, 2017 and December 31, 2016, respectively.
During the three months ended September
30, 2017 and 2016, the Company incurred $342,253 and $260,506, respectively, of interest expense related to the notes payable,
which includes $39,998 and $30,327, respectively, of amortization of deferred loan fees. During the nine months ended September
30, 2017 and 2016, the Company incurred $967,410 and $775,849, respectively, of interest expense related to the notes payable,
which includes $108,117 and $90,981, respectively, of amortization of deferred loan fees.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2017 and 2016
NOTE 6. STOCKHOLDERS’ EQUITY AND STOCK COMPENSATION
On October 16, 2014, the Company issued
425,000 shares of the Company’s common stock under the 2012 Plan to certain officers and consultants of the Company. The
shares issued are subject to restrictions and future vesting conditions based on the Company reaching certain future milestones.
During the year ended December 31, 2016, 106,250 of these shares became vested upon the achievement of certain milestones related
to our public offering of common stock in 2016. None of the remaining 318,750 shares were vested as of the issuance date. Compensation
expense will be recognized in the applicable future periods on these unvested shares should the applicable milestones be achieved
in accordance with the vesting schedule. There is no assurance that these milestones will in fact be achieved and that the shares
will in fact vest in the future.
The Company has outstanding warrants that
allow holders to purchase up to 263,588 shares at an exercise price of $4.00 per share. The warrants will expire on September
27, 2018, if not exercised prior to that date.
NOTE 7. INCOME TAXES
The Company intends to elect REIT status
effective for the year ended December 31, 2017. The Company is generally not subject to income taxes assuming it complies with
the specific rules applicable to REITs.
NOTE 8. RELATED PARTY TRANSACTIONS
The Company sub-leased office space on
a month-to-month basis from Reven Capital, LLC, which is wholly-owned by Chad M. Carpenter, a shareholder of the Company and its
Chief Executive Officer, through January 31, 2016. This arrangement was terminated upon the Company relocating its office space
and signing a new lease agreement with an unrelated party. Reven Capital, LLC currently subleases office space from the Company
on a month to month basis for a monthly rental of $500.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Legal and Regulatory
The Company is subject to potential liability
under laws and government regulations and various claims and legal actions arising in the ordinary course of the Company’s
business. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can
be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts established
for those claims. Based on information currently available, management is not aware of any legal or regulatory claims that would
have a material effect on the Company’s consolidated financial statements and, therefore, no accrual has been recorded as
of the periods ended September 30, 2017 and 2016.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis
of our financial condition and results of operations should be read in conjunction with the information appearing elsewhere in
this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2016. This discussion
and analysis contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors,
including those set further under Part I. Item 1A. “Risk Factors” in our most recent Annual Report on Form 10-K as
updated by our other periodic reporting.
Overview
We are an internally
managed Maryland corporation that engages in the acquisition, ownership and operation of portfolios of leased single-family homes
in the United States. We operate our portfolio properties as single family rentals, or SFRs, and we generate most of our revenue
from rental income from the existing tenants of the SFRs we have acquired. We intend to elect to be taxed as a real estate investment
trust, or REIT, for federal income tax purposes commencing with our taxable year ended December 31, 2017.
As of September 30,
2017, we have invested an aggregate of approximately $56.0 million and own a total of 755 homes, of which 264 homes are in the
Houston, Texas metropolitan area, 255 homes are in the Jacksonville, Florida metropolitan area, 120 homes are in the Memphis, Tennessee
metropolitan area (with two of the Memphis homes located just across the border in Mississippi), 69 homes are in the Birmingham,
Alabama metropolitan area, and 47 homes are in the Atlanta, Georgia metropolitan area.
We intend to expand
our acquisitions to other select markets in the United States that fit our investment criteria as we continue to evaluate new investment
opportunities in different markets. As of September 30, 2017, our portfolio properties were 93.9% occupied. All of our portfolio
properties have been acquired from available cash and with the proceeds from our secured loan transactions with banks pursuant
to which we had an outstanding principal amount owed of approximately $27.4 million as of September 30, 2017. Our loan transactions
are secured by first priority liens and related rents on specific portfolios of our homes.
Our principal objective
is to generate cash flow and distribute resulting profits to our stockholders in the form of distributions, while gaining home
price appreciation, or HPA, at the same time through the ownership of our portfolio properties. With this objective in mind, we
have developed our primary business strategy of acquiring portfolios of leased SFRs. We believe the execution of this strategy
will allow us to generate immediate and steady cash flow from the rental income from the SFRs that we acquire while potentially
gaining significant HPA over time. While our goal is to grow our company and generate available cash flow from the rental income
of our SFRs that will allow us to pay all of our operating costs for the operation of our portfolio properties and distribute profits
to our stockholders in the form of quarterly dividends, there can be no assurance we will be able to do so.
We plan to continue
to acquire and manage single-family homes with a focus on long term earnings growth and appreciation in asset value. Our ability
to identify and acquire single-family properties that meet our investment criteria will be affected by home prices in our markets,
the inventory of properties available through our acquisition channels, competition for our target assets, our capital available
for investment, and the cost of that capital. We believe the housing market environment in our markets remains attractive for single-family
property acquisitions and rentals. Pricing for housing in certain markets remains attractive and demand for housing is growing.
At the same time, we continue to face relatively steady competition for new properties and residents from local operators and institutional
managers. Housing prices across our markets have appreciated over the past year. Despite these gains, we believe housing in certain
of our markets continues to provide attractive acquisition opportunities and remains inexpensive relative to replacement cost and
affordability metrics.
We anticipate continued
strong rental demand for single-family homes. While new building activity has begun to increase, it remains below historical averages
and we believe substantial under-investment in residential housing over the past years will create upward pressure on home prices
and rents as demand exceeds supply.
Hurricane Harvey and Hurricane Irma
During the quarter ended September 30, 2017,
a significant number of our properties in Houston and Jacksonville incurred storm related damages from Hurricane Harvey and Hurricane
Irma. We have estimated our storm related damages to be approximately $2,600,000. The amount that is expected to be reimbursed
under the terms of our insurance policies is estimated to be approximately $1,650,000. The remaining $950,000 of repair costs represents
amounts we will fund from our available cash balances and are due to applicable deductible costs and uninsured costs relating to
the storms. This amount has been included in casualty losses, net, in our accompanying statement of operations.
The Company is actively repairing its damaged
homes in both Houston and Jacksonville and anticipates that all properties will be restored to their original operating condition
or better.
Property Portfolio
The following tables
represent our investment in the homes as of September 30, 2017:
Total Portfolio of Single-Family Homes — Summary Statistics
|
(as of September 30, 2017)
|
Market
|
|
No. of Homes
|
|
Aggregate Investment
|
|
Average
Investment per
Home
|
|
Properties
Leased
|
|
Properties
Vacant
|
|
Portfolio
Occupancy
Rate
|
|
Average Age
(years)
|
|
Average Size
(sq. ft.)
|
|
Average
Monthly Rent
|
|
Average
Remaining
Lease Term
(Months)
|
|
Atlanta,
Georgia
|
|
47
|
|
$
|
3,393,629
|
|
$
|
72,205
|
|
44
|
|
3
|
|
93.6%
|
|
29
|
|
1,453
|
|
$
|
897
|
|
3.8
|
|
Birmingham
,
Alabama
|
|
69
|
|
|
5,344,358
|
|
|
77,454
|
|
68
|
|
1
|
|
98.6%
|
|
48
|
|
1,293
|
|
|
869
|
|
4.2
|
|
Houston,
Texas
|
|
264
|
|
|
20,968,489
|
|
|
79,426
|
|
250
|
|
14
|
|
94.7%
|
|
48
|
|
1,453
|
|
|
1,100
|
|
3.7
|
|
Jacksonville
,
Florida
|
|
255
|
|
|
16,759,643
|
|
|
65,724
|
|
235
|
|
20
|
|
92.2%
|
|
54
|
|
1,289
|
|
|
908
|
|
7.2
|
|
Memphis,
Tennesee
|
|
120
|
|
|
9,575,664
|
|
|
79,797
|
|
112
|
|
8
|
|
93.3%
|
|
43
|
|
1,675
|
|
|
997
|
|
10.1
|
|
Totals
|
|
755
|
|
$
|
56,041,783
|
|
$
|
74,228
|
|
709
|
|
46
|
|
93.9%
|
|
48
|
|
1,418
|
|
$
|
985
|
|
5.9
|
|
Results of Operations
Three Months
Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
The following table
sets forth a comparison of the results of operations for the three months ended September 30, 2017 and 2016:
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
2,043,322
|
|
|
$
|
1,381,080
|
|
|
$
|
662,242
|
|
|
|
48.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and maintenance
|
|
|
593,339
|
|
|
|
406,475
|
|
|
|
186,864
|
|
|
|
46.0
|
%
|
Real estate taxes
|
|
|
346,669
|
|
|
|
230,165
|
|
|
|
116,504
|
|
|
|
50.6
|
%
|
Depreciation and amortization
|
|
|
537,968
|
|
|
|
326,029
|
|
|
|
211,939
|
|
|
|
65.0
|
%
|
General and administration
|
|
|
558,074
|
|
|
|
486,379
|
|
|
|
71,695
|
|
|
|
14.7
|
%
|
Noncash share-based compensation
|
|
|
-
|
|
|
|
425,000
|
|
|
|
(425,000
|
)
|
|
|
-100.0
|
%
|
Acquisition costs
|
|
|
-
|
|
|
|
18,265
|
|
|
|
(18,265
|
)
|
|
|
-100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2,036,050
|
|
|
|
1,892,313
|
|
|
|
143,737
|
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
7,272
|
|
|
|
(511,233
|
)
|
|
|
518,505
|
|
|
|
-101.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty loss, net
|
|
|
(978,181
|
)
|
|
|
-
|
|
|
|
(978,181
|
)
|
|
|
|
|
Net gain on sale of residential properties
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Other income
|
|
|
5,466
|
|
|
|
496
|
|
|
|
4,970
|
|
|
|
|
|
Interest expense
|
|
|
(342,253
|
)
|
|
|
(260,506
|
)
|
|
|
(81,747
|
)
|
|
|
-31.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses), net
|
|
|
(1,314,968
|
)
|
|
|
(260,010
|
)
|
|
|
(1,054,958
|
)
|
|
|
-405.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,307,696
|
)
|
|
$
|
(771,243
|
)
|
|
$
|
(536,453
|
)
|
|
|
-69.6
|
%
|
For the three months
ended September 30, 2017, we had total rental income of $2,043,322 compared to total rental income of $1,381,080 for the three
months ended September 30, 2016. The increase is due primarily to an increase in the number of homes owned during the 2017 period
when compared to the number of homes owned during the three months ended September 30, 2016. As of September 30, 2017, we owned
755 homes, at September 30, 2016 we owned 527 homes.
As of September 30,
2017, 709, or 93.9%, of our 755 homes were occupied. During the three months ended September 30, 2017, we had 60 home leases turnover,
which represented approximately 7.9% of our end of the quarter portfolio. As of September 30, 2017, we had 25 homes in Houston
and Jacksonville which were temporarily vacant due to the effects of Hurricane Harvey and Irma. As of September 30, 2016, 496,
or 94.1%, of our 527 homes were occupied. During the quarter ended September 30, 2016, we had 42 home leases turnover, which represented
approximately 8.0% of our end of the quarter portfolio.
For the three months
ended September 30, 2017, we had property operating and maintenance expenses of $593,339 compared to $406,475 for the corresponding
prior year period. Property operating and maintenance expenses consist of insurance, property management fees paid to third parties,
repairs and maintenance costs, home owner association fees, and other miscellaneous property costs. Real estate taxes for the three
months ended September 30, 2017 were $346,669 compared to $230,165 for the three months ended September 30, 2016. The increase
in property operating, maintenance expenses from 2016 to 2017 reflects the corresponding increase in our inventory of single family
homes. The increase in real estate taxes from 2016 to 2017 is based on an increase in our inventory of single family homes and
an increase in our provision for 2017 real estate taxes due to preliminary indications of tax assessment values increases in excess
of our historical annual increases. These increases our due to market value increases for many of our homes since our initial purchase.
We had net operating income from rentals of $1,103,314 for the three months ended September 30, 2017 compared to net operating
income from rentals of $744,440 in the corresponding prior year period. This resulted in a net operating income margin of 54.0%
in 2017 compared to a net operating income margin of 53.9% in 2016.
Depreciation and amortization
on our home investments increased to $537,968 for the three months ended September 30, 2017 compared to $326,029 in 2016, reflecting
the corresponding increase in our inventory of single family homes.
General and administrative
expenses for the three months ended September 30, 2017 totaled $558,074 compared to general and administrative expenses of $486,379
for the corresponding prior year period. General and administrative expenses consist of personnel costs, outside director fees,
occupancy fees, public company filing fees, legal, accounting, and other general expenses. The increase in our general and administrative
expenses is due to marginal increases in personnel, board of director expenses, travel and promotional expense in 2017 when compared
to 2016.
During the three months
ended September 30, 2016, noncash share-based compensation was $425,000 due to vesting of share awards to certain officers and
consultants upon the achievement of certain milestones related to our stock offering in that period. There was no corresponding
noncash share-based compensation in the corresponding current period.
Real estate acquisition
costs were $18,265 for the three months ended September 30, 2016. Due to new accounting guidance, our purchases of portfolios of
rented single family homes are now considered to be asset purchases; thus, corresponding acquisition costs will now be capitalized
as part of our purchase price of the single family residential properties acquired. Thus, there were no real estate acquisition
costs expensed for the three months ended September 30, 2017. Real estate acquisition costs in 2016 consisted primarily of closing
costs, due diligence costs and reports, and legal and accounting fees relating to our acquisitions of single family homes.
The above results in
total expenses of $2,036,050 for the three months ended September 30, 2017 resulting in an operating income for the three months
ended September 30, 2017 of $7,272, compared to total expenses of $1,892,313 for the three months ended September 30, 2016 and
a corresponding operating loss of $511,233 for the three months ended September 30, 2016.
During the three months
ended September 30, 2017, we incurred casualty losses of $978,181 primarily due to damages to our homes from Hurricane Harvey and
Irma. These homes are currently being repaired and we expect them to be restored to their pre-storm conditions. We expect costs
in excess of our deductibles and recorded casualty loss to be reimbursed by our insurance carriers. We did not incur any casualty
losses during the three months ended September 30, 2016. Other income was $5,466 for the three months ended September 30, 2017
as compared to other income of $496 for the three months ended September 30, 2016. Interest expense on our notes payable was $342,253
for the three months ended September 30, 2017 compared to $260,506 for the three months ended September 30, 2016. The increase
is primarily due to higher note payable balances for the three months ended September 30, 2017 when compared to the corresponding
period in 2016. This resulted in net other expense of $1,314,968 for the three months ended September 30, 2017 compared to a net
other expense of $260,010 for the three months ended September 30, 2016.
Net loss for the three
months ended September 30, 2017 was $1,307,696. The net loss for the three months ended September 30, 2016 was $771,243. The weighted
average number of shares outstanding for the three months ended September 30, 2017 increased to 10,734,025 from 8,245,013 for the
three months ended September 30, 2016 resulting in a net loss per share of $0.12 for the three months ended September 30, 2017
and a net loss per share of $0.09 for the three months ended September 30, 2016. The increase in weighted average number of shares
outstanding was due to the completion of our public offering during 2016. Note that if the effect of the casualty loss caused by
Hurricane Harvey and Irma were removed from our operating results for the three months ending September 30, 2017, the net loss
would have been approximately $329,515 or approximately $.03 per share.
Nine Months Ended
September 30, 2017 Compared to Nine Months Ended September 30, 2016
The following table
sets forth a comparison of the results of operations for the nine months ended September 30, 2017 and 2016:
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
5,814,135
|
|
|
$
|
4,153,979
|
|
|
$
|
1,660,156
|
|
|
|
40.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and maintenance
|
|
|
1,694,969
|
|
|
|
1,207,217
|
|
|
|
487,752
|
|
|
|
40.4
|
%
|
Real estate taxes
|
|
|
988,839
|
|
|
|
658,256
|
|
|
|
330,583
|
|
|
|
50.2
|
%
|
Depreciation and amortization
|
|
|
1,458,933
|
|
|
|
964,953
|
|
|
|
493,980
|
|
|
|
51.2
|
%
|
General and administration
|
|
|
1,860,473
|
|
|
|
1,466,865
|
|
|
|
393,608
|
|
|
|
26.8
|
%
|
Noncash share-based compensation
|
|
|
-
|
|
|
|
425,000
|
|
|
|
(425,000
|
)
|
|
|
-100.0
|
%
|
Acquisition costs
|
|
|
-
|
|
|
|
76,129
|
|
|
|
(76,129
|
)
|
|
|
-100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
6,003,214
|
|
|
|
4,798,420
|
|
|
|
1,204,794
|
|
|
|
25.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(189,079
|
)
|
|
|
(644,441
|
)
|
|
|
455,362
|
|
|
|
-70.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casualty loss, net
|
|
|
(895,194
|
)
|
|
|
-
|
|
|
|
(895,194
|
)
|
|
|
|
|
Net gain on sale of residential properties
|
|
|
75,796
|
|
|
|
-
|
|
|
|
75,796
|
|
|
|
|
|
Other income
|
|
|
13,628
|
|
|
|
805
|
|
|
|
12,823
|
|
|
|
|
|
Interest expense
|
|
|
(967,410
|
)
|
|
|
(775,849
|
)
|
|
|
(191,561
|
)
|
|
|
-24.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses), net
|
|
|
(1,773,180
|
)
|
|
|
(775,044
|
)
|
|
|
(998,136
|
)
|
|
|
-128.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,962,259
|
)
|
|
$
|
(1,419,485
|
)
|
|
$
|
(542,774
|
)
|
|
|
-38.2
|
%
|
For the nine months
ended September 30, 2017, we had total rental income of $5,814,135 compared to total rental income of $4,153,979 for the nine months
ended September 30, 2016. The increase in total rental and other income is due primarily to the increase in rental homes owned
for the 2017 time period as compared to 2016.
For the nine months
ended September 30, 2017, we had property operating and maintenance expenses of $1,694,969 compared to $1,207,217 for the nine
months ended September 30, 2016. Real estate taxes for the nine months ended September 30, 2017 were $988,839 compared to $658,256
for the nine months ended September 30, 2016. The increase in real estate taxes from 2016 to 2017 is due to a corresponding increase
in our inventory of single family homes, and increase in tax assessments due to fair market value increases in our homes when compared
to historical tax assessments.
We had net operating
income from rentals of $3,130,327 for the first nine months of 2017 compared to net operating income from rentals of $2,288,506
in the corresponding prior year’s period. The increase in net operating income is due primarily to the increase in rental
homes owned during the current 2016 period. This results in a net operating income margin of 53.8% in 2017 compared to a net operating
income margin of 55.1% in 2016.
Depreciation and amortization
increased to $1,458,933 during the nine months ended September 30, 2017 compared to $964,953 during the nine months ended September
30, 2016, reflecting the corresponding increase in our inventory of single family homes.
General and administrative
expenses for the nine months ended September 30, 2017 totaled $1,860,473 compared to general and administrative expenses of $1,466,865
for the prior year period. The increase in our general and administrative expenses is due primarily to marginal increases in legal,
accounting, personnel, board of director fees, miscellaneous travel and promotional expense in 2017 when compared to 2016, due
to an increase in acquisition and promotional activities in the current period.
During the nine months
ended September 30, 2016, noncash share-based compensation was $425,000 due to vesting of share awards to certain officers and
consultants upon the achievement of certain milestones related to our stock offering in that period. There was no corresponding
noncash share-based compensation in the corresponding current period.
Real estate acquisition
costs for the nine months ended September 30, 2016 totaled $76,129. Due to new accounting guidance, our purchase of portfolios
of rented single family homes are now considered to be asset purchases; thus, corresponding acquisition costs will now be capitalized
as part of our purchase price of the single family residential properties acquired. Thus, there were no real estate acquisition
costs expensed for the nine months ended September 30, 2017. Real estate acquisition costs in 2016 consisted primarily of closing
costs, due diligence costs and reports, and legal and accounting fees relating to our acquisitions of single family homes.
During the nine months
ended September 30, 2017, we incurred net casualty losses of $895,194 primarily due to damages to our homes from Hurricane Harvey
and Irma in the last quarter. These homes are currently being repaired and we expect them to be restored to their pre-storm conditions.
We expect costs in excess of our deductibles and recorded casualty loss to be reimbursed by our insurance carriers. We did not
incur any casualty losses during the three months ended September 30, 2016. We sold two residential properties during the nine
months ended September 30, 2017 for a gain of $75,796. There were no corresponding sales during the nine months ended September
30, 2016. Other income was $13,628 for the nine months ended September 30, 2017, as compared to other income of $805 for the nine
months ended September 30, 2016. Interest expense on our notes payable was $967,410 for the nine months ended September 30, 2017
compared to $775,849 for the nine months ended September 30, 2016. The increase is primarily due to higher note payable balances
for the nine months ended September 30, 2017 when compared to the corresponding period in 2016. This resulted in net other expense
of $1,773,180 for the nine months ended September 30, 2017 compared to a net other expense of $775,044 for the nine months ended
September 30, 2016.
Net loss for the nine
months ended September 30, 2017 was $1,962,259. The net loss for the nine months ended September 30, 2016 was $1,419,485. The weighted
average number of shares outstanding for the nine months ended September 30, 2017 increased to 10,734,025 from 7,441,650 for the
nine months ended September 30, 2016, resulting in a net loss per share of $0.18 for the nine months ended September 30, 2017 and
a net loss per share of $0.19 for the nine months ended September 30, 2016. Note that if the effect of the casualty loss caused
by Hurricane Harvey and Irma were removed from our operating results for the nine months ending September 30, 2017, the net loss
would have been approximately $1,067,065 or approximately $.10 per share.
Liquidity and Capital Resources
Liquidity is a measure
of our ability to meet potential cash requirements, fund and maintain our assets and operations, make interest payments and fund
other general business needs. Our liquidity, to a certain extent, is subject to general economic, financial, competitive and other
factors that are beyond our control. Our near-term liquidity requirements consist primarily of acquiring properties, funding our
operations, and making interest payments.
Our liquidity and capital
resources as of September 30, 2017 consisted primarily of cash of $6,980,464. We believe our current liquidity and the expected
cash flows from operations will be sufficient to fund the present level of our operations through the 12 months following the date
of this report. However, our future acquisition activity will depend primarily on our ability to raise funds from the further issuance
of shares of our common stock or units of our operating partnership combined with new loan transactions secured by our current
and future home inventories. In order to purchase additional single family homes, we intend to opportunistically utilize the capital
markets to raise additional capital, including through the issuance of debt and equity securities, but there can be no assurance
that we will be able to access adequate liquidity sources on favorable terms, or at all.
Credit Facilities
On January 31, 2017,
we borrowed $5,020,000 from a regional bank pursuant to our issuance of a promissory note secured by deeds of trust in the principal
amount of $5,020,000. Principal and accrued interest are payable in 60 consecutive monthly installments of $31,759 on the first
day of the month until January 31, 2022 when the entire amount of principal and interest remaining unpaid will be payable. Interest
accrues and is payable monthly on the loan at the rate equal to four and one-half percent (4.50%) per annum until maturity. The
loan is secured by first priority liens on 97 homes in the Houston, Texas metropolitan area. The note and the deeds of trust contain
customary terms and conditions, including, without limitation, customary events of default and acceleration upon default, including
defaults in the payment of principal or interest, defaults in compliance with the covenants and bankruptcy or other insolvency
events.
On April 4, 2017, we
entered into loan modification agreements where we modified the interest rate and amended the maturity period on our loans with
another regional bank with a total current outstanding principal amount due of approximately $19,500,000. The modified loan agreement
provides that monthly interest and principal payments will be made based on a fixed interest rate of 4.5% and an amortization period
of 25 years. All unpaid principal will be due on April 5, 2020. The other terms remain generally unchanged. These loans are secured
by first priority liens and related rents on our properties.
On August 1, 2017,
we received loan proceeds and issued a promissory note in the principal amount of $1,793,633 to a regional bank secured by our
homes located in Georgia. Interest accrues at a fixed rate of 4.5% and monthly principal and interest payments will be made based
on a 25-year amortization period with the remaining unpaid principal due July 5, 2020.
On August 22, 2017,
we received loan proceeds and issued a promissory note in the principal amount of $1,155,000 to a regional bank secured by 28 of
the Company’s homes located in Tennessee. Interest accrues at a fixed rate of 4.5% and monthly principal and interest payments
will be made based on a 25-year amortization period with the remaining unpaid principal due September 5, 2020.
Cash Flows
The following table
summarizes our cash flows for the nine months ended September 30, 2017 and 2016.
|
|
|
|
|
|
|
|
$
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Net cash provided by (used in) operating activities
|
|
|
321,752
|
|
|
|
(84,921
|
)
|
|
|
406,673
|
|
Net cash used in investing activities
|
|
|
(10,171,771
|
)
|
|
|
(389,502
|
)
|
|
|
(9,782,269
|
)
|
Net cash provided by financing activities
|
|
|
6,785,506
|
|
|
|
14,416,328
|
|
|
|
(7,630,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash
|
|
|
(3,064,513
|
)
|
|
|
13,941,905
|
|
|
|
(17,006,418
|
)
|
Operating Activities
We had net cash provided
by operating activities of $321,752 for the nine months ended September 30, 2017. This resulted from a net loss of $1,962,259,
adding back depreciation and amortization of $1,458,933, amortization of deferred loan fees of $108,117, and casualty loss, net
of $895,194 and deducting gain on sale of residential property of $75,796, and then decreasing the amount by the net change in
operating assets and liabilities of $102,437.
We had net cash used
in operating activities of $84,921 for the nine months ended September 30, 2016. This resulted from a net loss of $1,419,485, adding
back depreciation and amortization of $964,953, noncash share-based compensation of $425,000 and amortization of deferred loan
fees of $90,981, and then decreasing the amount by the net change in operating assets and liabilities of $146,370.
Investing Activities
During the nine months
ended September 30, 2017, we invested $10,117,039 in new homes, $668,268 in capital improvements for our homes, and $219,407 in
lease origination costs. We received $205,027 of proceeds on the disposition of residential property, $554,806 of insurance proceeds
for property damages, and received $73,110 in refunds of escrow deposits for a total of $10,171,771 of cash used in investing activities.
During the nine months
ended September 30, 2016, we invested $364,823 in capital improvements and $76,080 in lease origination costs, and received $51,401
in refunds of escrow deposits for a total of $389,502 of cash used in investing activities.
Financing Activities
During the nine months
ended September 30, 2017, we had net cash provided by financing activities of $6,785,506 derived from $7,968,633 of proceeds from
a note payable, less $405,750 of notes payable principal payments, less $220,773 of loan fees, less payments of deferred stock
issuance costs of $556,604.
During the nine months
ended September 30,2016, we had net cash provided by financing activities of $14,416,328 consisting of $15,415,100 of proceeds
from the issuance of shares, less $27,056 in notes payable principal payments and $971,716 of payments of deferred stock issuance
costs.
Our future acquisition
activity relies primarily on our ability to raise funds from the further issuance of common shares combined with new loan transactions
secured by our current and future home inventories. We remain focused on acquiring new capital. We believe our current cash balance
combined with our estimated future net rental revenue is sufficient to fund our operating activities through the 12 months following
the date of this report.
Off Balance Sheet Arrangements
None.
Net Operating Income
We define net operating
income (or NOI) as total revenue less property operating and maintenance and real estate taxes. NOI is a non-GAAP measurement that
excludes acquisition costs, depreciation and amortization, general and administration, legal and accounting, and interest expenses.
We consider NOI to
be a meaningful financial measure when considered with the financial statements determined in accordance with GAAP. We believe
NOI is helpful to investors in understanding the amount of income after operating expenses which is generated in a given period.
The following is a
reconciliation of our NOI to net loss as determined in accordance with GAAP for the three and nine month periods ended September
30, 2017 and 2016.
|
|
Three Months ended September 30,
|
|
|
Nine Months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,307,696
|
)
|
|
$
|
(771,243
|
)
|
|
$
|
(1,962,259
|
)
|
|
$
|
(1,419,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
537,968
|
|
|
|
326,029
|
|
|
|
1,458,933
|
|
|
|
964,953
|
|
General and administration
|
|
|
558,074
|
|
|
|
486,379
|
|
|
|
1,860,473
|
|
|
|
1,466,865
|
|
Noncash share-based compensation
|
|
|
-
|
|
|
|
425,000
|
|
|
|
-
|
|
|
|
425,000
|
|
Acquisition costs
|
|
|
-
|
|
|
|
18,265
|
|
|
|
-
|
|
|
|
76,129
|
|
Other income (expenses), net
|
|
|
1,314,968
|
|
|
|
260,010
|
|
|
|
1,773,180
|
|
|
|
775,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
$
|
1,103,314
|
|
|
$
|
744,440
|
|
|
$
|
3,130,327
|
|
|
$
|
2,288,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income as a percentage of total revenue
|
|
|
54.0
|
%
|
|
|
53.9
|
%
|
|
|
53.8
|
%
|
|
|
55.1
|
%
|
NOI should not be considered
an alternative to net loss or net cash flows from operating activities, as determined in accordance with GAAP, as indications of
our performance or as measures of liquidity. Nor is NOI necessarily indicative of cash available to fund future cash needs or distributions
to shareholders. In addition, although we use NOI for comparability in assessing our performance against other REITs, not all REITs
compute the same non-GAAP measure of NOI. Accordingly, our basis for computing this non- GAAP measure may not be comparable with
that of other REITs. This is due in part to the differences in property operating and maintenance expenses incurred by, and real
estate taxes applicable to, different companies and the significant effect these items have on NOI.
Funds From Operations and Core Funds
From Operations
Funds From Operations
(or FFO) is a non-GAAP financial measure that we believe, when considered with the financial statements determined in accordance
with GAAP, is helpful to investors in understanding our performance because it captures features particular to real estate performance
by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than do other
depreciable assets. The National Association of Real Estate Investment Trusts (or NAREIT) defines FFO as net income (computed in
accordance with GAAP), excluding gains (or losses) from sales of, and impairment losses recognized with respect to, depreciable
property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments
for unconsolidated partnerships and joint ventures are calculated on the same basis to determine FFO.
Core Funds From Operations
(or Core FFO) is a non-GAAP financial measure that we use as a supplemental measure of our performance. We believe that Core FFO
is further helpful to investors as it provides a more consistent measurement of our performance across reporting periods by removing
the impact of certain items that are not comparable from period to period. We adjust FFO for expensed acquisition fees and costs,
share-based compensation, non-cash interest expense related to amortization of deferred financing costs, casualty gains and losses,
and certain other non-comparable costs to arrive at Core FFO.
FFO and Core FFO should
not be considered alternatives to net income (loss) or net cash flows from operating activities, as determined in accordance with
GAAP, as indications of our performance or as measures of liquidity. These non-GAAP measures are not necessarily indicative of
cash available to fund future cash needs. In addition, although we use these non-GAAP measures for comparability in assessing our
performance against other REITs, not all REITs compute the same non-GAAP measures. Accordingly, there can be no assurance that
our basis for computing these non-GAAP measures is comparable with that of other REITs. This is due in part to the differences
in capitalization policies used by different companies and the significant effect these capitalization policies have on FFO and
Core FFO. Real estate costs which are accounted for as capital improvements are added to the carrying value of the property and
depreciated over time, whereas real estate costs that are expenses are accounted for as a current period expense. This affects
FFO and Core FFO because costs that are accounted for as expenses reduce FFO and Core FFO. Conversely, real estate costs associated
with assets that are capitalized and then subsequently depreciated are added back to net income to calculate FFO and Core FFO.
The following table
sets forth a reconciliation of our net loss as determined in accordance with GAAP and our calculations of FFO and Core FFO for
the three and nine months ended September 30, 2017 and 2016:
|
|
Three Months ended September 30,
|
|
|
Nine Months ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,307,696
|
)
|
|
$
|
(771,243
|
)
|
|
$
|
(1,962,259
|
)
|
|
$
|
(1,419,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back depreciation and amortization
|
|
|
537,968
|
|
|
|
326,029
|
|
|
|
1,458,933
|
|
|
|
964,953
|
|
Less gain on sale of residential property
|
|
|
-
|
|
|
|
-
|
|
|
|
(75,796
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from (used in) operations
|
|
$
|
(769,728
|
)
|
|
$
|
(445,214
|
)
|
|
$
|
(579,122
|
)
|
|
$
|
(454,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back noncash amortization of deferred loan fees
|
|
|
39,998
|
|
|
|
30,327
|
|
|
|
108,117
|
|
|
|
90,981
|
|
Add back casualty loss, net
|
|
|
978,181
|
|
|
|
-
|
|
|
|
895,194
|
|
|
|
-
|
|
Add back noncash share-based compensation
|
|
|
-
|
|
|
|
425,000
|
|
|
|
-
|
|
|
|
425,000
|
|
Add back acquisition costs
|
|
|
-
|
|
|
|
18,265
|
|
|
|
-
|
|
|
|
76,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core funds from operations
|
|
$
|
248,451
|
|
|
$
|
28,378
|
|
|
$
|
424,189
|
|
|
$
|
137,578
|
|