# NexPoint Residential Trust, Inc. (NXRT) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from NexPoint Residential Trust, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1620393/000156459022005606/nxrt-10k_20211231.htm
Accession: 0001564590-22-005606
Filing date: 2022-02-18
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/NXRT/
All MD&A years: /company/NXRT/mda/
Next year: /company/NXRT/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of our financial condition and our historical results of operations. The following should be read in conjunction with our financial statements and accompanying notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected, forecasted, or expected in these forward-looking statements as a result of various factors, including, but not limited to, those discussed below and elsewhere in this annual report. See “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in this annual report. Our management believes the assumptions underlying the Company’s financial statements and accompanying notes are reasonable. However, the Company’s financial statements and accompanying notes may not be an indication of our financial condition and results of operations in the future.

Overview

As of December 31, 2021, our Portfolio consisted of 39 multifamily properties primarily located in the Southeastern and Southwestern United States encompassing 14,825 units of apartment space that was approximately 94.3% leased with a weighted average monthly effective rent per occupied apartment unit of $1,261. Substantially all of our business is conducted through the OP. We own the Portfolio through the OP and our TRS. The OP owns approximately 99.9% of the Portfolio; our TRS owns approximately 0.1% of the Portfolio. The OP GP is the sole general partner of the OP. As of December 31, 2021, there were 23,819,402 OP Units outstanding, of which 23,746,169, or 99.7%, were owned by us and 73,233, or 0.3%, were owned by an unaffiliated limited partner (see Note 10 to our consolidated financial statements).

We are primarily focused on directly or indirectly acquiring, owning, and operating well-located multifamily properties with a value-add component in large cities and suburban submarkets of large cities, primarily in the Southeastern and Southwestern United States. We generate revenue primarily by leasing our multifamily properties. We intend to employ targeted management and a value-add program at a majority of our properties in an attempt to improve rental rates and the NOI at our properties and achieve long-term capital appreciation for our stockholders. We are externally managed by the Adviser through the Advisory Agreement, by and among the OP, the Adviser and us. The Advisory Agreement was renewed on February 14, 2022 for a one-year term. The Adviser is wholly owned by NexPoint Advisors, L.P.

On March 4, 2020, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of Jefferies, Raymond James, KeyBanc and Truist, pursuant to which the Company may issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $225,000,000.  Sales of shares of common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act, including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange, to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices.  In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies, KeyBanc, and Raymond James, or their respective affiliates, through the 2020 ATM Program. During the year ended December 31, 2020, the Company issued 718,306 shares of common stock at an average price of $43.92 per share for gross proceeds of $31.5 million under the 2020 ATM Program. The Company paid approximately $0.5 million in fees to the 2020 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $0.6 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. During the year ended December 31, 2021, the Company issued 350,513 shares of common stock at an average price of $75.41 per share for gross proceeds of $26.4 million under the 2020 ATM Program. The Company paid approximately $0.4 million in fees to the 2020 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $0.4 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. The 2020 ATM Program may be terminated by the Company at any time and expires automatically once aggregate sales under the 2020 ATM Program reach $225,000,000 (see Note 8 to our consolidated financial statements).

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, and expect to continue to qualify as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the years ended December 31, 2021, 2020 and 2019.

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On October 15, 2021, a lawsuit was filed by a trust set up in connection with the bankruptcy of Highland Capital Management, L.P. in the United States Bankruptcy Court for the Northern District of Texas. The lawsuit makes claims against a number of entities, including our Sponsor, the parent of our Advisor, and James Dondero. The lawsuit does not include claims related to our business or our assets or operations. Our Sponsor and Mr. Dondero have informed us that they believe the lawsuit has no merit and they intend to vigorously defend against the claims. We do not expect that the lawsuit will have a material effect on our business, results of operations or financial condition.

Components of Our Revenues and Expenses

Revenues

Rental income. Our earnings are primarily attributable to the rental revenue from our multifamily properties. We anticipate that the leases we enter into for our multifamily properties will typically be for one year or less on average. Also included are utility reimbursements, late fees, pet fees, and other rental fees charged to tenants.

Other income. Other income includes ancillary income earned from tenants such as non-refundable fees, application fees, laundry fees, cable TV income, and other miscellaneous fees charged to tenants.

Expenses

Property operating expenses. Property operating expenses include property maintenance costs, salary and employee benefit costs, utilities, casualty-related expenses and recoveries and other property operating costs.

Real estate taxes and insurance. Real estate taxes include the property taxes assessed by local and state authorities depending on the location of each property. Insurance includes the cost of commercial, general liability, and other needed insurance for each property.

Property management fees. Property management fees include fees paid to BH, our property manager, or other third party management companies for managing each property (see Note 10 to our consolidated financial statements).

Advisory and administrative fees. Advisory and administrative fees include the fees paid to our Adviser pursuant to the Advisory Agreement (see Note 11 to our consolidated financial statements).

Corporate general and administrative expenses. Corporate general and administrative expenses include, but are not limited to, audit fees, legal fees, listing fees, board of director fees, equity-based compensation expense, investor relations costs and payments of reimbursements to our Adviser for operating expenses. Corporate general and administrative expenses and the advisory and administrative fees paid to our Adviser (including advisory and administrative fees on properties defined in the Advisory Agreement as New Assets) will not exceed 1.5% of Average Real Estate Assets per calendar year (or part thereof that the Advisory Agreement is in effect), calculated in accordance with the Advisory Agreement, or the Expense Cap. The Expense Cap does not limit the reimbursement by us of expenses related to securities offerings paid by our Adviser. The Expense Cap also does not apply to legal, accounting, financial, due diligence, and other service fees incurred in connection with mergers and acquisitions, extraordinary litigation, or other events outside our ordinary course of business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of real estate assets. Additionally, in the sole discretion of the Adviser, the Adviser may elect to waive certain advisory and administrative fees otherwise due.  If advisory and administrative fees are waived in a period, the waived fees for that period are considered to be waived permanently and the Adviser may not be reimbursed in the future.

Property general and administrative expenses. Property general and administrative expenses include the costs of marketing, professional fees, general office supplies, and other administrative related costs of each property.

Depreciation and amortization. Depreciation and amortization costs primarily include depreciation of our multifamily properties and amortization of acquired in-place leases.

Other Income and Expense

Interest expense. Interest expense primarily includes the cost of interest expense on debt, the amortization of deferred financing costs and the related impact of interest rate derivatives used to manage our interest rate risk.

Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs includes prepayment penalties and defeasance costs, the write-off of unamortized deferred financing costs and fair market value adjustments of assumed debt related to the early repayment of debt, costs incurred in a debt modification that are not capitalized as deferred financing costs and other costs incurred in a debt extinguishment.

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Casualty losses. Casualty losses include expenses resulting from damages from an unexpected and unusual event such as a natural disaster. Expenses can include additional payments on insurance premiums, impairment recognized on a property, and other abnormal expenses arising from the related event.  

Miscellaneous income. Miscellaneous income includes proceeds received from insurance for business interruption involving the loss of rental income at a property that has temporarily suspended operations due to an unexpected and unusual event.

Gain on sales of real estate. Gain on sales of real estate includes the gain recognized upon sales of properties. Gain on sales of real estate is calculated by deducting the carrying value of the real estate and costs incurred to sell the properties from the sales prices of the properties.

Results of Operations for the Years Ended December 31, 2021, 2020 and 2019

The year ended December 31, 2021 as compared to the year ended December 31, 2020

The following table sets forth a summary of our operating results for the years ended December 31, 2021 and 2020 (in thousands):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2021","","","2020","","","$ Change"],["Total revenues","","$","219,240","","","$","204,800","","","$","14,440"],["Total expenses","","","(201,032",")","","","(191,236",")","","","(9,796",")"],["Operating income before gain on sales of real estate","","","18,208","","","","13,564","","","","4,644"],["Gain on sales of real estate","","","46,214","","","","69,151","","","","(22,937",")"],["Operating income","","","64,422","","","","82,715","","","","(18,293",")"],["Interest expense","","","(44,623",")","","","(44,753",")","","","130"],["Loss on extinguishment of debt and modification costs","","","(912",")","","","(1,470",")","","","558"],["Casualty gain","","","2,595","","","","5,886","","","","(3,291",")"],["Miscellaneous income","","","1,624","","","","1,772","","","","(148",")"],["Net income","","","23,106","","","","44,150","","","","(21,044",")"],["Net income attributable to redeemable noncontrolling interests in the Operating Partnership","","","69","","","","132","","","","(63",")"],["Net income attributable to common stockholders","","$","23,037","","","$","44,018","","","$","(20,981",")"]]
[[/GREPCENT_TABLE]]

The change in our net income between the periods primarily relates to decreases in gain on sales of real estate of $22.9 million and casualty gain of $3.3 million, partially offset by an increase in total revenues of $14.4 million. The change in our net income between the periods was also due to our acquisition and disposition activity in 2020 and 2021 and the timing of the transactions (we disposed of three properties in the first quarter of 2020, one property in the third quarter of 2020, and purchased one property in the fourth quarter of 2020; we purchased two properties in the second quarter of 2021, one property in the third quarter of 2021, one property in the fourth quarter of 2021, and disposed of two properties in the fourth quarter of 2021).

Revenues

Rental income was $213.5 million for the year ended December 31, 2021 compared to $199.2 million for the year ended December 31, 2020, which was an increase of approximately $14.3 million. The increase between the periods was primarily due to our acquisition and disposition activity in 2020 and 2021 and the timing of the transactions, as described above, and a 11.8% increase in the weighted average monthly effective rent per occupied apartment unit in our Portfolio to $1,261 as of December 31, 2021 from $1,128 as of December 31, 2020, primarily driven by the value-add program that we have implemented and organic growth in rents in the markets where our properties are located.

Other income. Other income was $5.7 million for the year ended December 31, 2021 compared to $5.6 million for the year ended December 31, 2020, which was an increase of approximately $0.1 million. The increase between the periods was primarily due to a $0.2 million decrease in application and administration concessions, partially offset by a $0.1 million decrease in cable tv income.

Expenses

Property operating expenses. Property operating expenses were $47.7 million for the year ended December 31, 2021 compared to $47.2 million for the year ended December 31, 2020, which was an increase of approximately $0.5 million. The increase between the periods was primarily due to our acquisition and disposition activity in 2020 and 2021 and the timing of the transactions, as described above. The increase between periods was also due to a $0.8 million, or 4.0%, increase in payroll expenses.

48

Real estate taxes and insurance. Real estate taxes and insurance costs were $33.2 million for the year ended December 31, 2021 compared to $31.7 million for the year ended December 31, 2020, which was an increase of approximately $1.5 million. The increase between the periods was primarily due to a $1.1 million, or 4.0%, increase in property taxes due to higher assessments of value by taxing authorities. The increase between the periods was also due to our acquisition and disposition activity in 2020 and 2021 and the timing of the transactions, as described above.

Property management fees. Property management fees were $6.3 million for the year ended December 31, 2021 compared to $6.0 million for the year ended December 31, 2020, which was an increase of approximately $0.3 million. The increase between the periods was primarily due to an increase in total revenues, which the fee is primarily based on.

Advisory and administrative fees. Advisory and administrative fees were $7.6 million for the year ended December 31, 2021 compared to $7.7 million for the year ended December 31, 2020, which was an decrease of approximately $0.1 million. For the years ended December 31, 2021 and 2020, our Adviser elected to voluntarily waive advisory and administrative fees of approximately $17.3 million and $15.4 million and are considered permanently waived. Our Adviser is not contractually obligated to waive fees on New Assets in the future and may cease waiving fees on New Assets at its discretion. Advisory and administrative fees may increase in future periods as we acquire additional properties, which will be classified as New Assets.

Corporate general and administrative expenses. Corporate general and administrative expenses were $12.0 million for the year ended December 31, 2021 compared to $10.0 million for the year ended December 31, 2020, which was an increase of approximately $2.0 million. The increase was primarily due to an increase in stock compensation expense of $1.5 million.

Property general and administrative expenses. Property general and administrative expenses were $7.3 million for the year ended December 31, 2021 compared to $6.2 million for the year ended December 31, 2020, which was an increase of approximately $1.1 million. The increase between the periods was primarily due to increases in centralized marketing services of $0.3 million and lead generation expense of $0.1 million.

Depreciation and amortization. Depreciation and amortization costs were $86.9 million for the year ended December 31, 2021 compared to $82.4 million for the year ended December 31, 2020, which was an increase of approximately $4.5 million. The increase between the periods was primarily due to an increase of depreciation expense of $7.2 million, partially offset by the amortization of intangible lease assets of $4.1 million related to five properties for the year ended December 31, 2021 compared to $6.8 million related to six properties for the year ended December 31, 2020, which was a decrease of approximately $2.7 million.

Other Income and Expense

Interest expense. Interest expense was $44.6 million for the year ended December 31, 2021 compared to $44.8 million for the year ended December 31, 2020, which was a decrease of approximately $0.2 million. The decrease between the periods was primarily due to an increase in interest rate swap expense of approximately $5.6 million, partially offset by a decrease in interest on debt of $5.1 million. The following table details the various costs included in interest expense for the years ended December 31, 2021 and 2020 (in thousands):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2021","","","2020","","","$ Change"],["Interest on debt","","$","27,405","","","$","32,546","","","$","(5,141",")"],["Amortization of deferred financing costs","","","2,197","","","","2,837","","","","(640",")"],["Interest rate swaps","","","14,909","","","","9,337","","","","5,572"],["Interest rate caps expense","","","112","","","","33","","","","79"],["Total","","$","44,623","","","$","44,753","","","$","(130",")"]]
[[/GREPCENT_TABLE]]

49

Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs was $0.9 million for the year ended December 31, 2021 compared to $1.5 million for the year ended December 31, 2020, which was a decrease of approximately $0.6 million. The decrease between periods was primarily due to a decrease in prepayment penalties and defeasance costs of $0.3 million and a decrease in write-offs of deferred financing costs of $0.3 million. The following table details the various costs included in loss on extinguishment of debt and modification costs for the years ended December 31, 2021 and 2020 (in thousands):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2021","","","2020","","","$ Change"],["Prepayment penalties and defeasance costs","","$","407","","","$","711","","","$","(304",")"],["Write-off of deferred financing costs","","","503","","","","756","","","","(253",")"],["Debt modification and other extinguishment costs","","","2","","","","3","","","","(1",")"],["Total","","$","912","","","$","1,470","","","$","(558",")"]]
[[/GREPCENT_TABLE]]

Casualty gains (losses). Casualty gains were $2.6 million for the year ended December 31, 2021 compared to casualty gains of $5.9 million for the year ended December 31, 2020. The decrease between periods was primarily due to significant damages sustained at Cutter’s Point, Venue 8651, and Timber Creek (see Note 5 to our consolidated financial statements).

Miscellaneous income. Miscellaneous income was $1.6 million for the year ended December 31, 2021 compared to $1.8 million for the year ended December 31, 2020, which was a decrease of approximately $0.2 million. The decrease between the periods was primarily due to business interruption proceeds received from insurance for lost rents at Cutter’s Point and Venue 8651 (see Note 5 to our consolidated financial statements).

Gain on sales of real estate. Gain on sales of real estate was $46.2 million for the year ended December 31, 2021 compared to $69.2 million for the year ended December 31, 2020, which was a decrease of approximately $23.0 million. During the year ended December 31, 2021, we sold two properties; during the year ended December 31, 2020, we sold four properties.

The year ended December 31, 2020 as compared to the year ended December 31, 2019

The following table sets forth a summary of our operating results for the years ended December 31, 2020 and 2019 (in thousands):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2020","","","2019","","","$ Change"],["Total revenues","","$","204,800","","","$","181,066","","","$","23,734"],["Total expenses","","","(191,236",")","","","(166,157",")","","","(25,079",")"],["Operating income","","","13,564","","","","14,909","","","","(1,345",")"],["Interest expense","","","(44,753",")","","","(37,385",")","","","(7,368",")"],["Loss on extinguishment of debt and modification costs","","","(1,470",")","","","(2,869",")","","","1,399"],["Gain on sales of real estate","","","69,151","","","","127,684","","","","(58,533",")"],["Casualty gain (loss)","","","5,886","","","","(3,488",")","","","9,374"],["Miscellaneous income","","","1,772","","","","587","","","","1,185"],["Net income","","","44,150","","","","99,438","","","","(55,288",")"],["Net income attributable to redeemable noncontrolling interests in the Operating Partnership","","","132","","","","298","","","","(166",")"],["Net income attributable to common stockholders","","$","44,018","","","$","99,140","","","$","(55,122",")"]]
[[/GREPCENT_TABLE]]

The change in our net income between the periods primarily relates to a decrease in gain on sales of real estate of $58.5 million and increases in total property operating expenses of $4.5 million and depreciation and amortization expense of $13.3 million, partially offset by an increase in total revenues of $23.7 million. The change in our net income between the periods was also due to our acquisition and disposition activity in 2019 and 2020 and the timing of the transactions (we purchased three properties in the first quarter of 2019, one property in the second quarter of 2019, four properties in the third quarter of 2019, three properties in the fourth quarter of 2019, and disposed of six properties in the third quarter of 2019; we disposed of three properties in the first quarter of 2020, one property in the third quarter of 2020, and purchased one property in the fourth quarter of 2020).

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Revenues

Rental income. Rental income was $199.2 million for the year ended December 31, 2020 compared to $177.2 million for the year ended December 31, 2019, which was an increase of approximately $22.0 million. The increase between the periods was primarily due to our acquisition and disposition activity in 2019 and 2020 and the timing of the transactions, as described above, and a 2.3% increase in the weighted average monthly effective rent per occupied apartment unit in our Portfolio to $1,128 as of December 31, 2020 from $1,103 as of December 31, 2019, primarily driven by the value-add program that we have implemented and organic growth in rents in the markets where our properties are located.

Other income. Other income was $5.6 million for the year ended December 31, 2020 compared to $3.9 million for the year ended December 31, 2019, which was an increase of approximately $1.7 million. The increase between the periods was primarily due to a $1.9 million increase in cable TV income partially offset by a $0.1 million decrease in application fees.

Expenses

Property operating expenses. Property operating expenses were $47.2 million for the year ended December 31, 2020 compared to $42.7 million for the year ended December 31, 2019, which was an increase of approximately $4.5 million. The increase between the periods was primarily due to our acquisition and disposition activity in 2019 and 2020 and the timing of the transactions, as described above. The increase between periods was also due to a $0.8 million, or 4.0%, increase in payroll expenses.

Real estate taxes and insurance. Real estate taxes and insurance costs were $31.7 million for the year ended December 31, 2020 compared to $25.1 million for the year ended December 31, 2019, which was an increase of approximately $6.6 million. The increase between the periods was primarily due to a $5.1 million, or 23.1%, increase in property taxes. The increase between the periods was also due to our acquisition and disposition activity in 2019 and 2020 and the timing of the transactions, as described above. Property taxes incurred in the first year of ownership may be significantly less than subsequent years since the purchase price of the property may trigger a significant increase in assessed value by the taxing authority in subsequent years, increasing the cost of real estate taxes.

Property management fees. Property management fees were $6.0 million for the year ended December 31, 2020 compared to $5.4 million for the year ended December 31, 2019, which was an increase of approximately $0.6 million. The increase between the periods was primarily due to an increase in total revenues, which the fee is primarily based on.

Advisory and administrative fees. Advisory and administrative fees were $7.7 million for the year ended December 31, 2020 compared to $7.5 million for the year ended December 31, 2019, which was an increase of approximately $0.2 million. For the year ended December 31, 2020, our Adviser elected to voluntarily waive the advisory and administrative fees incurred on the properties we acquired subsequent to October 2016, excluding Hollister Place, Stone Creek at Old Farm and The Heritage, which totaled approximately $15.4 million and are considered to be permanently waived. For the year ended December 31, 2019, our Adviser elected to voluntarily waive the advisory and administrative fees incurred on the properties we acquired subsequent to October 2016, excluding Hollister Place and Stone Creek at Old Farm, which totaled approximately $9.1 million and are considered to be permanently waived for the period. The advisory and administrative fees waived by our Adviser for the years ended December 31, 2020 and 2019 are considered to be permanently waived for the periods. Our Adviser is not contractually obligated to waive fees on New Assets in the future and may cease waiving fees on New Assets at its discretion. Advisory and administrative fees may increase in future periods as we acquire additional properties, which will be classified as New Assets.

Corporate general and administrative expenses. Corporate general and administrative expenses were $10.0 million for the year ended December 31, 2020 compared to $9.6 million for the year ended December 31, 2019, which was an increase of approximately $0.4 million. The increase was primarily due to an increase in stock compensation expense of $0.4 million.

Property general and administrative expenses. Property general and administrative expenses were $6.2 million for the year ended December 31, 2020 compared to $6.8 million for the year ended December 31, 2019, which was a decrease of approximately $0.6 million. The decrease between the periods was primarily due to decreases in eviction fees of $0.2 million.

Depreciation and amortization. Depreciation and amortization costs were $82.4 million for the year ended December 31, 2020 compared to $69.1 million for the year ended December 31, 2019, which was an increase of approximately $13.3 million. The increase between the periods was primarily due to an increase of depreciation expense of $19.2 million, partially offset by the amortization of intangible lease assets of $6.8 million related to six properties for the year ended December 31, 2020 compared to $12.7 million related to fourteen properties for the year ended December 31, 2019, which was a decrease of approximately $5.9 million.

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Other Income and Expense

Interest expense. Interest expense was $44.8 million for the year ended December 31, 2020 compared to $37.4 million for the year ended December 31, 2019, which was an increase of approximately $7.4 million. The increase between the periods was primarily due to an increase in interest rate swap expense of approximately $15.8 million, partially offset by a decrease in interest on debt of $9.2 million. The following table details the various costs included in interest expense for the years ended December 31, 2020 and 2019 (in thousands):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2020","","","2019","","","$ Change"],["Interest on debt","","$","32,546","","","$","41,744","","","$","(9,198",")"],["Amortization of deferred financing costs","","","2,837","","","","2,083","","","","754"],["Interest rate swaps - effective portion","","","9,337","","","","(6,472",")","","","15,809"],["Interest rate caps expense","","","33","","","","30","","","","3"],["Total","","$","44,753","","","$","37,385","","","$","7,368"]]
[[/GREPCENT_TABLE]]

Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs was $1.5 million for the year ended December 31, 2020 compared to $2.9 million for the year ended December 31, 2019, which was a decrease of approximately $1.4 million. The decrease between periods was primarily due to a decrease in prepayment penalties and defeasance costs of $0.7 million and a decrease in write-offs of deferred financing costs of $0.7 million. The following table details the various costs included in loss on extinguishment of debt and modification costs for the years ended December 31, 2020 and 2019 (in thousands):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2020","","","2019","","","$ Change"],["Prepayment penalties and defeasance costs","","$","711","","","$","1,449","","","$","(738",")"],["Write-off of deferred financing costs","","","756","","","","1,419","","","","(663",")"],["Debt modification and other extinguishment costs","","","3","","","","1","","","","2"],["Total","","$","1,470","","","$","2,869","","","$","(1,399",")"]]
[[/GREPCENT_TABLE]]

Casualty gains (losses). Casualty gains were $5.9 million for the year ended December 31, 2020 compared to casualty losses of $3.5 million for the year ended December 31, 2019. The increase between periods was primarily due to significant damages sustained at Cutter’s Point, Venue 8651, and Timber Creek (see Note 5 to our consolidated financial statements).

Miscellaneous income. Miscellaneous income was $1.8 million for the year ended December 31, 2020 compared to $0.6 million for the year ended December 31, 2019, which was an increase of approximately $1.2 million. The increase between the periods was primarily due to business interruption proceeds received from insurance for lost rents at Cutter’s Point and Venue 8651 (see Note 5 to our consolidated financial statements).

Gain on sales of real estate. Gain on sales of real estate was $69.2 million for the year ended December 31, 2020 compared to $127.7 million for the year ended December 31, 2019, which was a decrease of approximately $58.5 million. During the year ended December 31, 2020, we sold four properties; during the year ended December 31, 2019, we sold six properties.

Non-GAAP Measurements

Net Operating Income and Same Store Net Operating Income

NOI is a non-GAAP financial measure of performance. NOI is used by investors and our management to evaluate and compare the performance of our properties to other comparable properties, to determine trends in earnings and to compute the fair value of our properties as NOI is calculated by adjusting net income (loss) to add back (1) interest expense (2) advisory and administrative fees, (3) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP, (4) corporate general and administrative expenses, (5) other gains and losses that are specific to us including loss on extinguishment of debt and modification costs, (6) casualty-related expenses/(recoveries) and casualty gains (losses), (7) pandemic expenses that are not reflective of continuing operations of the properties and (8) property general and administrative expenses that are not reflective of the continuing operations of the properties or are incurred on behalf of the Company at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees.

52

The cost of funds is eliminated from net income (loss) because it is specific to our particular financing capabilities and constraints. The cost of funds is also eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital, which may have changed or may change in the future. Non-operating fees to affiliates are eliminated because they do not reflect continuing operating costs of the property owner. Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our multifamily properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale, which will usually change from period to period. Casualty-related expenses and recoveries, casualty gains and losses, and losses of extinguished debt and modification costs are excluded because they do not reflect continuing operating costs of the property owner. Corporate level general and administrative expenses are eliminated because they do not reflect the operating activity performed at the properties. Entity level general and administrative expenses incurred at the properties and pandemic expenses are eliminated as they are specific to the way in which we have chosen to hold our properties and are the result of our ownership structuring. Also, expenses that are incurred upon acquisition of a property do not reflect continuing operating costs of the property owner. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed purchases or sales. We believe that eliminating these items from net income is useful because the resulting measure captures the actual ongoing revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs.

However, the usefulness of NOI is limited because it excludes corporate general and administrative expenses, interest expense, loss on extinguishment of debt and modification costs, acquisition costs, certain fees to affiliates such as advisory and administrative fees, depreciation and amortization expense and gains or losses from the sale of properties, pandemic expenses, and other gains and losses as determined under GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income, which further limits its usefulness.

NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income (loss) as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income (loss) computed in accordance with GAAP and discussions elsewhere in “—Results of Operations” regarding the components of net income (loss) that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.

We define “Same Store NOI” as NOI for our properties that are comparable between periods. We view Same Store NOI as an important measure of the operating performance of our properties because it allows us to compare operating results of properties owned for the entirety of the current and comparable periods and therefore eliminates variations caused by acquisitions or dispositions during the periods.

53

NOI and 2020-2021 Same Store NOI for the Years Ended December 31, 2021 and 2020

The following table, which has not been adjusted for the effects of noncontrolling interests, reconciles our NOI and our 2020-2021 Same Store NOI for the years ended December 31, 2021 and 2020 to net income, the most directly comparable GAAP financial measure (in thousands):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2021","","","2020"],["Net income","","$","23,106","","","$","44,150"],["Adjustments to reconcile net income to NOI:"],["Advisory and administrative fees","","","7,631","","","","7,670"],["Corporate general and administrative expenses","","","11,966","","","","10,035"],["Casualty-related expenses/(recoveries)","(1)","","(200",")","","","790"],["Casualty losses (gains)","","","(2,595",")","","","(5,886",")"],["Pandemic expense","(2)","","50","","","","510"],["Property general and administrative expenses","(3)","","2,232","","","","1,644"],["Depreciation and amortization","","","86,878","","","","82,411"],["Interest expense","","","44,623","","","","44,753"],["Loss on extinguishment of debt and modification costs","","","912","","","","1,470"],["Gain on sales of real estate","","","(46,214",")","","","(69,151",")"],["NOI","","$","128,389","","","$","118,396"],["Less Non-Same Store"],["Revenues","","","(19,157",")","","","(14,101",")"],["Operating expenses","","","6,971","","","","6,678"],["Operating income","","","(871",")","","","(1,687",")"],["Same Store NOI","","$","115,332","","","$","109,286"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Adjustment to net income to exclude certain property operating expenses that are casualty-related expenses/(recoveries)."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Represents additional cleaning, disinfecting and other costs incurred at the properties related to COVID-19."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","Adjustment to net income to exclude certain property general and administrative expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees."]]
[[/GREPCENT_TABLE]]

54

NOI and 2019-2021 Same Store NOI for the Years Ended December 31, 2021, 2020 and 2019

The following table, which has not been adjusted for the effects of noncontrolling interests, reconciles our NOI and our 2019-2021 Same Store NOI for the years ended December 31, 2021, 2020 and 2019 to net income, the most directly comparable GAAP financial measure (in thousands):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2021","","","2020","","","2019"],["Net income","","$","23,106","","","$","44,150","","","$","99,438"],["Adjustments to reconcile net income to NOI:"],["Advisory and administrative fees","","","7,631","","","","7,670","","","","7,500"],["Corporate general and administrative expenses","","","11,966","","","","10,035","","","","9,613"],["Casualty-related expenses/(recoveries)","(1)","","(200",")","","","790","","","","(34",")"],["Casualty losses (gains)","","","(2,595",")","","","(5,886",")","","","3,488"],["Pandemic expense","(2)","","50","","","","510","","","","\u2014"],["Property general and administrative expenses","(3)","","2,232","","","","1,644","","","","1,939"],["Depreciation and amortization","","","86,878","","","","82,411","","","","69,086"],["Interest expense","","","44,623","","","","44,753","","","","37,385"],["Loss on extinguishment of debt and modification costs","","","912","","","","1,470","","","","2,869"],["Gain on sales of real estate","","","(46,214",")","","","(69,151",")","","","(127,684",")"],["NOI","","$","128,389","","","$","118,396","","","$","103,600"],["Less Non-Same Store"],["Revenues","","","(98,786",")","","","(89,362",")","","","(69,608",")"],["Operating expenses","","","39,001","","","","37,394","","","","29,163"],["Operating income","","","(871",")","","","(1,687",")","","","(587",")"],["Same Store NOI","","$","67,733","","","$","64,741","","","$","62,568"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Adjustment to net income to exclude certain property operating expenses that are casualty-related expenses/(recoveries)."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Represents additional cleaning, disinfecting and other costs incurred at the properties related to COVID-19."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","Adjustment to net income to exclude certain property general and administrative expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional, centralized leasing service and franchise tax."]]
[[/GREPCENT_TABLE]]

Net Operating Income for Our 2020-2021 Same Store and Non-Same Store Properties for the Years Ended December 31, 2021 and 2020

There are 33 properties encompassing 13,098 units of apartment space in our same store pool for the years ended December 31, 2021 and 2020 (our “2020-2021 Same Store” properties). Our 2020-2021 Same Store properties exclude the following 6 properties in our Portfolio as of December 31, 2021: Fairways at San Marcos, The Verandas at Lake Norman, Creekside at Matthews, Six Forks Station, Hudson High House and Cutter’s Point as well as the 50 units that are currently down (see Note 5).

55

The following table reflects the revenues, property operating expenses and NOI for the years ended December 31, 2021 and 2020 for our 2020-2021 Same Store and Non-Same Store properties (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2021","","","2020","","","$ Change","","","% Change"],["Revenues"],["Same Store"],["Rental income","","$","194,609","","","$","185,283","","","$","9,326","","","","5.0","%"],["Other income","","","5,474","","","","5,416","","","","58","","","","1.1","%"],["Same Store revenues","","","200,083","","","","190,699","","","","9,384","","","","4.9","%"],["Non-Same Store"],["Rental income","","","18,896","","","","13,954","","","","4,942","","","","35.4","%"],["Other income","","","261","","","","147","","","","114","","","","77.6","%"],["Non-Same Store revenues","","","19,157","","","","14,101","","","","5,056","","","","35.9","%"],["Total revenues","","","219,240","","","","204,800","","","","14,440","","","","7.1","%"],["Operating expenses"],["Same Store"],["Property operating expenses (1)","","","43,643","","","","41,949","","","","1,694","","","","4.0","%"],["Real estate taxes and insurance","","","31,525","","","","29,874","","","","1,651","","","","5.5","%"],["Property management fees (2)","","","5,758","","","","5,499","","","","259","","","","4.7","%"],["Property general and administrative expenses (3)","","","4,578","","","","4,175","","","","403","","","","9.7","%"],["Same Store operating expenses","","","85,504","","","","81,497","","","","4,007","","","","4.9","%"],["Non-Same Store"],["Property operating expenses (4)","","","4,246","","","","3,952","","","","294","","","","7.4","%"],["Real estate taxes and insurance","","","1,627","","","","1,835","","","","(208",")","","","-11.3","%"],["Property management fees (2)","","","576","","","","472","","","","104","","","","22.0","%"],["Property general and administrative expenses (5)","","","522","","","","419","","","","103","","","","24.6","%"],["Non-Same Store operating expenses","","","6,971","","","","6,678","","","","293","","","","4.4","%"],["Total operating expenses","","","92,475","","","","88,175","","","","4,300","","","","4.9","%"],["Operating income"],["Same Store"],["Miscellaneous income","","","753","","","","84","","","","669","","","N/M"],["Non-Same Store"],["Miscellaneous income","","","871","","","","1,687","","","","(816",")","","","-48.4","%"],["Total operating income","","","1,624","","","","1,771","","","","(147",")","","","-8.3","%"],["NOI"],["Same Store","","","115,332","","","","109,286","","","","6,046","","","","5.5","%"],["Non-Same Store","","","13,057","","","","9,110","","","","3,947","","","","43.3","%"],["Total NOI","","$","128,389","","","$","118,396","","","$","9,993","","","","8.4","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","For the years ended December 31, 2021 and 2020, excludes approximately $255,000 and $414,000, respectively, of casualty-related recoveries."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the OP."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","For the years ended December 31, 2021 and 2020, excludes approximately $1,874,000 and $1,289,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(4)","For the years ended December 31, 2021 and 2020, excludes approximately $5,000 and $203,000, respectively, of casualty-related expenses."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(5)","For the years ended December 31, 2021 and 2020, excludes approximately $358,000 and $356,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees."]]
[[/GREPCENT_TABLE]]

See reconciliation of net income to NOI above under “NOI and 2020-2021 Same Store NOI for the Years Ended December 31, 2021 and 2020.”

56

2020-2021 Same Store Results of Operations for the Years Ended December 31, 2021 and 2020

As of December 31, 2021, our 2020-2021 Same Store properties were approximately 94.2% leased with a weighted average monthly effective rent per occupied apartment unit of $1,255. As of December 31, 2020, our 2020-2021 Same Store properties were approximately 93.9% leased with a weighted average monthly effective rent per occupied apartment unit of $1,130. For our 2020-2021 Same Store properties, we recorded the following operating results for the year ended December 31, 2021 as compared to the year ended December 31, 2020:

Revenues

Rental income. Rental income was $194.6 million for the year ended December 31, 2021 compared to $185.3 million for the year ended December 31, 2020, which was an increase of approximately $9.3 million, or 5.0%. The majority of the increase is related to a 11.1% increase in the weighted average monthly effective rent per occupied apartment unit to $1,255 as of December 31, 2021 from $1,130 as of December 31, 2020.

Other income. Other income was $5.5 million for the year ended December 31, 2021 compared to $5.4 million for the year ended December 31, 2020, which was an increase of approximately $0.1 million, or 1.1%. The majority of the increase is related to a $0.1 million increase in internet income.

Expenses

Property operating expenses. Property operating expenses were $43.6 million for the year ended December 31, 2021 compared to $41.9 million for the year ended December 31, 2020, which was an increase of approximately $1.7 million, or 4.0%. The majority of the increase is related to a $1.2 million, or 7.6%, increase in repairs and maintenance expense.

Real estate taxes and insurance. Real estate taxes and insurance costs were $31.5 million for the year ended December 31, 2021 compared to $29.9 million for the year ended December 31, 2020, which was an increase of approximately $1.6 million, or 5.5%. The majority of the increase is related to a $1.1 million, or 4.3%, increase in property taxes and a $0.5 million, or 13.3%, increase in insurance expense.

Property management fees. Property management fees were $5.8 million for the year ended December 31, 2021 compared to $5.5 million for the year ended December 31, 2020, which was an increase of approximately $0.3 million, or 4.7%. The majority of the increase is related to an increase in total revenues, which the fee is primarily based on.

Property general and administrative expenses. Property general and administrative expenses were $4.6 million for the year ended December 31, 2021 compared to $4.2 million for the year ended December 31, 2020, which was an increase of approximately $0.4 million, or 9.7%. The majority of the increase is related to a $0.3 million, or 11.4%, increase in marketing costs.

Net Operating Income for Our 2019-2021 Same Store and Non-Same Store Properties for the Years Ended December 31, 2021, 2020 and 2019

There are 22 properties encompassing 8,514 units of apartment space in our same store pool for the years ended December 31, 2021, 2020 and 2019 (our “2019-2021 Same Store” properties). Our 2019-2021 Same Store properties exclude the following 17 properties in our Portfolio as of December 31, 2021: Bella Vista, The Enclave, The Heritage, Summers Landing, Residences at Glenview Reserve, Residences at West Place, Avant at Pembroke Pines, Arbors of Brentwood, Torreyana, Bloom, Bella Solara, Fairways at San Marcos, The Verandas at Lake Norman, Creekside at Matthews, Six Forks Station, Hudson High House and Cutter’s Point as well as 50 units that are currently down (see Note 5).

57

The following table reflects the revenues, property operating expenses and NOI for the years ended December 31, 2021, 2020 and 2019 for our 2019-2021 Same Store and Non-Same Store properties (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,","","","2021 compared to 2020","","","2021 compared to 2019"],["","","2021","","","2020","","","2019","","","$ Change","","","% Change","","","$ Change","","","% Change"],["Revenues"],["Same Store"],["Rental income","","$","118,292","","","$","113,402","","","$","109,222","","","$","4,890","","","","4.3","%","","$","9,070","","","","8.3","%"],["Other income","","","2,162","","","","2,036","","","","2,236","","","","126","","","","6.2","%","","","(74",")","","","-3.3","%"],["Same Store revenues","","","120,454","","","","115,438","","","","111,458","","","","5,016","","","","4.3","%","","","8,996","","","","8.1","%"],["Non-Same Store"],["Rental income","","","95,213","","","","85,835","","","","67,940","","","","9,378","","","","10.9","%","","","27,273","","","","40.1","%"],["Other income","","","3,573","","","","3,527","","","","1,668","","","","46","","","","1.3","%","","","1,905","","","","114.2","%"],["Non-Same Store revenues","","","98,786","","","","89,362","","","","69,608","","","","9,424","","","","10.5","%","","","29,178","","","","41.9","%"],["Total revenues","","","219,240","","","","204,800","","","","181,066","","","","14,440","","","","7.1","%","","","38,174","","","","21.1","%"],["Operating expenses"],["Same Store"],["Property operating expenses (1)","","","27,334","","","","26,061","","","","25,766","","","","1,273","","","","4.9","%","","","1,568","","","","6.1","%"],["Real estate taxes and insurance","","","19,593","","","","18,582","","","","16,787","","","","1,011","","","","5.4","%","","","2,806","","","","16.7","%"],["Property management fees (2)","","","3,559","","","","3,428","","","","3,324","","","","131","","","","3.8","%","","","235","","","","7.1","%"],["Property general and administrative expenses (3)","","","2,988","","","","2,710","","","","3,013","","","","278","","","","10.3","%","","","(25",")","","","-0.8","%"],["Same Store operating expenses","","","53,474","","","","50,781","","","","48,890","","","","2,693","","","","5.3","%","","","4,584","","","","9.4","%"],["Non-Same Store"],["Property operating expenses (4)","","","20,555","","","","19,840","","","","16,960","","","","715","","","","3.6","%","","","3,595","","","","21.2","%"],["Real estate taxes and insurance","","","13,559","","","","13,127","","","","8,326","","","","432","","","","3.3","%","","","5,233","","","","62.9","%"],["Property management fees (2)","","","2,775","","","","2,543","","","","2,064","","","","232","","","","9.1","%","","","711","","","","34.4","%"],["Property general and administrative expenses (5)","","","2,112","","","","1,884","","","","1,813","","","","228","","","","12.1","%","","","299","","","","16.5","%"],["Non-Same Store operating expenses","","","39,001","","","","37,394","","","","29,163","","","","1,607","","","","4.3","%","","","9,838","","","","33.7","%"],["Total operating expenses","","","92,475","","","","88,175","","","","78,053","","","","4,300","","","","4.9","%","","","14,422","","","","18.5","%"],["Operating income"],["Same Store"],["Miscellaneous income","","","753","","","","84","","","","\u2014","","","","669","","","N/M","","","","753","","","","0.0","%"],["Non-Same Store"],["Miscellaneous income","","","871","","","","1,687","","","","587","","","","(816",")","","","-48.4","%","","","284","","","","48.4","%"],["Total operating income","","","1,624","","","","1,771","","","","587","","","","(147",")","","","-8.3","%","","","1,037","","","N/M"],["NOI"],["Same Store","","","67,733","","","","64,741","","","","62,568","","","","2,992","","","","4.6","%","","","5,165","","","","8.3","%"],["Non-Same Store","","","60,656","","","","53,655","","","","41,032","","","","7,001","","","","13.0","%","","","19,624","","","","47.8","%"],["Total NOI","","$","128,389","","","$","118,396","","","$","103,600","","","$","9,993","","","","8.4","%","","$","24,789","","","","23.9","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","For the years ended December 31, 2021, 2020 and 2019, excludes approximately $248,000, $595,000 and $80,000, respectively, of casualty-related recoveries."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the OP."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","For the years ended December 31, 2021, 2020 and 2019, excludes approximately $1,256,000, $674,000 and $1,071,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(4)","For the years ended December 31, 2021, 2020 and 2019, excludes approximately $98,000, $1,895,000 and $46,000, respectively, of casualty-related expenses."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(5)","For the years ended December 31, 2021, 2020 and 2019, excludes approximately $976,000, $970,000 and $869,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees."]]
[[/GREPCENT_TABLE]]

58

See reconciliation of net income to NOI above under “NOI and 2019-2021 Same Store NOI for the Years Ended December 31, 2021, 2020 and 2019.”

2019-2021 Same Store Results of Operations for the Years Ended December 31, 2021 and 2020

As of December 31, 2021, our 2019-2021 Same Store properties were approximately 94.5% leased with a weighted average monthly effective rent per occupied apartment unit of $1,162. As of December 31, 2020, our 2019-2021 Same Store properties were approximately 94.1% leased with a weighted average monthly effective rent per occupied apartment unit of $1,050. For our 2019-2021 Same Store properties, we recorded the following operating results for the year ended December 31, 2021 as compared to the year ended December 31, 2020:

Revenues

Rental income. Rental income was $118.3 million for the year ended December 31, 2021 compared to $113.4 million for the year ended December 31, 2020, which was an increase of approximately $4.9 million, or 4.3%. The majority of the increase is related to a 10.7% increase in the weighted average monthly effective rent per occupied apartment unit to $1,162 as of December 31, 2021 from $1,050 as of December 31, 2020, and a 0.4% increase in occupancy.

Other income. Other income was $2.2 million for the year ended December 31, 2021 compared to $2.0 million for the year ended December 31, 2020, which was an increase of approximately $0.2 million, or 6.2%. The majority of the increase is related to a $0.1 million decrease in concessions related to application and administration fees.

Expenses

Property operating expenses. Property operating expenses were $27.3 million for the year ended December 31, 2021 compared to $26.1 million for the year ended December 31, 2020, which was an increase of approximately $1.2 million, or 4.9%. The majority of the increase is related to an increase in repairs and maintenance costs of $0.6 million.

Real estate taxes and insurance. Real estate taxes and insurance costs were $19.6 million for the year ended December 31, 2021 compared to $18.6 million for the year ended December 31, 2020, which was an increase of approximately $1.0 million, or 5.4%. The majority of the increase is related to a $0.7 million, or 4.4%, increase in property taxes.

Property management fees. Property management fees were $3.6 million for the year ended December 31, 2021 compared to $3.4 million for the year ended December 31, 2020, which was an increase of approximately $0.2 million, or 3.8%. The majority of the increase is related to an increase in total revenues, which the fee is primarily based on.

Property general and administrative expenses. Property general and administrative expenses were $3.0 million for the year ended December 31, 2021 compared to $2.7 million for the year ended December 31, 2020, which was an increase of approximately $0.3 million, or 10.3%. The majority of the increase is related to a $0.2 million increase in office operations.

2019-2021 Same Store Results of Operations for the Years Ended December 31, 2021 and 2019

As of December 31, 2021, our 2019-2021 Same Store properties were approximately 94.5% leased with a weighted average monthly effective rent per occupied apartment unit of $1,162. As of December 31, 2019, our 2019-2021 Same Store properties were approximately 94.5% leased with a weighted average monthly effective rent per occupied apartment unit of $1,035. For our 2019-2021 Same Store properties, we recorded the following operating results for the year end December 31, 2021 as compared to the year ended December 31, 2019:

Revenues

Rental income. Rental income was $118.3 million for the year ended December 31, 2021 compared to $109.2 million for the year ended December 31, 2019, which was an increase of approximately $9.1 million, or 8.3%. The majority of the increase is related to a 12.3% increase in the weighted average monthly effective rent per occupied apartment unit to $1,162 as of December 31, 2021 from $1,035 as of December 31, 2019 and a 0.1% increase in occupancy.

Other income. Other income was $2.2 million for the year ended December 31, 2021 compared to $2.2 million for the year ended December 31, 2019.

Expenses

Property operating expenses. Property operating expenses were $27.3 million for the year ended December 31, 2021 compared to $25.8 million for the year ended December 31, 2019, which was an increase of approximately $1.5 million, or 6.1%. The majority of the increase is related to a $0.7 million, or 8.0%, increase in repair and maintenance expenses.

59

Real estate taxes and insurance. Real estate taxes and insurance costs were $19.6 million for the year ended December 31, 2021 compared to $16.8 million for the year ended December 31, 2019, which was an increase of approximately $2.8 million, or 16.7%. The majority of the increase is related to a $2.2 million, or 15.2%, increase in property taxes.

Property management fees. Property management fees were $3.6 million for the year ended December 31, 2021 to $3.3 million for the year ended December 31, 2019, which was an increase of approximately $0.3 million, or 7.1%. The majority of the increase is related to an increase in total revenues, which the fee is primarily based on.

Property general and administrative expenses. Property general and administrative expenses were $3.0 million for the year ended December 31, 2021 compared to $3.0 million for the year ended December 31, 2019.

FFO, Core FFO and AFFO

We believe that net income, as defined by GAAP, is the most appropriate earnings measure. We also believe that funds from operations (“FFO”), as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), core funds from operations (“Core FFO”) and adjusted funds from operations (“AFFO”) are important non-GAAP supplemental measures of operating performance for a REIT.

Since the historical cost accounting convention used for real estate assets requires depreciation except on land, such accounting presentation implies that the value of real estate assets diminishes predictably over time. However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. FFO is defined by NAREIT as net income computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization. We compute FFO attributable to common stockholders in accordance with NAREIT’s definition. Our presentation differs slightly in that we begin with net income (loss) before adjusting for amounts attributable to noncontrolling interests and we show the combined amounts attributable to such noncontrolling interests as an adjustment to arrive at FFO attributable to common stockholders.

Core FFO makes certain adjustments to FFO, which are either not likely to occur on a regular basis or are otherwise not representative of the ongoing operating performance of our portfolio. Core FFO adjusts FFO to remove items such as losses on extinguishment of debt and modification costs (including prepayment penalties and defeasance costs incurred on the early repayment of debt, the write-off of unamortized deferred financing costs and fair market value adjustments of assumed debt related to the early repayment of debt, costs incurred in a debt modification that are not capitalized as deferred financing costs and other costs incurred in a debt extinguishment), casualty-related expenses and recoveries and gains or losses, pandemic expenses, the amortization of deferred financing costs incurred in connection with obtaining short-term debt financing, and the noncontrolling interests (as described above) related to these items. We believe Core FFO is useful to investors as a supplemental gauge of our operating performance and is useful in comparing our operating performance with other REITs that are not as involved in the aforementioned activities.

AFFO makes certain adjustments to Core FFO in order to arrive at a more refined measure of the operating performance of our portfolio. There is no industry standard definition of AFFO and practice is divergent across the industry. AFFO adjusts Core FFO to remove items such as equity-based compensation expense and the amortization of deferred financing costs incurred in connection with obtaining long-term debt financing, and the noncontrolling interests (as described above) related to these items. We believe AFFO is useful to investors as a supplemental gauge of our operating performance and is useful in comparing our operating performance with other REITs that are not as involved in the aforementioned activities.

The effect of the conversion of OP Units held by noncontrolling limited partners is not reflected in the computation of basic and diluted FFO, Core FFO and AFFO per share, as they are exchangeable for common stock on a one-for-one basis. The FFO, Core FFO and AFFO allocable to such units is allocated on this same basis and reflected in the adjustments for noncontrolling interests in the table below. As such, the assumed conversion of these units would have no net impact on the determination of diluted FFO, Core FFO and AFFO per share. See Note 10 to our consolidated financial statements for additional information.

We believe that the use of FFO, Core FFO and AFFO, combined with the required GAAP presentations, improves the understanding of operating results of REITs among investors and makes comparisons of operating results among such companies more meaningful. While FFO, Core FFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent cash flows from operations or net income (loss) as defined by GAAP and should not be considered as an alternative or substitute to those measures in evaluating our liquidity or operating performance. FFO, Core FFO and AFFO do not purport to be indicative of cash available to fund our future cash requirements. Further, our computation of FFO, Core FFO and AFFO may not be comparable to FFO, Core FFO and AFFO reported by other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition or define Core FFO or AFFO differently than we do.

60

The following table reconciles our calculations of FFO, Core FFO and AFFO to net income, the most directly comparable GAAP financial measure, for the years ended December 31, 2021, 2020 and 2019 (in thousands, except per share amounts):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2021","","","2020","","","2019","","","% Change 2021 - 2020","","","% Change 2021 - 2019"],["Net income","","$","23,106","","","$","44,150","","","$","99,438","","","","-47.7","%","","N/M"],["Depreciation and amortization","","","86,878","","","","82,411","","","","69,086","","","","5.4","%","","","25.8","%"],["Gain on sales of real estate","","","(46,214",")","","","(69,151",")","","","(127,684",")","","","-33.2","%","","","-63.8","%"],["Adjustment for noncontrolling interests","","","(191",")","","","(172",")","","","(122",")","","","11.0","%","","","56.6","%"],["FFO attributable to common stockholders","","","63,579","","","","57,238","","","","40,718","","","","11.1","%","","","56.1","%"],["FFO per share - basic","","$","2.53","","","$","2.32","","","$","1.69","","","","8.9","%","","","49.5","%"],["FFO per share - diluted","","$","2.47","","","$","2.27","","","$","1.66","","","","8.8","%","","","49.1","%"],["Loss on extinguishment of debt and modification costs","","","912","","","","1,470","","","","2,869","","","","-68.2","%","","","-68.2","%"],["Casualty-related expenses/(recoveries)","","","(200",")","","","790","","","","(34",")","","N/M","","","","487.1","%"],["Casualty losses (gains)","","","(2,595",")","","","(5,886",")","","","3,488","","","N/M","","","N/M"],["Pandemic expense","(1)","","50","","","","510","","","","\u2014","","","N/M","","","N/M"],["Amortization of deferred financing costs - acquisition term notes","","","737","","","","1,384","","","","553","","","","-46.7","%","","","33.3","%"],["Adjustment for noncontrolling interests","","","4","","","","6","","","","(21",")","","","-33.3","%","","","-119.0","%"],["Core FFO attributable to common stockholders","","","62,487","","","","55,512","","","","47,573","","","","12.6","%","","","31.3","%"],["Core FFO per share - basic","","$","2.48","","","$","2.25","","","$","1.97","","","","10.5","%","","","25.8","%"],["Core FFO per share - diluted","","$","2.43","","","$","2.20","","","$","1.93","","","","10.3","%","","","25.4","%"],["Amortization of deferred financing costs - long term debt","","","1,460","","","","1,453","","","","1,530","","","","0.5","%","","","-4.5","%"],["Equity-based compensation expense","","","6,997","","","","5,504","","","","5,130","","","","27.1","%","","","36.4","%"],["Adjustment for noncontrolling interests","","","(25",")","","","(21",")","","","(20",")","","","19.0","%","","","25.0","%"],["AFFO attributable to common stockholders","","","70,919","","","","62,448","","","","54,213","","","","13.6","%","","","30.8","%"],["AFFO per share - basic","","$","2.82","","","$","2.53","","","$","2.25","","","","11.5","%","","","25.3","%"],["AFFO per share - diluted","","$","2.75","","","$","2.47","","","$","2.20","","","","11.2","%","","","24.9","%"],["Weighted average common shares outstanding - basic","","","25,170","","","","24,715","","","","24,116","","","","1.8","%","","","4.4","%"],["Weighted average common shares outstanding - diluted","","","25,760","","","","25,234","","","","24,593","","","","2.1","%","","","4.7","%"],["Dividends declared per common share","","$","1.404","","","$","1.279","","","$","1.138","","","","9.8","%","","","23.4","%"],["FFO Coverage - diluted","(2)","1.76x","","","1.77x","","","1.46x","","","","-0.9","%","","","20.8","%"],["Core FFO Coverage - diluted","(2)","1.73x","","","1.72x","","","1.70x","","","","0.4","%","","","1.6","%"],["AFFO Coverage - diluted","(2)","1.96x","","","1.94x","","","1.94x","","","","1.3","%","","","1.2","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Represents additional cleaning, disinfecting and other costs incurred at the properties related to COVID-19."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Indicates coverage ratio of FFO/Core FFO/AFFO per common share (diluted) over dividends declared per common share during the period."]]
[[/GREPCENT_TABLE]]

The year ended December 31, 2021 as compared to the year ended December 31, 2020

FFO was $63.6 million for the year ended December 31, 2021 compared to $57.2 million for the year ended December 31, 2020, which was an increase of approximately $6.4 million. The change in our FFO between the periods primarily relates to an increase in total revenues of $14.4 million, partially offset by an increase in total property operating expenses of $3.4 million and a decrease in casualty gains of $3.3 million.

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Core FFO was $62.5 million for the year ended December 31, 2021 compared to $55.5 million for the year ended December 31, 2020, which was an increase of approximately $7.0 million. The change in our Core FFO between the periods primarily relates to an increase in FFO and a decrease in casualty gains of $3.3 million, partially offset by a decrease in amortization of deferred financing costs for acquisition term notes of $0.6 million, a decrease in loss on extinguishment of debt and modification costs of $0.6 million, and a decrease to casualty related expenses of $1.0 million.

AFFO was $70.9 million for the year ended December 31, 2021 compared to $62.4 million for the year ended December 31, 2020, which was an increase of approximately $8.5 million. The change in our AFFO between the periods primarily relates to increases in Core FFO and equity-based compensation expense of $1.5 million.

The year ended December 31, 2021 as compared to the year ended December 31, 2019

FFO was $63.6 million for the year ended December 31, 2021 compared to $40.7 million for the year ended December 31, 2019, which was an increase of approximately $23.1 million. The change in our FFO between the periods primarily relates to an increase in total revenues of $38.2 million, partially offset by an increase in total property operating expenses of $14.6 million.

Core FFO was $62.5 million for the year ended December 31, 2021 compared to $47.6 million for the year ended December 31, 2019, which was an increase of approximately $15.1 million. The change in our Core FFO between the periods primarily relates to an increase in FFO, partially offset by a decrease in amortization of deferred financing costs for acquisition term notes of $0.6 million, an increase in casualty gains of $6.1 million, and a decrease in loss on extinguishment of debt and modification costs of $2.0 million.

AFFO was $70.9 million for the year ended December 31, 2021 compared to $54.2 million for the year ended December 31, 2019, which was an increase of approximately $16.9 million. The change in our AFFO between the periods primarily relates to increases in Core FFO and equity-based compensation expense of $1.9 million.

Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds necessary to pay for debt maturities, operating expenses and other expenditures directly associated with our multifamily properties, including:

[[GREPCENT_TABLE]]
[["","\u2022","capital expenditures to continue our value-add program and to improve the quality and performance of our multifamily properties;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","interest expense and scheduled principal payments on outstanding indebtedness (see \u201c\u2014Obligations and Commitments\u201d below);"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","recurring maintenance necessary to maintain our multifamily properties;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","distributions necessary to qualify for taxation as a REIT;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","acquisitions of additional properties;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","advisory and administrative fees payable to our Adviser;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","general and administrative expenses;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","reimbursements to our Adviser; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","property management fees payable to BH."]]
[[/GREPCENT_TABLE]]

We expect to meet our short-term liquidity requirements generally through net cash provided by operations and existing cash balances. As of December 31, 2021, we had approximately $11.9 million of renovation value-add reserves for our planned capital expenditures to implement our value-add program. Renovation value-add reserves are not required to be held in escrow by a third party. We may reallocate these funds, at our discretion, to pursue other investment opportunities or meet our short-term liquidity requirements.

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional multifamily properties, renovations and other capital expenditures to improve our multifamily properties and scheduled debt payments and distributions. We expect to meet our long-term liquidity requirements through various sources of capital, which may include a revolving credit facility and future debt or equity issuances, existing working capital, net cash provided by operations, long-term mortgage indebtedness and other secured and unsecured borrowings, and property dispositions. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the state of overall equity and credit markets, our degree of leverage, our unencumbered asset base and borrowing restrictions imposed by lenders (including as a result of any failure to comply with financial covenants in our existing and future indebtedness), general market conditions for REITs,

62

our operating performance and liquidity, market perceptions about us and restrictions on sales of properties under the Code. The Company continues to monitor the impact on COVID-19 and its impact on future rent collections, valuation of real estate investments, impact on cash flow and ability to refinance or repay debt. The success of our business strategy will depend, in part, on our ability to access these various capital sources.

In addition to our value-add program, our multifamily properties will require periodic capital expenditures and renovation to remain competitive. Also, acquisitions, redevelopments, or expansions of our multifamily properties will require significant capital outlays. Long-term, we may not be able to fund such capital improvements solely from net cash provided by operations because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gains, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gains. As a result, our ability to fund capital expenditures, acquisitions, or redevelopment through retained earnings long-term is limited. Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes. If we are unable to obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations, and prospects could be materially and adversely affected.

On February 20, 2019, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of Jefferies, Raymond James and Truist (collectively, the “2019 ATM Sales Agents”), pursuant to which the Company could issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $100,000,000 (the “2019 ATM Program”).  Sales of shares of common stock, if any, could be made in transactions that were deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act, including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange, to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices.  In addition to the issuance and sale of shares of common stock, the Company could enter into forward sale agreements with each of Jefferies and Raymond James, or their respective affiliates, through the 2019 ATM Program. During the year ended December 31, 2019, the Company issued 1,565,322 shares of common stock at an average price of $45.98 per share for gross proceeds of approximately $72.0 million.  The Company paid approximately $1.1 million in fees to the 2019 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $1.0 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. During the year ended December 31, 2020, the Company issued 560,000 shares of common stock at an average price of $50.00 per share for gross proceeds of $28.0 million under the 2019 ATM Program. The Company paid approximately $0.4 million in fees to the 2019 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $0.4 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. On February 27, 2020, the 2019 ATM Program reached aggregate sales of $100,000,000 and therefore expired.

On March 4, 2020, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of Jefferies, Raymond James, KeyBanc and Truist, pursuant to which the Company may issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $225,000,000.  Sales of shares of common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act, including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange, to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices.  In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies, KeyBanc, and Raymond James, or their respective affiliates, through the 2020 ATM Program. During the year ended December 31, 2020, the Company issued 718,306 shares of common stock at an average price of $43.92 per share for gross proceeds of $31.5 million under the 2020 ATM Program. The Company paid approximately $0.5 million in fees to the 2020 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $0.6 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. During the year ended December 31, 2021, the Company issued 350,513 shares of common stock at an average price of $75.41 per share for gross proceeds of $26.4 million under the 2020 ATM Program. The Company paid approximately $0.4 million in fees to the 2020 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $0.4 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. The 2020 ATM Program may be terminated by the Company at any time and expires automatically once aggregate sales under the 2020 ATM Program reach $225,000,000 (see Note 8 to our consolidated financial statements).

We believe that our available cash, expected operating cash flows, and potential debt or equity financings will provide sufficient funds for our operations, anticipated scheduled debt service payments and dividend requirements for the twelve-month period following December 31, 2021.

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Cash Flows

The following table presents selected data from our consolidated statements of cash flows for the years ended December 31, 2021, 2020 and 2019 (in thousands):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2021","","","2020","","","2019"],["Net cash provided by operating activities","","$","73,268","","","$","57,226","","","$","51,366"],["Net cash provided by (used in) investing activities","","","(235,906",")","","","11,503","","","","(553,129",")"],["Net cash provided by (used in) financing activities","","","194,319","","","","(82,896",")","","","529,816"],["Net increase (decrease) in cash, cash equivalents and restricted cash","","","31,681","","","","(14,167",")","","","28,053"],["Cash, cash equivalents and restricted cash, beginning of year","","","57,015","","","","71,182","","","","43,129"],["Cash, cash equivalents and restricted cash, end of year","","$","88,696","","","$","57,015","","","$","71,182"]]
[[/GREPCENT_TABLE]]

The year ended December 31, 2021 as compared to the year ended December 31, 2020

Cash flows from operating activities. During the year ended December 31, 2021, net cash provided by operating activities was $73.3 million compared to net cash provided by operating activities of $57.2 million for the year ended December 31, 2020. The change in cash flows from operating activities was mainly due to an increase in total revenues of $14.4 million between the periods.

Cash flows from investing activities. During the year ended December 31, 2021, net cash used in investing activities was $235.9 million compared to net cash provided by investing activities of $11.5 million for the year ended December 31, 2020. The change in cash flows from investing activities was mainly due to our acquisition and disposition activity in 2021 and 2020 and the timing of the transactions.

Cash flows from financing activities. During the year ended December 31, 2021, net cash provided by financing activities was $194.3 million compared to net cash used in financing activities of $82.9 million for the year ended December 31, 2020. The change in cash flows from financing activities was mainly due to a net increase in debt of approximately $270.5 million between the periods.

The year ended December 31, 2020 as compared to the year ended December 31, 2019

Cash flows from operating activities. During the year ended December 31, 2020, net cash provided by operating activities was $57.2 million compared to net cash provided by operating activities of $51.4 million for the year ended December 31, 2019. The change in cash flows from operating activities was mainly due to an increase in total revenues of $23.7 million, partially offset by increases in total property operating expenses of $11.2 million and interest expense of $7.4 million.

Cash flows from investing activities. During the year ended December 31, 2020, net cash provided by investing activities was $11.5 million compared to net cash used in investing activities of $553.1 million for the year ended December 31, 2019. The change in cash flows from investing activities was mainly due to our acquisition and disposition activity in 2020 and 2019 and the timing of the transactions.

Cash flows from financing activities. During the year ended December 31, 2020, net cash used in financing activities was $82.9 million compared to net cash provided by financing activities of $529.8 million for the year ended December 31, 2019. The change in cash flows from financing activities was mainly due to a net decrease in debt of approximately $555.8 million between the periods.

Debt, Derivatives and Hedging Activity

Mortgage Debt

As of December 31, 2021, our subsidiaries had aggregate mortgage debt outstanding to third parties of approximately $1.3 billion at a weighted average interest rate of 1.81% and an adjusted weighted average interest rate of 2.94%. For purposes of calculating the adjusted weighted average interest rate of our mortgage debt outstanding, we have included the weighted average fixed rate of 1.3461% for one-month LIBOR on our combined $1.2 billion notional amount of interest rate swap agreements, which effectively fix the interest rate on $1.2 billion of our floating rate mortgage debt. See Notes 6 and 7 to our consolidated financial statements for additional information.

We have entered into and expect to continue to enter into interest rate swap and cap agreements with various third parties to fix or cap the floating interest rates on a majority of our floating rate mortgage debt outstanding. The interest rate swap agreements generally have a term of four to five years and effectively establish a fixed interest rate on debt on the underlying notional amounts. The interest rate swap agreements involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of December 31, 2021, interest rate swap agreements effectively covered 96% of our $1.2 billion of floating rate mortgage debt outstanding.

64

The interest rate cap agreements generally have a term of three to four years, cover the outstanding principal amount of the underlying debt and are generally required by our lenders. Under the interest rate cap agreements, we pay a fixed fee in exchange for the counterparty to pay any interest above a maximum rate. As of December 31, 2021, interest rate cap agreements covered $458.8 million of our $1.2 billion of floating rate mortgage debt outstanding. These interest rate cap agreements effectively cap one-month LIBOR on $458.8 million of our floating rate mortgage debt at a weighted average rate of 4.79%.

We intend to invest in additional multifamily properties as suitable opportunities arise and adequate sources of equity and debt financing are available. We expect that future investments in properties, including any improvements or renovations of current or newly acquired properties, will depend on and will be financed by, in whole or in part, our existing cash, future borrowings and the proceeds from additional issuances of common stock or other securities or property dispositions.

Although we expect to be subject to restrictions on our ability to incur indebtedness, we expect that we will be able to refinance existing indebtedness or incur additional indebtedness for acquisitions or other purposes, if needed. However, there can be no assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing common stock or other debt or equity securities, on terms that are acceptable to us or at all.

Furthermore, following the completion of our value-add and capital expenditures programs and depending on the interest rate environment at the applicable time, we may seek to refinance our floating rate debt into longer-term fixed rate debt at lower leverage levels.

Amended and Restated Corporate Credit Facility

On January 28, 2019, the Company, through the OP, entered into a $75.0 million credit facility (the “Corporate Credit Facility”) with Truist Bank, as administrative agent and the lenders party thereto, and immediately drew $52.5 million to fund a portion of the purchase price of Bella Vista, The Enclave, and The Heritage. The Corporate Credit Facility is a full-term, interest-only facility with an initial 24-month term, has one 12-month extension at the option of the Company, and the Company has the right to request an increase in the facility amount up to $150 million (the “Accordion Feature”).  The facility bears interest at a rate of one-month LIBOR plus a range from 2.00% to 2.50%, depending on the Company’s leverage level as determined under the Corporate Credit Facility agreement, and is guaranteed by the Company. On June 29, 2019, the Company, through the OP, exercised its option under the Accordion Feature of the Corporate Credit Facility and increased the amount of the facility from $75 million to $125 million. In conjunction with the increase in the facility, the Company incurred costs of $0.5 million in obtaining the additional financing through the Accordion Feature. On August 28, 2019, the Company, through the OP, increased the amount of the Corporate Credit Facility by $25 million, resulting in aggregate commitments of $150 million as of September 30, 2019. In conjunction with the increase in the facility, the Company incurred costs of $0.2 million of deferred financing costs. On November 20, 2019, the Company, through the OP, increased the amount of the Corporate Credit Facility by $75 million, resulting in aggregate commitments of $225 million as of December 31, 2019. In conjunction with the increase in the facility, the Company incurred costs of $0.8 million of deferred financing costs. As of December 31, 2020, there was $183.0 million in aggregate principal outstanding on the Corporate Credit Facility.

On June 30, 2021, the Company, through the OP, entered into a secured $250.0 million credit facility with Truist Bank (“Truist”), as administrative agent, and the lenders from time to time party thereto (the “Amended and Restated Corporate Credit Facility”). $225 million of the Amended and Restated Corporate Credit Facility was a revolving credit facility and $25 million of the Amended and Restated Corporate Credit Facility was a term loan. In addition, on June 30, 2021, in connection with entering into the Amended and Restated Corporate Credit Facility, the Company, through the OP, terminated its $225.0 million revolving credit facility with Truist, as administrative agent, and the lenders from time to time party thereto, prior to the maturity date of January 28, 2022. Subject to conditions provided in the Amended and Restated Corporate Credit Facility, the Amended and Restated Corporate Credit Facility may be increased up to an additional $100.0 million (the “Accordion Feature”) if the lenders agree to increase their commitments or if the lenders agree for the increase to be funded by any additional lender proposed by the Company, through the OP. The Amended and Restated Corporate Credit Facility will mature on June 30, 2024 with respect to the revolving commitments, unless the Company exercises its option to voluntarily and permanently reduce all of the revolving commitments before the maturity date or elects to exercise its right and option to extend the facility with respect to the revolving commitments for a single one-year term. On September 9, 2021, the Company, through the OP, modified the Amended and Restated Corporate Credit Facility to provide for an additional $35.0 million term loan with a maturity date of December 31, 2021, increasing the Amended and Restated Corporate Credit Facility from $250 million to $285 million. In conjunction with the increase in the facility, the Company incurred costs of $0.3 million in obtaining the additional financing through the modification. On September 30, 2021, the Company made a $10.0 million principal payment on the term loans resulting in $275.0 million in aggregate principal outstanding as of September 30, 2021 on the Amended and Restated Corporate Credit Facility. On November 3, 2021, the Company made a $50.0 million principal payment on the remaining term loans maturing December 31, 2021. On December 6, 2021, the Company, through the OP, increased the amount of the Amended and Restated Corporate Credit Facility by $55.0 million, and incurred costs of $0.4 million of deferred financing costs in

65

conjunction with the increase in the facility. As of December 31, 2021, there was $280.0 million in aggregate principal outstanding on the Amended and Restated Corporate Credit Facility.

Advances under the Amended and Restated Corporate Credit Facility accrue interest at a per annum rate equal to, at the Company’s election, either LIBOR plus a margin of 1.90% to 2.40%, depending on the Company’s total leverage ratio, or a base rate determined according to the highest of (a) the prime rate, (b) the federal funds rate plus 0.50%, (c) LIBOR plus 1.0% or (d) 0.0% plus a margin of 0.90% to 1.40%, depending on the Company’s total leverage ratio. An unused commitment fee at a rate of 0.15% or 0.25%, depending on the outstanding aggregate revolving commitments, applies to unutilized borrowing capacity under the Amended and Restated Corporate Credit Facility. Amounts owing under the Amended and Restated Corporate Credit Facility may be prepaid at any time without premium or penalty. The Amended and Restated Corporate Credit Facility is guaranteed by the Company and the obligations under the Amended and Restated Corporate Credit Facility are, subject to some exceptions, secured by a continuing security interest in substantially all of the assets of the Company. The Company is in compliance with all the covenants in its Amended and Restated Corporate Credit Facility

Interest Rate Swap Agreements

In order to fix a portion of, and mitigate the risk associated with, our floating rate indebtedness (without incurring substantial prepayment penalties or defeasance costs typically associated with fixed rate indebtedness when repaid early or refinanced), we, through the OP, have entered into nine interest rate swap transactions with KeyBank and two with Truist Bank (collectively the “Counterparties”) with a combined notional amount of $1.2 billion which are effective as of December 31, 2021. As of December 31, 2021, the interest rate swaps we have entered into effectively replace the floating interest rate (one-month LIBOR) with respect to $1.2 billion of our floating rate mortgage debt outstanding with a weighted average fixed rate of 1.3461%. During the term of these interest rate swap agreements, we are required to make monthly fixed rate payments of 1.3461%, on a weighted average basis, on the notional amounts, while the Counterparties are obligated to make monthly floating rate payments based on one-month LIBOR to us referencing the same notional amounts. For purposes of hedge accounting under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging, we have designated these interest rate swaps as cash flow hedges of interest rate risk. See Notes 6 and 7 to our consolidated financial statements for additional information.

The following table contains summary information regarding our outstanding interest rate swaps (dollars in thousands):

[[GREPCENT_TABLE]]
[["Effective Date","","Termination Date","","Counterparty","","Notional","","","Fixed Rate (1)"],["April 1, 2017","","April 1, 2022","","KeyBank","","$","100,000","","","","1.957","%"],["May 1, 2017","","April 1, 2022","","KeyBank","","","50,000","","","","1.961","%"],["July 1, 2017","","July 1, 2022","","KeyBank","","","100,000","","","","1.782","%"],["June 1, 2019","","June 1, 2024","","KeyBank","","","50,000","","","","2.002","%"],["June 1, 2019","","June 1, 2024","","Truist","","","50,000","","","","2.002","%"],["September 1, 2019","","September 1, 2026","","KeyBank","","","100,000","","","","1.462","%"],["September 1, 2019","","September 1, 2026","","KeyBank","","","125,000","","","","1.302","%"],["January 3, 2020","","September 1, 2026","","KeyBank","","","92,500","","","","1.609","%"],["March 4, 2020","","June 1, 2026","","Truist","","","100,000","","","","0.820","%"],["June 1, 2021","","September 1, 2026","","KeyBank","","","200,000","","","","0.845","%"],["June 1, 2021","","September 1, 2026","","KeyBank","","","200,000","","","","0.953","%"],["","","","","","","$","1,167,500","","","","1.346","%","(2)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","The floating rate option for the interest rate swaps is one-month LIBOR. As of December 31, 2021, one-month LIBOR was 0.10125%."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Represents the weighted average fixed rate of the interest rate swaps."]]
[[/GREPCENT_TABLE]]

As of December 31, 2021, the Company had the following outstanding interest rate swaps that were designated as cash flow hedges of interest rate risk with future effective dates (dollars in thousands):

[[GREPCENT_TABLE]]
[["Effective Date","","Termination Date","","Counterparty","","Notional Amount","","","Fixed Rate (1)"],["March 1, 2022","","March 1, 2025","","Truist","","$","145,000","","","","0.5730","%"],["March 1, 2022","","March 1, 2025","","Truist","","","105,000","","","","0.6140","%"],["September 1, 2026","","January 1, 2027","","KeyBank","","","92,500","","","","1.7980","%"],["","","","","","","$","342,500","","","","0.9164","%","(2)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","The floating rate option for the interest rate swaps is one-month LIBOR. As of December 31, 2021, one-month LIBOR was 0.10125%."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["(2)","Represents the weighted average fixed rate of the forward interest rate swaps."]]
[[/GREPCENT_TABLE]]

Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of December 31, 2021 for the next five calendar years subsequent to December 31, 2021. We used one-month LIBOR as of December 31, 2021 to calculate interest expense due by period on our floating rate debt and net interest expense due by period on our interest rate swaps.

[[GREPCENT_TABLE]]
[["","","","Payments Due by Period (in thousands)"],["","","","Total","","","2022","","","2023","","","2024","","","2025","","","2026","","","Thereafter"],["Operating Properties Mortgage Debt"],["Principal payments","","","$","1,281,146","","","$","1,482","","","$","21,198","","","$","395,068","","","$","205,338","","","$","423,149","","","$","234,911"],["Interest expense","(1)","","","145,639","","","","35,228","","","","32,921","","","","28,365","","","","22,910","","","","15,351","","","","10,864"],["Total","","","$","1,426,785","","","$","36,710","","","$","54,119","","","$","423,433","","","$","228,248","","","$","438,500","","","$","245,775"],["Credit Facility"],["Principal payments","","","$","280,000","","","$","\u2014","","","$","\u2014","","","$","280,000","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["Interest expense","","","","17,785","","","","7,125","","","","7,126","","","","3,534","","","","\u2014","","","","\u2014","","","","\u2014"],["Total","","","$","297,785","","","$","7,125","","","$","7,126","","","$","283,534","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["Total contractual obligations and commitments","","","$","1,724,570","","","$","43,835","","","$","61,245","","","$","706,967","","","$","228,248","","","$","438,500","","","$","245,775"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Interest expense obligations includes the impact of expected settlements on interest rate swaps which have been entered into in order to fix the interest rate on the hedged portion of our floating rate debt obligations. As of December 31, 2021, we had entered into eleven interest rate swap transactions with a combined notional amount of $1.2 billion. We have allocated the total impact of expected settlements on the $1.2 billion notional amount of interest rate swaps to \u201cOperating Properties Mortgage Debt.\u201d We used one-month LIBOR as of December 31, 2021 to determine our expected settlements through the terms of the interest rate swaps."]]
[[/GREPCENT_TABLE]]

Amended and Restated Corporate Credit Facility

The Amended and Restated Corporate Credit Facility will mature on June 30, 2024 with respect to the revolving commitments, unless the Company exercises its option to voluntarily and permanently reduce all of the revolving commitments before the maturity date or elects to exercise its right and option to extend the facility with respect to the revolving commitments for a single one-year term. During the year ended December 31, 2021, the Company repaid all of its $55M in term loans maturing December 31, 2021.

Advisory Agreement

Our Advisory Agreement requires that we pay our Adviser an annual advisory and administrative fee of 1.2%. The advisory and administrative fees paid to the Adviser on the Contributed Assets (as defined in the Advisory Agreement) are subject to an annual cap of approximately $5.4 million. For the years ended December 31, 2021 and 2020, the Company incurred advisory and administrative fees of $7.6 million and $7.7 million, respectively.

NLMF Holdco, LLC

The Company’s agreement with NLMF Holdco, LLC may result in additional funding requirements to cover future project costs. The maximum exposure of potential commitments is expected to be no more than $4.0 million. We expect that these actions will provide faster, more reliable and lower cost internet to our residents. We expect to roll out this service to our other properties in the future. As of December 31, 2021, the Company has funded approximately $0.2 million to NLMF Holdco, LLC which is included in prepaid and other assets on the consolidated balance sheet of the Company. For the year ended December 31, 2021, the Company incurred expenses of $0.1 million for fiber internet service which is included in property operating expenses on the consolidated statement of operations and comprehensive income. To provide faster, more reliable and lower cost internet to our residents, we have entered into agreements, in the form of Exhibit 10.20, with NLMF Holdco, LLC, an entity under common control with our Adviser and in which we own a 10% equity interest and agreements, in the form of Exhibit 10.21, with NLMF Leaseco, LLC, which is controlled by Matt McGraner, one of our officers. The foregoing description does not purport to be complete and is qualified in its entirety by the form agreements, which are attached hereto as Exhibit 10.20 and Exhibit 10.21 and are incorporated herein by reference.

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Capital Expenditures and Value-Add Program

We anticipate incurring average annual repairs and maintenance expense of $575 to $725 per apartment unit in connection with the ongoing operations of our business. These expenditures are expensed as incurred. In addition, we reserve, on average, approximately $250 to $350 per apartment unit for non-recurring capital expenditures and/or lender required replacement reserves. When incurred, these expenditures are either capitalized or expensed, in accordance with GAAP, depending on the type of the expenditure. Although we will continuously monitor the adequacy of this average, we believe these figures to be sufficient to maintain the properties at a high level in the markets in which we operate. A majority of the properties in our Portfolio were underwritten and acquired with the premise that we would invest $4,000 to $10,000 per unit in the first 36 months of ownership, in an effort to add value to the asset’s exterior and interiors. In many cases, we reserve cash at the closing of each acquisition to fund these planned capital expenditures and value-add improvements. As of December 31, 2021, we had approximately $11.9 million of renovation value-add reserves for our planned capital expenditures and other expenses to implement our value-add program, which will complete approximately 1,226 planned interior rehabs. The following table sets forth a summary of our capital expenditures related to our value-add program for the years ended December 31, 2021, 2020 and 2019 (in thousands):

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["Rehab Expenditures","","2021","","","2020","","","2019"],["Interior","(1)","$","11,278","","","$","10,093","","","$","12,044"],["Exterior and common area","","","7,773","","","","20,447","","","","11,242"],["Total rehab expenditures","","$","19,051","","","$","30,540","","","$","23,286"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Includes total capital expenditures during the period on completed and in-progress interior rehabs. For the years ended December 31, 2021, 2020 and 2019, we completed full and partial interior rehabs on 1,264, 1,679 and 2,516 units, respectively."]]
[[/GREPCENT_TABLE]]

Freddie Mac Multifamily Green Advantage Program

In order to obtain more favorable pricing on our mortgage debt financing with Freddie Mac, the Company decided to participate in Freddie Mac’s Multifamily Green Advantage program (the “Green Program”). As of December 31, 2021, the Company has completed its Green Program improvements on all but one property, which is expected to be completed in 2022. We expect to reduce water/sewer costs at each property where the Green Program is implemented by at least 15% through the replacement of showerheads, plumbing fixtures and toilets with modern energy efficient upgrades. Due to changes in Freddie Mac’s requirements to participate in the Green Program, we are not implementing this on acquisitions going forward.

Income Taxes

We anticipate that we will continue to qualify to be taxed as a REIT for U.S. federal income tax purposes, and we intend to continue to be organized and to operate in a manner that will permit us to qualify as a REIT. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to stockholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the years ended December 31, 2021, 2020 and 2019.

If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax on our taxable income at regular corporate income tax rates, and dividends paid to our stockholders would not be deductible by us in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to stockholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify to be taxed as a REIT.

We evaluate the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” (greater than 50 percent probability) of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Our management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. We have no examinations in progress and none are expected at this time.

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We recognize our tax positions and evaluate them using a two-step process. First, we determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, we will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.

We had no material unrecognized tax benefit or expense, accrued interest or penalties as of December 31, 2021. We and our subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2020, 2019 and 2018 tax years remain open to examination by tax jurisdictions to which our subsidiaries and we are subject. When applicable, we recognize interest and/or penalties related to uncertain tax positions on our consolidated statements of operations and comprehensive income (loss).

Dividends

We intend to make regular quarterly dividend payments to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We intend to make regular quarterly dividend payments of all or substantially all of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our Board. Before we make any dividend payments, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets, borrow funds or raise additional capital to make cash dividends or we may make a portion of the required dividend in the form of a taxable distribution of stock or debt securities.

We will make dividend payments based on our estimate of taxable earnings per share of common stock, but not earnings calculated pursuant to GAAP. Our dividends and taxable income and GAAP earnings will typically differ due to items such as depreciation and amortization, fair value adjustments, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses. Our quarterly dividends per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share. Our Board declared our fourth quarterly dividend of 2021 of $0.38 per share on October 29, 2021, which was paid on December 30, 2021 and funded out of cash flows from operations.

Off-Balance Sheet Arrangements

As of December 31, 2021, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these judgments, assumptions and estimates for changes that would affect the reported amounts. These estimates are based on management’s historical industry experience and on various other judgments and assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these judgments, assumptions and estimates. Below is a discussion of the accounting policies that we consider critical to understanding our financial condition or results of operations where there is uncertainty or where significant judgment is required. A discussion of recent accounting pronouncements and our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in this annual report.

Purchase Price Allocation

Upon acquisition of a property considered to be an asset acquisition, the purchase price and related acquisition costs (“total consideration”) are allocated to land, buildings, improvements, furniture, fixtures, and equipment, and intangible lease assets based on relative fair value in accordance with FASB ASC 805, Business Combinations. Acquisition costs are capitalized in accordance with FASB ASC 805.

The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (see Note 7 to our consolidated financial statements), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available

69

information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.

Impairment

Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The key inputs into our impairment analysis include, but are not limited to, the holding period, net operating income, and capitalization rates. In such cases, we will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value. The Company’s impairment analysis identifies and evaluates events or changes in circumstances that indicate the carrying amount of a real estate investment may not be recoverable, including determining the period the Company will hold the rental property, net operating income, and the estimated capitalization rate for each respective real estate investment.

Inflation

The real estate market has not been affected significantly by inflation in the past several years due to a relatively low inflation rate. The majority of our lease terms are for a period of one year or less and reset to market if renewed. The majority of our leases also contain protection provisions applicable to reimbursement billings for utilities. Should inflation return, due to the short-term nature of our leases, we do not believe our results will be materially affected.

Inflation may also affect the overall cost of debt, as the implied cost of capital increases. Currently, interest rates are less than historical averages. However, the Federal Reserve, in response to or in anticipation of continued inflation concerns, could continue to raise interest rates. We intend to mitigate these risks through long-term fixed interest rate loans and interest rate hedges, which to date have included interest rate cap and interest rate swap agreements.

REIT Tax Election

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code and expect to continue to qualify as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our “REIT taxable income,” as defined by the Code, to our stockholders. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the years ended December 31, 2021, 2020 and 2019. We believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT.