UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission file number: 000-56165
Cottonwood Communities, Inc.
(Exact name of Registrant as specified in its charter)
________________________________ | | | | | | | | | | | | | | |
| Maryland | | 61-1805524 | |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | |
1245 E. Brickyard Road, Suite 250, Salt Lake City, UT 84106
(Address of principal executive offices) (Zip code)
(801) 278-0700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
None | N/A | N/A |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | | |
Large accelerated filer | ☐ | Accelerated filer | ☐ | |
Non-Accelerated filer | ý | Smaller reporting company | ý | |
| | Emerging growth company | ý | |
| | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ý | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of MayAugust 10, 2022, there were 2,609,1523,946,993 shares of the registrant’s Class T common stock, 1,0194,638 shares of the registrant's Class D common stock, 1,284,8732,790,005 shares of the registrant's Class I common stock, 23,274,90722,967,811 shares of the registrant’s Class A common stock, and 17,52917,533 shares of the registrant’s Class TX common stock outstanding.
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Cottonwood Communities, Inc. |
Table of Contents |
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PART I | | |
| Item 1. | | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
PART II | | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| Item 5. | | |
| Item 6. | | |
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PART 1I - FINANCIAL INFORMATION
Item 1. Financial Statements
| Cottonwood Communities, Inc. | Cottonwood Communities, Inc. | Cottonwood Communities, Inc. |
Condensed Consolidated Balance Sheets | Condensed Consolidated Balance Sheets | Condensed Consolidated Balance Sheets |
(in thousands, except share and per share data) | (in thousands, except share and per share data) | (in thousands, except share and per share data) |
| | | March 31, 2022 | | December 31, 2021 | | June 30, 2022 | | December 31, 2021 |
Assets | Assets | | (Unaudited) | | | Assets | | (Unaudited) | | |
Real estate assets, net | Real estate assets, net | | $ | 1,416,553 | | | $ | 1,408,483 | | Real estate assets, net | | $ | 1,518,810 | | | $ | 1,408,483 | |
Investments in unconsolidated real estate entities | Investments in unconsolidated real estate entities | | 152,596 | | | 190,733 | | Investments in unconsolidated real estate entities | | 128,806 | | | 190,733 | |
Investments in real-estate related loans | Investments in real-estate related loans | | 13,031 | | | 13,035 | | Investments in real-estate related loans | | 13,027 | | | 13,035 | |
Cash and cash equivalents | Cash and cash equivalents | | 121,890 | | | 27,169 | | Cash and cash equivalents | | 72,640 | | | 27,169 | |
Restricted cash | Restricted cash | | 28,295 | | | 18,221 | | Restricted cash | | 68,069 | | | 18,221 | |
Other assets | Other assets | | 30,655 | | | 29,249 | | Other assets | | 33,078 | | | 29,249 | |
Total assets | Total assets | | $ | 1,763,020 | | | $ | 1,686,890 | | Total assets | | $ | 1,834,430 | | | $ | 1,686,890 | |
Liabilities, Equity, and Noncontrolling Interests | Liabilities, Equity, and Noncontrolling Interests | | | | | Liabilities, Equity, and Noncontrolling Interests | | | | |
Liabilities | Liabilities | | Liabilities | |
Mortgage notes and revolving credit facility, net | Mortgage notes and revolving credit facility, net | | $ | 769,061 | | | $ | 642,107 | | Mortgage notes and revolving credit facility, net | | $ | 910,421 | | | $ | 642,107 | |
Construction loans, net | Construction loans, net | | 66,174 | | | 116,656 | | Construction loans, net | | 79,911 | | | 116,656 | |
Preferred stock, net | Preferred stock, net | | 257,585 | | | 245,268 | | Preferred stock, net | | 119,063 | | | 245,268 | |
Unsecured promissory notes, net | Unsecured promissory notes, net | | 43,443 | | | 43,543 | | Unsecured promissory notes, net | | 43,443 | | | 43,543 | |
Performance participation allocation due to affiliate | Performance participation allocation due to affiliate | | 19,934 | | | 51,761 | | Performance participation allocation due to affiliate | | 30,078 | | | 51,761 | |
Accounts payable, accrued expenses and other liabilities | Accounts payable, accrued expenses and other liabilities | | 58,320 | | | 46,886 | | Accounts payable, accrued expenses and other liabilities | | 66,318 | | | 46,886 | |
Total liabilities | Total liabilities | | 1,214,517 | | | 1,146,221 | | Total liabilities | | 1,249,234 | | | 1,146,221 | |
Commitments and contingencies (Note 11) | Commitments and contingencies (Note 11) | | 0 | | 0 | Commitments and contingencies (Note 11) | | 0 | | 0 |
Equity and noncontrolling interests | Equity and noncontrolling interests | | Equity and noncontrolling interests | |
Stockholders' equity | Stockholders' equity | | Stockholders' equity | |
Common stock, Class T shares, $0.01 par value, 275,000,000 shares authorized; 1,383,342 shares issued and outstanding at March 31, 2022. No Class T shares were outstanding at December 31, 2021. | | 14 | | | — | | |
Common stock, Class I shares, $0.01 par value, 275,000,000 shares authorized; 608,019 and 151,286 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively. | | 6 | | | 2 | | |
Common stock, Class A shares, $0.01 par value, 125,000,000 shares authorized; 23,288,245 and 23,445,174 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively. | | 232 | | | 234 | | |
Common stock, Class TX shares, $0.01 par value, 50,000,000 shares authorized; 17,525 and 17,520 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively. | | — | | | — | | |
Common stock, Class T shares, $0.01 par value, 275,000,000 shares authorized; 2,944,885 shares issued and outstanding at June 30, 2022. No Class T shares were outstanding at December 31, 2021. | | Common stock, Class T shares, $0.01 par value, 275,000,000 shares authorized; 2,944,885 shares issued and outstanding at June 30, 2022. No Class T shares were outstanding at December 31, 2021. | | 29 | | | — | |
Common stock, Class D shares, $0.01 par value, 275,000,000 shares authorized; 1,019 shares issued and outstanding at June 30, 2022. No Class D shares were outstanding at December 31, 2021. | | Common stock, Class D shares, $0.01 par value, 275,000,000 shares authorized; 1,019 shares issued and outstanding at June 30, 2022. No Class D shares were outstanding at December 31, 2021. | | — | | | — | |
Common stock, Class I shares, $0.01 par value, 275,000,000 shares authorized; 1,755,746 and 151,286 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively. | | Common stock, Class I shares, $0.01 par value, 275,000,000 shares authorized; 1,755,746 and 151,286 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively. | | 18 | | | 2 | |
Common stock, Class A shares, $0.01 par value, 125,000,000 shares authorized; 23,012,120 and 23,445,174 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively. | | Common stock, Class A shares, $0.01 par value, 125,000,000 shares authorized; 23,012,120 and 23,445,174 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively. | | 230 | | | 234 | |
Common stock, Class TX shares, $0.01 par value, 50,000,000 shares authorized; 17,530 and 17,520 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively. | | Common stock, Class TX shares, $0.01 par value, 50,000,000 shares authorized; 17,530 and 17,520 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively. | | — | | | — | |
Additional paid-in capital | Additional paid-in capital | | 279,347 | | | 252,035 | | Additional paid-in capital | | 323,723 | | | 252,035 | |
Accumulated distributions | Accumulated distributions | | (21,587) | | | (17,273) | | Accumulated distributions | | (26,352) | | | (17,273) | |
Accumulated deficit | Accumulated deficit | | (58,869) | | | (55,864) | | Accumulated deficit | | (64,712) | | | (55,864) | |
Total stockholders' equity | Total stockholders' equity | | 199,143 | | | 179,134 | | Total stockholders' equity | | 232,936 | | | 179,134 | |
Noncontrolling interests | Noncontrolling interests | | | | | Noncontrolling interests | | | | |
Limited partners | Limited partners | | 282,549 | | | 291,258 | | Limited partners | | 270,525 | | | 291,258 | |
Partially owned entities | Partially owned entities | | 66,811 | | | 70,277 | | Partially owned entities | | 81,735 | | | 70,277 | |
Total noncontrolling interests | Total noncontrolling interests | | 349,360 | | | 361,535 | | Total noncontrolling interests | | 352,260 | | | 361,535 | |
Total equity and noncontrolling interests | Total equity and noncontrolling interests | | 548,503 | | | 540,669 | | Total equity and noncontrolling interests | | 585,196 | | | 540,669 | |
Total liabilities, equity and noncontrolling interests | Total liabilities, equity and noncontrolling interests | | $ | 1,763,020 | | | $ | 1,686,890 | | Total liabilities, equity and noncontrolling interests | | $ | 1,834,430 | | | $ | 1,686,890 | |
| See accompanying notes to condensed consolidated financial statements | See accompanying notes to condensed consolidated financial statements | See accompanying notes to condensed consolidated financial statements |
| Cottonwood Communities, Inc. | Cottonwood Communities, Inc. | Cottonwood Communities, Inc. |
Condensed Consolidated Statements of Operations | Condensed Consolidated Statements of Operations | Condensed Consolidated Statements of Operations |
(Unaudited) | (Unaudited) | (Unaudited) |
(in thousands, except share and per share data) | (in thousands, except share and per share data) | (in thousands, except share and per share data) |
| | | | | Three Months Ended March 31, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Revenues | Revenues | | | | | Revenues | | | | | | | |
Rental and other property revenues | Rental and other property revenues | | $ | 26,820 | | | $ | 3,172 | | Rental and other property revenues | $ | 28,603 | | | $ | 16,843 | | | $ | 55,423 | | | $ | 20,015 | |
Property management revenues | Property management revenues | | 3,124 | | | — | | Property management revenues | 2,703 | | | 2,121 | | | 5,826 | | | 2,121 | |
Other revenues | Other revenues | | 615 | | | 245 | | Other revenues | 634 | | | 277 | | | 1,249 | | | 523 | |
Total revenues | Total revenues | | 30,559 | | | 3,417 | | Total revenues | 31,940 | | | 19,241 | | | 62,498 | | | 22,659 | |
Operating expenses | Operating expenses | | Operating expenses | |
Property operations expense | Property operations expense | | 9,672 | | | 1,348 | | Property operations expense | 10,589 | | | 6,804 | | | 20,262 | | | 8,152 | |
Property management expense | Property management expense | | 4,952 | | | — | | Property management expense | 4,587 | | | 2,552 | | | 9,540 | | | 2,552 | |
Asset management fee | Asset management fee | | 3,792 | | | 886 | | Asset management fee | 4,348 | | | 1,442 | | | 8,139 | | | 2,328 | |
Performance participation allocation | Performance participation allocation | | 19,934 | | | — | | Performance participation allocation | 10,144 | | | 6,455 | | | 30,078 | | | 6,455 | |
Depreciation and amortization | Depreciation and amortization | | 11,268 | | | 1,338 | | Depreciation and amortization | 11,992 | | | 14,482 | | | 23,259 | | | 15,820 | |
General and administrative expenses | General and administrative expenses | | 3,223 | | | 2,503 | | General and administrative expenses | 3,352 | | | 2,264 | | | 6,575 | | | 4,769 | |
Total operating expenses | Total operating expenses | | 52,841 | | | 6,075 | | Total operating expenses | 45,012 | | | 33,999 | | | 97,853 | | | 40,076 | |
Loss from operations | Loss from operations | | (22,282) | | | (2,658) | | Loss from operations | (13,072) | | | (14,758) | | | (35,355) | | | (17,417) | |
Equity in earnings of unconsolidated real estate entities | | 2,670 | | | 951 | | |
Equity in earnings (losses) of unconsolidated real estate entities | | Equity in earnings (losses) of unconsolidated real estate entities | 4,052 | | | (652) | | | 6,723 | | | 299 | |
Interest income | Interest income | | 16 | | | — | | Interest income | 8 | | | 136 | | | 23 | | | 137 | |
Interest expense | Interest expense | | (11,117) | | | (1,330) | | Interest expense | (11,687) | | | (5,824) | | | (22,804) | | | (7,154) | |
Gain on sale of unconsolidated real estate entities | | Gain on sale of unconsolidated real estate entities | 7,634 | | | — | | | 7,634 | | | — | |
Promote from incentive allocation agreement | Promote from incentive allocation agreement | | 30,309 | | | — | | Promote from incentive allocation agreement | — | | | — | | | 30,309 | | | — | |
Loss on debt extinguishment | | (551) | | | — | | |
Other income | | 1,530 | | | 27 | | |
Gain (loss) on debt extinguishment, net | | Gain (loss) on debt extinguishment, net | 70 | | | — | | | (481) | | | — | |
Other income (expense) | | Other income (expense) | 290 | | | (9) | | | 1,819 | | | 18 | |
Income (loss) before income taxes | Income (loss) before income taxes | | 575 | | | (3,010) | | Income (loss) before income taxes | (12,705) | | | (21,107) | | | (12,132) | | | (24,117) | |
Income tax expense | Income tax expense | | (7,463) | | | — | | Income tax expense | (288) | | | (293) | | | (7,750) | | | (293) | |
Net loss | Net loss | | (6,888) | | | (3,010) | | Net loss | (12,993) | | | (21,400) | | | (19,882) | | | (24,410) | |
Net loss attributable to noncontrolling interests: | Net loss attributable to noncontrolling interests: | | Net loss attributable to noncontrolling interests: | |
Limited partners | Limited partners | | 3,828 | | | — | | Limited partners | 6,752 | | | 12,783 | | | 10,580 | | | 12,783 | |
Partially owned entities | Partially owned entities | | 55 | | | — | | Partially owned entities | 398 | | | 2,613 | | | 453 | | | 2,613 | |
Net loss attributable to common stockholders | Net loss attributable to common stockholders | | $ | (3,005) | | | $ | (3,010) | | Net loss attributable to common stockholders | $ | (5,843) | | | $ | (6,004) | | | $ | (8,849) | | | $ | (9,014) | |
| Weighted-average common shares outstanding | Weighted-average common shares outstanding | | 24,654,085 | | | 12,232,289 | | Weighted-average common shares outstanding | 27,156,490 | | | 12,492,221 | | | 25,912,200 | | | 12,362,973 | |
Net loss per common share - basic and diluted | Net loss per common share - basic and diluted | | $ | (0.12) | | | $ | (0.25) | | Net loss per common share - basic and diluted | $ | (0.22) | | | $ | (0.48) | | | $ | (0.34) | | | $ | (0.73) | |
| See accompanying notes to condensed consolidated financial statements | See accompanying notes to condensed consolidated financial statements | | See accompanying notes to condensed consolidated financial statements | |
| Cottonwood Communities, Inc. | Cottonwood Communities, Inc. | Cottonwood Communities, Inc. |
Condensed Consolidated Statements of Stockholders' Equity | Condensed Consolidated Statements of Stockholders' Equity | Condensed Consolidated Statements of Stockholders' Equity |
(Unaudited) | (Unaudited) | (Unaudited) |
(in thousands, except share data) | (in thousands, except share data) | (in thousands, except share data) |
| | | Cottonwood Communities, Inc. Stockholders' Equity | | Noncontrolling interests | | | Cottonwood Communities, Inc. Stockholders' Equity | | Noncontrolling interests | |
| | Par Value | Additional Paid-In Capital | Accumulated Distributions | Accumulated Deficit | Total Stockholders' Equity | | Limited Partners | Partially Owned Entities | Total Equity and Noncontrolling Interests | | Par Value | Additional Paid-In Capital | Accumulated Distributions | Accumulated Deficit | Total Stockholders' Equity | | Limited Partners | Partially Owned Entities | Total Equity and Noncontrolling Interests |
| | Shares | Common Stock Class T | Common Stock Class I | Common Stock Class A | Common Stock Class TX | | | Common Stock Class T | Common Stock Class D | Common Stock Class I | Common Stock Class A | Common Stock Class TX | |
Balance at January 1, 2022 | Balance at January 1, 2022 | 23,613,980 | | $ | — | | $ | 2 | | $ | 234 | | $ | — | | $ | 252,035 | | $ | (17,273) | | $ | (55,864) | | $ | 179,134 | | | $ | 291,258 | | $ | 70,277 | | $ | 540,669 | | Balance at January 1, 2022 | $ | — | | $ | — | | $ | 2 | | $ | 234 | | $ | — | | $ | 252,035 | | $ | (17,273) | | $ | (55,864) | | $ | 179,134 | | | $ | 291,258 | | $ | 70,277 | | $ | 540,669 | |
Issuance of common stock | Issuance of common stock | 1,839,600 | | 14 | | 4 | | — | | — | | 32,769 | | — | | — | | 32,787 | | | — | | — | | 32,787 | | Issuance of common stock | 14 | | — | | 4 | | — | | — | | 32,912 | | — | | — | | 32,930 | | | — | | — | | 32,930 | |
Offering costs | Offering costs | — | | — | | — | | — | | — | | (2,958) | | — | | — | | (2,958) | | | — | | — | | (2,958) | | Offering costs | — | | — | | — | | — | | — | | (2,958) | | — | | — | | (2,958) | | | — | | — | | (2,958) | |
Distribution reinvestment | Distribution reinvestment | 26,600 | | — | | — | | — | | — | | 607 | | — | | — | | 607 | | | — | | — | | 607 | | Distribution reinvestment | — | | — | | — | | — | | — | | 464 | | — | | — | | 464 | | | — | | — | | 464 | |
Common stock/OP Units repurchased | Common stock/OP Units repurchased | (183,049) | | — | | — | | (2) | | — | | (3,106) | | — | | — | | (3,108) | | | (286) | | — | | (3,394) | | Common stock/OP Units repurchased | — | | — | | — | | (2) | | — | | (3,106) | | — | | — | | (3,108) | | | (286) | | — | | (3,394) | |
Contributions from noncontrolling interests | Contributions from noncontrolling interests | — | | — | | — | | — | | — | | — | | — | | — | | — | | | — | | 662 | | 662 | | Contributions from noncontrolling interests | — | | — | | — | | — | | — | | — | | — | | — | | — | | | — | | 662 | | 662 | |
Share-based compensation | Share-based compensation | — | | — | | — | | — | | — | | — | | — | | — | | — | | | 865 | | — | | 865 | | Share-based compensation | — | | — | | — | | — | | — | | — | | — | | — | | — | | | 865 | | — | | 865 | |
Distributions to investors | Distributions to investors | — | | — | | — | | — | | — | | — | | (4,314) | | — | | (4,314) | | | (5,460) | | (4,073) | | (13,847) | | Distributions to investors | — | | — | | — | | — | | — | | — | | (4,314) | | — | | (4,314) | | | (5,460) | | (4,073) | | (13,847) | |
Net loss | Net loss | — | | — | | — | | — | | — | | — | | — | | (3,005) | | (3,005) | | | (3,828) | | (55) | | (6,888) | | Net loss | — | | — | | — | | — | | — | | — | | — | | (3,005) | | (3,005) | | | (3,828) | | (55) | | (6,888) | |
Balance at March 31, 2022 | Balance at March 31, 2022 | 25,297,131 | | $ | 14 | | $ | 6 | | $ | 232 | | $ | — | | $ | 279,347 | | $ | (21,587) | | $ | (58,869) | | $ | 199,143 | | | $ | 282,549 | | $ | 66,811 | | $ | 548,503 | | Balance at March 31, 2022 | $ | 14 | | $ | — | | $ | 6 | | $ | 232 | | $ | — | | $ | 279,347 | | $ | (21,587) | | $ | (58,869) | | $ | 199,143 | | | $ | 282,549 | | $ | 66,811 | | $ | 548,503 | |
| Issuance of common stock | | Issuance of common stock | 15 | | — | | 12 | | — | | — | | 53,522 | | — | | — | | 53,549 | | | — | | — | | 53,549 | |
Offering costs | | Offering costs | — | | — | | — | | — | | — | | (4,211) | | — | | — | | (4,211) | | | — | | — | | (4,211) | |
Distribution reinvestment | | Distribution reinvestment | — | | — | | — | | 1 | | — | | 656 | | — | | — | | 657 | | | — | | — | | 657 | |
Common stock/OP Units repurchased | | Common stock/OP Units repurchased | — | | — | | — | | (3) | | — | | (5,591) | | — | | — | | (5,594) | | | (445) | | — | | (6,039) | |
Contributions from noncontrolling interests | | Contributions from noncontrolling interests | — | | — | | — | | — | | — | | — | | — | | — | | — | | | — | | 15,444 | | 15,444 | |
Share-based compensation | | Share-based compensation | — | | — | | — | | — | | — | | — | | — | | — | | — | | | 731 | | — | | 731 | |
Distributions to investors | | Distributions to investors | — | | — | | — | | — | | — | | — | | (4,765) | | — | | (4,765) | | | (5,558) | | (122) | | (10,445) | |
Net loss | | Net loss | — | | — | | — | | — | | — | | — | | — | | (5,843) | | (5,843) | | | (6,752) | | (398) | | (12,993) | |
Balance at June 30, 2022 | | Balance at June 30, 2022 | $ | 29 | | $ | — | | $ | 18 | | $ | 230 | | $ | — | | $ | 323,723 | | $ | (26,352) | | $ | (64,712) | | $ | 232,936 | | | $ | 270,525 | | $ | 81,735 | | $ | 585,196 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cottonwood Communities, Inc. Stockholders' Equity | | | Noncontrolling interests | |
| Par Value | Additional Paid-In Capital | Accumulated Distributions | Accumulated Deficit | Total Stockholders' Equity | | Limited Partners | Partially Owned Entities | Total Equity and Noncontrolling Interests |
| Shares | Common Stock Class T | Common Stock Class I | Common Stock Class A | Common Stock Class TX | |
Balance at January 1, 2021 | 12,232,289 | | $ | — | | $ | — | | $ | 122 | | $ | — | | $ | 121,677 | | $ | (7,768) | | $ | (11,948) | | $ | 102,083 | | | $ | — | | $ | — | | $ | 102,083 | |
Share-based compensation | — | | — | | — | | — | | — | | 45 | | — | | — | | 45 | | | — | | — | | 45 | |
Distributions to investors | — | | — | | — | | — | | — | | — | | (1,511) | | — | | (1,511) | | | — | | — | | (1,511) | |
Net loss | — | | — | | — | | — | | — | | — | | — | | (3,010) | | (3,010) | | | — | | — | | (3,010) | |
Balance at March 31, 2021 | 12,232,289 | | $ | — | | $ | — | | $ | 122 | | $ | — | | $ | 121,722 | | $ | (9,279) | | $ | (14,958) | | $ | 97,607 | | | $ | — | | $ | — | | $ | 97,607 | |
| | | | | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cottonwood Communities, Inc. |
Condensed Consolidated Statements of Stockholders' Equity (Continued) |
(Unaudited) |
(in thousands, except share data) |
| | | | | | | | | | | | | |
| Cottonwood Communities, Inc. Stockholders' Equity | | | Noncontrolling interests | |
| Par Value | Additional Paid-In Capital | Accumulated Distributions | Accumulated Deficit | Total Stockholders' Equity | | Limited Partners | Partially Owned Entities | Total Equity and Noncontrolling Interests |
| Common Stock Class T | Common Stock Class D | Common Stock Class I | Common Stock Class A | Common Stock Class TX | |
Balance at January 1, 2021 | $ | — | | $ | — | | $ | — | | $ | 122 | | $ | — | | $ | 121,677 | | $ | (7,768) | | $ | (11,948) | | $ | 102,083 | | | $ | — | | $ | — | | $ | 102,083 | |
Share-based compensation | — | | — | | — | | — | | — | | 45 | | — | | — | | 45 | | | — | | — | | 45 | |
Distributions to investors | — | | — | | — | | — | | — | | — | | (1,511) | | — | | (1,511) | | | — | | — | | (1,511) | |
Net loss | — | | — | | — | | — | | — | | — | | — | | (3,010) | | (3,010) | | | — | | — | | (3,010) | |
Balance at March 31, 2021 | — | | — | | — | | 122 | | — | | 121,722 | | (9,279) | | (14,958) | | 97,607 | | | — | | — | | 97,607 | |
CRII Merger | — | | — | | — | | 4 | | — | | 4,654 | | — | | — | | 4,658 | | | 363,278 | | 221,656 | | 589,592 | |
Contributions from noncontrolling interests | — | | — | | — | | — | | — | | — | | — | | — | | — | | | — | | 83 | | 83 | |
Share-based compensation | — | | — | | — | | — | | — | | — | | — | | — | | — | | | 421 | | — | | 421 | |
Other | — | | — | | — | | — | | — | | (200) | | — | | — | | (200) | | | — | | — | | (200) | |
Distributions to investors | — | | — | | — | | — | | — | | — | | (1,546) | | — | | (1,546) | | | (2,312) | | (1,256) | | (5,114) | |
Net loss | — | | — | | — | | — | | — | | — | | — | | (6,004) | | (6,004) | | | (12,783) | | (2,613) | | (21,400) | |
Balance at June 30, 2021 | $ | — | | $ | — | | $ | — | | $ | 126 | | $ | — | | $ | 126,176 | | $ | (10,825) | | $ | (20,962) | | $ | 94,515 | | | $ | 348,604 | | $ | 217,870 | | $ | 660,989 | |
| | | | | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements | | | | |
| Cottonwood Communities, Inc. | Cottonwood Communities, Inc. | Cottonwood Communities, Inc. |
Condensed Consolidated Statements of Cash Flows | Condensed Consolidated Statements of Cash Flows | Condensed Consolidated Statements of Cash Flows |
(Unaudited) | (Unaudited) | (Unaudited) |
(in thousands) | (in thousands) | (in thousands) |
| | | Three Months Ended March 31, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Cash flows from operating activities: | Cash flows from operating activities: | | | | | Cash flows from operating activities: | | | | |
Net loss | Net loss | | $ | (6,888) | | | $ | (3,010) | | Net loss | | $ | (19,882) | | | $ | (24,410) | |
Adjustments to reconcile net loss to net cash used in operating activities: | Adjustments to reconcile net loss to net cash used in operating activities: | | Adjustments to reconcile net loss to net cash used in operating activities: | |
Depreciation and amortization | Depreciation and amortization | | 11,268 | | | 1,338 | | Depreciation and amortization | | 23,259 | | | 15,820 | |
Gain on sale of investments in unconsolidated real estate entities | | Gain on sale of investments in unconsolidated real estate entities | | (7,634) | | | — | |
Share-based compensation | Share-based compensation | | 865 | | | 45 | | Share-based compensation | | 1,596 | | | 466 | |
Other operating | Other operating | | 1,312 | | | 350 | | Other operating | | 3,014 | | | 697 | |
Loss on debt extinguishment | Loss on debt extinguishment | | 551 | | | — | | Loss on debt extinguishment | | 481 | | | — | |
Equity in earnings of unconsolidated real estate entities | Equity in earnings of unconsolidated real estate entities | | (2,670) | | | (951) | | Equity in earnings of unconsolidated real estate entities | | (6,723) | | | (299) | |
Distributions from unconsolidated real estate entities - return on capital | Distributions from unconsolidated real estate entities - return on capital | | 2,235 | | | — | | Distributions from unconsolidated real estate entities - return on capital | | 6,423 | | | 800 | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Other assets | Other assets | | (1,170) | | | 401 | | Other assets | | (3,498) | | | (1,225) | |
Performance participation allocation | Performance participation allocation | | 19,934 | | | — | | Performance participation allocation | | 30,078 | | | 6,455 | |
Performance participation allocation payment | Performance participation allocation payment | | (51,761) | | | — | | Performance participation allocation payment | | (51,761) | | | — | |
Accounts payable, accrued expenses and other liabilities | Accounts payable, accrued expenses and other liabilities | | 11,518 | | | 1,625 | | Accounts payable, accrued expenses and other liabilities | | 17,439 | | | 7,503 | |
Net cash used in operating activities | | (14,806) | | | (202) | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | | (7,208) | | | 5,807 | |
Cash flows from investing activities: | Cash flows from investing activities: | | | | | Cash flows from investing activities: | | | | |
Acquisitions of real estate, net of cash acquired | | Acquisitions of real estate, net of cash acquired | | (93,985) | | | — | |
Cash, cash equivalents and restricted cash acquired in connection with the CRII Merger | | Cash, cash equivalents and restricted cash acquired in connection with the CRII Merger | | — | | | 51,943 | |
Capital expenditures and development activities | Capital expenditures and development activities | | (18,488) | | | (36) | | Capital expenditures and development activities | | (31,341) | | | (22,322) | |
Investments in unconsolidated real estate entities | Investments in unconsolidated real estate entities | | (197) | | | (2,512) | | Investments in unconsolidated real estate entities | | (197) | | | (11,262) | |
Proceeds from sale of investments in unconsolidated real estate entities | | Proceeds from sale of investments in unconsolidated real estate entities | | 28,734 | | | — | |
Distributions from unconsolidated real estate entities - return on capital | Distributions from unconsolidated real estate entities - return on capital | | 38,769 | | | — | | Distributions from unconsolidated real estate entities - return on capital | | 38,769 | | | — | |
Contributions to investments in real-estate related loans | Contributions to investments in real-estate related loans | | — | | | (824) | | Contributions to investments in real-estate related loans | | — | | | (6,319) | |
Proceeds from settlement of investments in real-estate related loans | | Proceeds from settlement of investments in real-estate related loans | | — | | | 9,332 | |
Other investing activities | | Other investing activities | | — | | | 178 | |
Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | | 20,084 | | | (3,372) | | Net cash provided by (used in) investing activities | | (58,020) | | | 21,550 | |
| Cottonwood Communities, Inc. | Cottonwood Communities, Inc. | Cottonwood Communities, Inc. |
Condensed Consolidated Statements of Cash Flows (Continued) | Condensed Consolidated Statements of Cash Flows (Continued) | Condensed Consolidated Statements of Cash Flows (Continued) |
(Unaudited) | (Unaudited) | (Unaudited) |
(in thousands) | (in thousands) | (in thousands) |
| | Three Months Ended March 31, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Cash flows from financing activities: | Cash flows from financing activities: | | | | | Cash flows from financing activities: | | | | |
Principal payments on mortgage notes | Principal payments on mortgage notes | | (404) | | | — | | Principal payments on mortgage notes | | (793) | | | (78) | |
Borrowings from revolving credit facility | Borrowings from revolving credit facility | | 52,800 | | | 3,500 | | Borrowings from revolving credit facility | | 138,000 | | | 3,500 | |
Repayments on revolving credit facility | Repayments on revolving credit facility | | (72,800) | | | (5,000) | | Repayments on revolving credit facility | | (98,000) | | | (15,000) | |
Borrowings under mortgage notes and term loans | Borrowings under mortgage notes and term loans | | 369,500 | | | — | | Borrowings under mortgage notes and term loans | | 464,372 | | | — | |
Repayments of mortgage notes and term loans | Repayments of mortgage notes and term loans | | (218,693) | | | — | | Repayments of mortgage notes and term loans | | (231,177) | | | — | |
Deferred financing costs on mortgage notes and term loans | Deferred financing costs on mortgage notes and term loans | | (4,036) | | | — | | Deferred financing costs on mortgage notes and term loans | | (4,931) | | | — | |
Borrowings from construction loans | Borrowings from construction loans | | 9,178 | | | — | | Borrowings from construction loans | | 22,915 | | | 16,700 | |
Repayments of construction loans | Repayments of construction loans | | (59,660) | | | — | | Repayments of construction loans | | (59,660) | | | — | |
Proceeds from issuance of Series 2019 Preferred Stock | Proceeds from issuance of Series 2019 Preferred Stock | | 14,162 | | | 10,427 | | Proceeds from issuance of Series 2019 Preferred Stock | | 15,472 | | | 30,486 | |
Redemption of preferred stock | Redemption of preferred stock | | (2,738) | | | — | | Redemption of preferred stock | | (142,616) | | | (623) | |
Offering costs paid on issuance of preferred stock | Offering costs paid on issuance of preferred stock | | (1,693) | | | (1,064) | | Offering costs paid on issuance of preferred stock | | (1,708) | | | (3,222) | |
Repurchase of unsecured promissory notes | Repurchase of unsecured promissory notes | | (96) | | | — | | Repurchase of unsecured promissory notes | | (96) | | | — | |
Proceeds from issuance of common stock | Proceeds from issuance of common stock | | 33,395 | | | — | | Proceeds from issuance of common stock | | 87,600 | | | — | |
Repurchase of common stock/OP Units | Repurchase of common stock/OP Units | | (3,394) | | | — | | Repurchase of common stock/OP Units | | (9,432) | | | — | |
Offering costs paid on issuance of common stock | Offering costs paid on issuance of common stock | | (2,959) | | | — | | Offering costs paid on issuance of common stock | | (7,170) | | | — | |
Contributions from noncontrolling interests | Contributions from noncontrolling interests | | 662 | | | — | | Contributions from noncontrolling interests | | 11,758 | | | — | |
Distributions to common stockholders | Distributions to common stockholders | | (4,174) | | | (1,503) | | Distributions to common stockholders | | (8,774) | | | (3,049) | |
Distributions to noncontrolling interests - limited partners | Distributions to noncontrolling interests - limited partners | | (5,460) | | | — | | Distributions to noncontrolling interests - limited partners | | (11,018) | | | (2,156) | |
Distributions to noncontrolling interests - partially owned entities | Distributions to noncontrolling interests - partially owned entities | | (4,073) | | | — | | Distributions to noncontrolling interests - partially owned entities | | (4,195) | | | (1,265) | |
Net cash provided by financing activities | Net cash provided by financing activities | | 99,517 | | | 6,360 | | Net cash provided by financing activities | | 160,547 | | | 25,293 | |
Net increase in cash and cash equivalents and restricted cash | Net increase in cash and cash equivalents and restricted cash | | 104,795 | | | 2,786 | | Net increase in cash and cash equivalents and restricted cash | | 95,319 | | | 52,650 | |
Cash and cash equivalents and restricted cash, beginning of period | Cash and cash equivalents and restricted cash, beginning of period | | 45,390 | | | 4,633 | | Cash and cash equivalents and restricted cash, beginning of period | | 45,390 | | | 4,633 | |
Cash and cash equivalents and restricted cash, end of period | Cash and cash equivalents and restricted cash, end of period | | $ | 150,185 | | | $ | 7,419 | | Cash and cash equivalents and restricted cash, end of period | | $ | 140,709 | | | $ | 57,283 | |
| Reconciliation of cash and cash equivalents and restricted cash to the condensed consolidated balance sheets: | Reconciliation of cash and cash equivalents and restricted cash to the condensed consolidated balance sheets: | | Reconciliation of cash and cash equivalents and restricted cash to the condensed consolidated balance sheets: | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 121,890 | | | $ | 7,134 | | Cash and cash equivalents | | $ | 72,640 | | | $ | 37,507 | |
Restricted cash | Restricted cash | | 28,295 | | | 285 | | Restricted cash | | 68,069 | | | 19,776 | |
Total cash and cash equivalents and restricted cash | Total cash and cash equivalents and restricted cash | | $ | 150,185 | | | $ | 7,419 | | Total cash and cash equivalents and restricted cash | | $ | 140,709 | | | $ | 57,283 | |
| Supplemental disclosure of non-cash investing and financing activities: | | Supplemental disclosure of non-cash investing and financing activities: | |
Fair value of assets acquired and liabilities assumed with the CRII Merger: | | Fair value of assets acquired and liabilities assumed with the CRII Merger: | |
Real estate assets | | Real estate assets | | $ | — | | | $ | 1,291,030 | |
Investments in unconsolidated real estate entities | | Investments in unconsolidated real estate entities | | $ | — | | | $ | 120,775 | |
Intangibles | | Intangibles | | $ | — | | | $ | 32,122 | |
Debt | | Debt | | $ | — | | | $ | 734,852 | |
Preferred stock | | Preferred stock | | $ | — | | | $ | 143,979 | |
Other assets acquired | | Other assets acquired | | $ | — | | | $ | 62,147 | |
Other liabilities assumed | | Other liabilities assumed | | $ | — | | | $ | 40,926 | |
Fair value of equity issued to CRII Shareholders in the CRII Merger | | Fair value of equity issued to CRII Shareholders in the CRII Merger | | $ | — | | | $ | 4,658 | |
Fair value of noncontrolling interests from the CRII Merger | | Fair value of noncontrolling interests from the CRII Merger | | $ | — | | | $ | 581,659 | |
| See accompanying notes to condensed consolidated financial statements | See accompanying notes to condensed consolidated financial statements | See accompanying notes to condensed consolidated financial statements |
Cottonwood Communities, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.Organization and Business
Cottonwood Communities, Inc. (the “Company,” “CCI,” “we,” “us,” or “our”) invests in a diverse portfolio of multifamily apartment communities and multifamily real estate-related assets throughout the United States. We are externally managed by our advisor, CC Advisors III, LLC (“CC Advisors III”), a wholly-owned subsidiary of our sponsor, Cottonwood Communities Advisors, LLC (“CCA”). We were incorporated in Maryland in 2016. We hold all of our assets through our Operating Partnership. Our Operating Partnership was Cottonwood Communities O.P., LP (“CCOP”) prior to the CRII Merger (as defined below) and isoperating partnership, Cottonwood Residential O.P., LP (“CROP”) after the CRII Merger, as described below. The Operating Partnership,. CROP, together with its subsidiaries, holds the Company's real estate interests and conducts the ongoing operations of the Company. We are the sole member of the sole general partner of the Operating PartnershipCROP and own general partner interests in the Operating PartnershipCROP alongside third party limited partners.
We are a non-traded perpetual-life, net asset value (“NAV”) real estate investment trust (“REIT”). We qualified as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2019. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent we annually distribute all of our net taxable income to stockholders and maintain our qualification as a REIT.
From August 13, 2018 to December 22, 2020 we conducted an initial public offering of our common stock (the “Initial Offering”), for which receivedwe raised gross proceeds of $122.0 million. The Initial Offering ended in December 2020 as we pursued the 2021 Mergers described below. On November 4, 2021, after the 2021 Mergers (defined below) were completed, we registered with the SEC an offering of up to $1.0 billion of shares of common stock (the “Follow-on Offering”), consisting of up to $900.0 million in shares of common stock offered in a primary offering (the “Primary Offering”) and $100.0 million in shares under our distribution reinvestment plan (the “DRP Offering”). As of June 30, 2022, we have raised gross proceeds of $90.3 million from the Follow-on Offering, including proceeds from the DRP Offering.
On November 8, 2019, we commenced a private placement offering exempt from registration under the Securities Act pursuant to which we offered a maximum of $128.0 million in shares of Series 2019 Preferred Stock to accredited investors at a purchase price of $10.00 per share (the "Private Offering"“Private Offering”). As of March 31, 2022, we had received gross proceeds of $127.3 million from theThe Private Offering. The offeringOffering was fully subscribed in March 2022.2022, having received gross proceeds of $127.0 million.
We own and operate a diverse portfolio of investments in multifamily apartment communities located in targeted markets throughout the United States. As of March 31,June 30, 2022, our portfolio consists of ownership interests or structured investment interests in 33 multifamily apartment communities with a total of 9,7469,670 units, including 1,373 units in 4 multifamily apartment communities in which we have a structured investment interest and another 1,079 units in 4 multifamily apartment communities under construction.construction or recently completed and in lease-up. In addition, we have an ownership interest in 3 parcels of land planned for development.
The 2021 Mergers
On January 26, 2021, we entered into stock-for-stock and unit-for unit merger agreements with 3 affiliated REITs. The merger with Cottonwood Residential II, Inc. (“CRII,” the “CRII Merger”) closed on May 7, 2021. The merger with Cottonwood Multifamily REIT I, Inc. (“CMRI,” the “CMRI Merger”) closed on July 7, 2021. The merger with Cottonwood Multifamily REIT II, Inc. (“CMRII,” the “CMRII Merger”) also closed on July 7, 2021. We refer to the CRII Merger, the CMRI Merger and the CMRII Merger as the “2021 Mergers.”
CRII stockholders received (i) 2.015 shares of our Class A common stock in exchange for their shares of common stock, (ii) 1 share of our Series 2016 preferred stock in exchange for their CRII Series 2016 preferred stock, and (iii) 1 share of our Series 2017 preferred stock in exchange for their CRII Series 2017 preferred stock.
CROP, the Operating Partnershipoperating partnership of CRII, replaced CCOPCottonwood Communities O.P., LP (“CCOP”) as our Operating Partnership.operating partnership. The participating partnership units of CROP, which excluded preferred units, were split by a ratio of 2.015 (“CROP Unit Split”). Issued and outstanding partnership units of CCOP, which included Series 2019 Preferred units, LTIP units, Special LTIP units, general partner units and common limited partnership units converted into corresponding units at CROP, the terms of which were identical to the converted CCOP partnership unit.
After giving effect to the CROP Unit Split, each preferred unit, general partner unit, common limited partnership unit, and LTIP unit of CROP remained issued and outstandingoutstanding.
CMRI stockholders received 1.175 shares of our Class A common stock in exchange for their CMRI common stock. CMRII’s stockholders received 1.072 shares of our Class A common stock in exchange for their CMRII common stock. In connection with the mergers of the operating partnerships of each of CMRI and CMRII with and into CROP, the partnership units outstanding, which were split to equal the amount of the common stock outstanding, were converted into CROP common units at the same ratio as the common stock. Each asset held by CMRI and CMRII was owned through joint ventures with CROP. As a result of the consummation of the CMRI Merger and the CMRII Merger, our ownership interest in the properties held through joint ventures with CMRI and CMRII increased to 100% on July 15, 2021.
Through the 2021 Mergers we acquired interests in 22 stabilized multifamily apartment communities, 4 multifamily development projects, 1 structured investment, and land held for development. We also acquired CRII’s property management business and its employees, an advisory contract with Cottonwood Multifamily Opportunity Fund, Inc. (“CMOF”), and personnel who performed certain administrative and other services for us on behalf of CC Advisors III.
CC Advisors III continues to manage our business as our external advisor pursuant to an amended and restated advisory agreement. With the exception of our Chief Legal Officer, Chief Operating Officer, Chief Accounting Officer and Chief Development Officer, we do not employ our executive officers.
Much of our structure and agreements have changed materially as a result of the 2021 Mergers. Accordingly, information presented in these condensed consolidated financial statements may not be directly comparable to prior periods.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The condensed consolidated financial statements, including the condensed notes thereto, are unaudited and exclude some of the disclosures required in audited financial statements. The condensed consolidated balance sheet as of December 31, 2021 has been derived from the Company’s audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments and eliminations, consisting only of normal recurring adjustments necessary for a fair presentation in conformity with GAAP. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the period ending December 31, 2021 filed with the SEC.
The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries for which we have a controlling interest. All intercompany balances and transactions have been eliminated in consolidation.
Certain amounts in the prior year condensed consolidated financial statements and notes to the condensed consolidated financial statements have been reclassified to conform to the current year presentation. Such reclassifications did not impact previously reported net loss or accumulated deficit or change net cash provided by or used in operating, investing or financing activities.
Organization and Offering Costs
Organization and offering costs in the Initial Offering were paid by our advisor, which totaled $14.1 million. Organization and offering costs within the Follow-on Offering are paid by purchasers of the shares through an adjustment to the purchase price of the share or their distribution (depending on the class of share purchased) or by us. They are recorded as an offset to equity. As of March 31,June 30, 2022, approximately $4.7$8.9 million in organization and offering costs had been incurred in connection with the Follow-on Offering.
Organization and offering costs in the Private Offering for our Series 2019 Preferred Stock were paid by us. They are deferred and amortized up to the redemption date through interest expense. We incurred approximately $13.2 million of organization and offering costs related to the Private Offering, which was fully subscribed and terminated in March 2022.
Income Taxes
As a REIT, we are not subject to federal income tax with respect to the portion of our income that meets certain criteria and is distributed annually to stockholders. Taxable income from activities managed through our taxable REIT subsidiary (“TRS”) are subject to federal, state and local income taxes. Provision for such taxes has been included in income tax expense on our condensed consolidated statements of operations. In 2018, we entered into an incentive allocation agreement with a real estate firm who bought a portfolio of twelve assets from us. The agreement allowed us to participate in distributions from the portfolio should returns on the portfolio exceed certain amounts. In March 2022, the firm sold the portfolio and our TRS realized a promote distribution of $30.3 million. Income tax expense accrued for this discrete item was $7.3 million. In June 2022, the taxable gain from the promote was contributed to a Qualified Opportunity Zone fund, which provides tax benefits for development programs located in designated areas as established by Congress in the Tax Cuts and Jobs act of 2017. As a result, the $7.3 million income tax payable was reclassified to a deferred tax liability. We expect that this deferred tax liability will be realized in 2026.
3. Real Estate Assets, Net
The following table summarizes the carrying amounts of our consolidated real estate assets (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Land | $ | 202,531 | | | $ | 202,531 | |
Buildings and improvements | 1,076,901 | | | 1,074,126 | |
Furniture, fixtures and equipment | 43,629 | | | 37,463 | |
Intangible assets | 34,905 | | | 34,905 | |
Construction in progress (1) | 137,040 | | | 127,493 | |
| 1,495,006 | | | 1,476,518 | |
Less: Accumulated depreciation and amortization (2) | (78,453) | | | (68,035) | |
Real estate assets, net | $ | 1,416,553 | | | $ | 1,408,483 | |
| | | |
(1) Includes construction in progress for our development projects and capitalized costs for improvements not yet placed in service at our stabilized properties. |
(2) Includes the amortization of $33.2 million of in-place lease assets acquired with the CRII Merger over a period of six months in 2021. |
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Land | $ | 219,488 | | | $ | 202,531 | |
Buildings and improvements | 1,211,802 | | | 1,074,126 | |
Furniture, fixtures and equipment | 50,767 | | | 37,463 | |
Intangible assets | 37,176 | | | 34,905 | |
Construction in progress (1) | 89,180 | | | 127,493 | |
| 1,608,413 | | | 1,476,518 | |
Less: Accumulated depreciation and amortization (2) | (89,603) | | | (68,035) | |
Real estate assets, net | $ | 1,518,810 | | | $ | 1,408,483 | |
| | | |
(1) Includes construction in progress for our development projects and capitalized costs for improvements not yet placed in service at our stabilized properties. |
(2) Includes the amortization of $33.2 million of in-place lease assets acquired with the CRII Merger over a period of six months in 2021. |
Asset acquisitions
Cottonwood Lighthouse Point
On June 22, 2022, we acquired Cottonwood Lighthouse Point, a multifamily apartment community in Pompano Beach, Florida, for $95.5 million. We did not havefunded the purchase with debt of $48.0 million and available cash. Acquired assets and liabilities were recorded at relative fair value as an asset acquisition.
The following table summarizes the purchase price allocation of the real estate asset acquisitions or business combinations duringassets acquired in the three months ended March 31, 2022. Below is a description of the mergers that occurred in 2021.Cottonwood Lighthouse Point acquisition (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Allocated Amounts |
Property | Building | Land | Land Improvements | Personal Property | Lease Intangibles | Total |
Cottonwood Lighthouse Point | $76,322 | $13,647 | $1,843 | $2,011 | $1,783 | $95,606 |
The weighted-average amortization period for the intangible lease assets acquired in connection with the Cottonwood Lighthouse Point acquisition was 0.5 years.
Block C
On June 28, 2022, Block C, an early-stage development joint venture with CMOF, was recapitalized. Entities affiliated with us and our advisor contributed capital to the joint venture and were admitted as members. We contributed additional funds to obtain a controlling interest and consolidated the joint venture, which had previously been recorded as an equity method investment. The joint venture consists of cash, land held for development, and payables. Refer to Note 9 for further information on the Block C recapitalization.
CRII Merger
On May 7, 2021, we completed the CRII Merger, which was accounted for as a business combination in accordance with ASC 805, Business Combinations ("ASC 805"). Based on an evaluation of the relevant factors and the guidance in ASC 805, CCI was determined to be both the legal and accounting acquirer. In order to make this consideration, various factors were analyzed including which entity issued its equity interests, relative voting rights, existence of noncontrolling interests, control of the board of directors, management composition, relative size, transaction initiation, operational structure, relative composition of employees, and other factors. The most significant factor identified was the relative voting rights, as CCI stockholders hold the majority of the controlling financial (voting) interests. CCI also initiated the transaction and was the entity issuing common equity interests in the merger.
The consideration given in exchange for CRII was as follows ($ in thousands, except share and per share data):
| | | | | |
CRII Common stock issued and outstanding | 213,434 | |
Exchange ratio | 2.015 | |
CCI common stock issued as consideration | 430,070 | |
CCI's estimated value per share as of May 7, 2021 | $ | 10.83 | |
Value of CCI common stock issued as consideration | $ | 4,658 | |
The allocation of the purchase price below required significant judgment and represented management's best estimate of the fair value as of the acquisition date. The following table shows the purchase price allocation of CRII's identifiable asset and liabilities assumed as of May 7, 2021 ($ in thousands):
| | | | | |
Assets | |
Real estate assets (1) | $ | 1,291,030 | |
Investments in unconsolidated real estate entities | 120,775 | |
Cash and cash equivalents | 31,799 | |
Restricted cash | 20,144 | |
Other assets (2) | 42,325 | |
Total assets acquired | $ | 1,506,073 | |
| |
Liabilities | |
Mortgage notes, net | $ | 622,095 | |
Construction loans | 64,114 | |
Preferred stock | 143,979 | |
Unsecured promissory notes | 48,643 | |
Accounts payable, accrued expenses and other liabilities | 40,926 | |
Total liabilities assumed | 919,757 | |
Consolidated net assets acquired | 586,316 | |
Noncontrolling interests (3) | (581,659) | |
Net assets acquired | $ | 4,657 | |
|
(1) Real estate assets acquired in connection with the CRII Merger include $33.2 million of intangible lease assets, which have a weighted-average amortization period of 0.5 years. As such, based on the May 7, 2021 merger date, the intangible lease assets acquired from the CRII Merger have been fully amortized by December 31, 2021. |
(2) Other assets includes $32.1 million of intangible assets from the CRII Merger. Of this amount, $8.0 million relates to a promote asset which was removed upon the closing of the CMRI Merger and CMR II Merger on July 15, 2021. The remaining $24.1 million of intangible assets have a weighted-average amortization period of 8.8 years, and include $22.2 million related to the acquisition of CRII's property management and ancillary businesses (with a weighted-average amortization period of 9.2 years) and $1.9 million related to acquired disposition fees on certain properties and promotes on development assets (with a weighted-average amortization period of 3.8 years). |
(3) The fair value of noncontrolling interests is based on the fair value of assets and liabilities held by the noncontrolling interests at their ownership share. These values were determined using methods similar to those used by independent appraisers, and include using replacement cost estimates less depreciation, discounted cash flows, market comparisons, and direct capitalization of net operating income. |
As a result of the CRII Merger we consolidated 17 multifamily apartment communities and 4 development properties as well as added 6 multifamily apartment communities accounted for under the equity method of accounting.
The results of operations for the CRII Merger are included in the Company's statements of operations beginning on the May 7, 2021 merger closing date onward. For the threesix months ended March 31,June 30, 2022, the accompanying statements of operations include the following revenue and net income generated from the assets acquired and liabilities assumed with the CRII Merger (unaudited, in thousands):
| | | | | |
Revenue | $ | 26,39658,799 | |
Net income | $ | 20,11429,295 | |
Pro Forma Financial Information (unaudited)
The following condensed pro forma operating information is presented as if the CRII Merger occurred in 2020 and had been included in operations as of January 1, 2020. The pro forma operating information excludes certain nonrecurring adjustments, such as acquisition fees and expenses incurred, to reflect the pro forma impact the acquisition would have on earnings on a continuous basis (in(unaudited, in thousands):
| | | | | Three Months Ended March 31, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Pro forma revenue: | Pro forma revenue: | | | | | Pro forma revenue: | | | | | | | |
Historic results | Historic results | | $ | 30,559 | | | $ | 3,417 | | Historic results | $ | 31,940 | | | $ | 19,241 | | | $ | 62,498 | | | $ | 22,659 | |
CRII Merger (excluding those in historic results) | CRII Merger (excluding those in historic results) | | — | | | 25,147 | | CRII Merger (excluding those in historic results) | — | | | 11,510 | | | — | | | 36,657 | |
Total | Total | | $ | 30,559 | | | $ | 28,564 | | Total | $ | 31,940 | | | $ | 30,751 | | | $ | 62,498 | | | $ | 59,316 | |
| Pro forma net loss: | Pro forma net loss: | | Pro forma net loss: | |
Historic results | Historic results | | $ | (6,888) | | | $ | (3,010) | | Historic results | $ | (12,993) | | | $ | (21,400) | | | $ | (19,882) | | | $ | (24,410) | |
CRII Merger (excluding those in historic results) | CRII Merger (excluding those in historic results) | | — | | | (7,959) | | CRII Merger (excluding those in historic results) | — | | | (5,341) | | | — | | | (13,300) | |
Total | Total | | $ | (6,888) | | | $ | (10,969) | | Total | $ | (12,993) | | | $ | (26,741) | | | $ | (19,882) | | | $ | (37,710) | |
The pro forma information is not necessarily indicative of the results which actually would have occurred if the business combination had occurred on the first day of the periods presented, nor does the pro forma financial information purport to represent the results of operations for future periods.
CMRI Merger and CMRII Merger
With the closing of the CRII Merger in May 2021, we consolidated the properties that CMRI and CMRII invested in through joint ventures with CROP. As a result of the consummation of the CMRI Merger and the CMRII Merger in July 2021, our ownership interest in these properties increased to 100%. The acquisition of an additional ownership interest of a consolidated entity is accounted for as an equity transaction. Accordingly, CMRI's and CMRII's noncontrolling interest in the properties was reduced by its carrying amount and the difference between the carrying amount and the consideration paid was recorded as an adjustment to our equity through additional paid-in capital. Information regarding these equity transactions is as follows (in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | |
2021 Consideration | | | CMRI Merger | | CMRII Merger |
Common stock issued and outstanding | | | 4,904,045 | | | 4,881,490 | |
Exchange ratio | | | 1.175 | | | 1.072 | |
CCI common stock issued as consideration | | | 5,762,253 | | | 5,232,957 | |
Per share value of CCI Common Stock | | | $ | 11.7865 | | | $ | 11.7865 | |
Fair value of CCI Common Stock issued | | | $ | 67,917 | | | $ | 61,678 | |
Settlement of promote | | | 5,585 | | | 2,424 | |
Settlement of CMRI and CMRII promissory notes and interest with CROP | | | 1,545 | | | 2,475 | |
Net liabilities assumed | | | 2,223 | | | 1,477 | |
Total consideration | | | $ | 77,270 | | | $ | 68,054 | |
| | | | | |
2021 Change in equity | | | CMRI Merger | | CMRII Merger |
Carrying amount of noncontrolling interest | | | $ | 79,447 | | | $ | 63,752 | |
Total consideration | | | 77,270 | | | 68,054 | |
Additional paid in capital adjustment | | | $ | 2,177 | | | $ | (4,302) | |
| | | | | |
Fair value of CCI Common Stock issued | | | $ | 67,917 | | | $ | 61,678 | |
Additional paid in capital adjustment | | | 2,177 | | | (4,302) | |
Total change in equity | | | $ | 70,094 | | | $ | 57,376 | |
4. Investments in Unconsolidated Real Estate Entities
Our investments in unconsolidated real estate entities consist of ownership interests in stabilized properties and preferred equity investments as follows as of March 31,June 30, 2022 and December 31, 2021 (in thousands):
| | | Balance at | | Balance at |
Property / Development | Property / Development | Location | % Owned | | March 31, 2022 | | December 31, 2021 | Property / Development | Location | % Owned | | June 30, 2022 | | December 31, 2021 |
Stabilized Assets | Stabilized Assets | | | | Stabilized Assets | | | |
3800 Main(1) | 3800 Main(1) | Houston, TX | 50.0% | | $ | 10,227 | | | $ | 10,347 | | 3800 Main(1) | Houston, TX | 0% (1) | | $ | — | | | $ | 10,347 | |
Alpha Mill (1) | Charlotte, NC | 57.2% | | 21,876 | | | 22,034 | | |
Alpha Mill (2) (3) | | Alpha Mill (2) (3) | Charlotte, NC | 28.3% | | 10,595 | | | 22,034 | |
Cottonwood Bayview (1)(2) | Cottonwood Bayview (1)(2) | St. Petersburg, FL | 71.0% | | 31,450 | | | 31,399 | | Cottonwood Bayview (1)(2) | St. Petersburg, FL | 71.0% | | 31,430 | | | 31,399 | |
Cottonwood Ridgeview (1)(2) | Cottonwood Ridgeview (1)(2) | Plano, TX | 90.5% | | 3,881 | | | 34,352 | | Cottonwood Ridgeview (1)(2) | Plano, TX | 90.5% | | 2,548 | | | 34,352 | |
Fox Point (1)(2) | Fox Point (1)(2) | Salt Lake City, UT | 52.8% | | 15,742 | | | 16,056 | | Fox Point (1)(2) | Salt Lake City, UT | 52.8% | | 15,367 | | | 16,056 | |
Toscana at Valley Ridge (1)(2) | Toscana at Valley Ridge (1)(2) | Lewisville, TX | 58.6% | | 9,625 | | | 9,370 | | Toscana at Valley Ridge (1)(2) | Lewisville, TX | 58.6% | | 9,439 | | | 9,370 | |
Melrose Phase II (1)(2) | Melrose Phase II (1)(2) | Nashville, TN | 79.8% | | 6,945 | | | 15,523 | | Melrose Phase II (1)(2) | Nashville, TN | 79.8% | | 6,637 | | | 15,523 | |
Preferred Equity Investments | Preferred Equity Investments | | Preferred Equity Investments | |
Lector85 | Lector85 | Ybor City, FL | | 13,425 | | | 13,010 | | Lector85 | Ybor City, FL | | 13,858 | | | 13,010 | |
Vernon Boulevard | Vernon Boulevard | Queens, NY | | 18,658 | | | 18,079 | | Vernon Boulevard | Queens, NY | | 19,269 | | | 18,079 | |
Riverfront | Riverfront | West Sacramento, CA | | 17,569 | | | 16,884 | | Riverfront | West Sacramento, CA | | 18,289 | | | 16,884 | |
Other | Other | | 3,198 | | | 3,679 | | Other | | 1,374 | | | 3,679 | |
Total | Total | | $ | 152,596 | | | $ | 190,733 | | Total | | $ | 128,806 | | | $ | 190,733 | |
| (1) We account for our tenant-in-common interests in these properties as equity method investments. | |
(1) On June 23, 2022, 3800 Main was sold. We received $16.8 million in cash for the sale and recorded a gain on sale of $6.8 million. | | (1) On June 23, 2022, 3800 Main was sold. We received $16.8 million in cash for the sale and recorded a gain on sale of $6.8 million. |
(2) We account for our tenant-in-common interests in these properties as equity method investments. | | (2) We account for our tenant-in-common interests in these properties as equity method investments. |
(3) On April 7, 2022, we sold 28.9% of our ownership interest in Alpha Mill for $11.9 million to certain unaffiliated third parties and we recorded a gain on sale of $0.8 million related to the transaction, which reduced our remaining ownership in Alpha Mill to 28.3%. | | (3) On April 7, 2022, we sold 28.9% of our ownership interest in Alpha Mill for $11.9 million to certain unaffiliated third parties and we recorded a gain on sale of $0.8 million related to the transaction, which reduced our remaining ownership in Alpha Mill to 28.3%. |
Our investments in unconsolidated real estate entities for the stabilized assets above were acquired on May 7, 2021 as part of the CRII Merger. Equity in earnings (losses) for our stabilized assets for the three months ended March 31,June 30, 2022 and 2021 were $2.3 million and $(2.0) million, respectively. Equity in earnings for our stabilized assets for the six months ended June 30, 2022 was $0.8$3.3 million. Equity in losses for our stabilized and other assets during the period from the CRII Merger closing on May 7, 2021 to June 30, 2021 was $2.0 million. During the three months ended March 31, 2022, we received $30.4 million and $8.3 million in distributions as a return of capital from debt refinances at Cottonwood Ridgeview and Melrose Phase II, respectively.
Our preferred equity investments, which are in development projects, have liquidation rights and priorities that are different from ownership percentages. As such, equity in earnings is determined using the hypothetical liquidation book value ("HLBV"(“HLBV”) method. Equity in earnings for our preferred equity investments for the three months ended March 31,June 30, 2022 and 2021 were approximately $1.7$1.8 million and $1.0$1.4 million, respectively. Equity in earnings for our preferred equity investments for the six months ended June 30, 2022 and 2021 were $3.4 million and $2.3 million, respectively. By the end of 2021, we had fully funded our commitments on all of our preferred equity investments.
5. Debt
Mortgage Notes and Revolving Credit Facility
The following table is a summary of the mortgage notes and revolving credit facility secured by our properties as of March 31,June 30, 2022 and December 31, 2021 ($ in thousands):
| | | Principal Balance Outstanding | | Principal Balance Outstanding |
Indebtedness | Indebtedness | Weighted-Average Interest Rate | Weighted-Average Remaining Term (1) | March 31, 2022 | December 31, 2021 | Indebtedness | Weighted-Average Interest Rate | Weighted-Average Remaining Term (1) | June 30, 2022 | December 31, 2021 |
Fixed rate loans | Fixed rate loans | | Fixed rate loans | |
Fixed rate mortgages | Fixed rate mortgages | 3.68% | 4.5 Years | $ | 450,431 | | $ | 213,009 | | Fixed rate mortgages | 3.66% | 4.4 Years | $ | 428,396 | | $ | 213,009 | |
Total fixed rate loans | Total fixed rate loans | | 450,431 | | 213,009 | | Total fixed rate loans | | 428,396 | | 213,009 | |
Variable rate loans (2) | Variable rate loans (2) | | Variable rate loans (2) | |
Floating rate mortgages | Floating rate mortgages | 2.44% | 6.5 Years | 321,592 | | 407,022 | | Floating rate mortgages | 3.24% | 7.2 Years | 426,130 | | 407,022 | |
Variable rate revolving credit facility (3) | Variable rate revolving credit facility (3) | 1.85% | 3.0 Years | — | | 20,000 | | Variable rate revolving credit facility (3) | 2.98% | 2.7 Years | 60,000 | | 20,000 | |
Total variable rate loans | Total variable rate loans | | 321,592 | | 427,022 | | Total variable rate loans | | 486,130 | | 427,022 | |
Total secured loans | Total secured loans | | 772,023 | | 640,031 | | Total secured loans | | 914,526 | | 640,031 | |
Unamortized debt issuance costs | Unamortized debt issuance costs | | (4,712) | | (940) | | Unamortized debt issuance costs | | (5,679) | | (940) | |
Premium on assumed debt, net | Premium on assumed debt, net | | 1,750 | | 3,016 | | Premium on assumed debt, net | | 1,574 | | 3,016 | |
Mortgage notes and revolving credit facility, net | Mortgage notes and revolving credit facility, net | | $ | 769,061 | | $ | 642,107 | | Mortgage notes and revolving credit facility, net | | $ | 910,421 | | $ | 642,107 | |
| (1) For loans where we have the ability to exercise extension options at our own discretion, the maximum maturity date has been assumed. | (1) For loans where we have the ability to exercise extension options at our own discretion, the maximum maturity date has been assumed. | (1) For loans where we have the ability to exercise extension options at our own discretion, the maximum maturity date has been assumed. |
(2) The interest rate of our variable rate loans is primarily based on one-month LIBOR or one-month SOFR. | (2) The interest rate of our variable rate loans is primarily based on one-month LIBOR or one-month SOFR. | (2) The interest rate of our variable rate loans is primarily based on one-month LIBOR or one-month SOFR. |
(3) We may obtain advances secured against Cottonwood One Upland and Parc Westborough up to $125.0 million on our variable rate revolving credit facility, as long as certain loan-to-value ratios and other requirements are maintained. | (3) We may obtain advances secured against Cottonwood One Upland and Parc Westborough up to $125.0 million on our variable rate revolving credit facility, as long as certain loan-to-value ratios and other requirements are maintained. | (3) We may obtain advances secured against Cottonwood One Upland and Parc Westborough up to $125.0 million on our variable rate revolving credit facility, as long as certain loan-to-value ratios and other requirements are maintained. |
We are in compliance with all covenants associated with our mortgage notes and revolving credit facility as of March 31,June 30, 2022.
Construction Loans
Information on our construction loans are as follows ($ in thousands):
| Development | Development | Interest Rate | Final Expiration Date | Loan Amount | Amount Drawn at March 31, 2022 | Development | Interest Rate | Final Expiration Date | Loan Amount | Amount Drawn at June 30, 2022 | Amount Drawn at December 31, 2021 |
Sugarmont (1) | | Sugarmont (1) | (1) | $ | — | | $ | 59,660 | |
Park Avenue | Park Avenue | One-Month USD Libor + 1.75% | November 30, 2023 | $ | 37,000 | | $ | 33,512 | | Park Avenue | One-Month USD Libor + 1.75% | November 30, 2023 | $ | 37,000 | | 34,727 | | 29,520 | |
Cottonwood on Broadway | Cottonwood on Broadway | One-Month USD Libor + 1.9% | May 15, 2024 | 44,625 | | 30,859 | | Cottonwood on Broadway | One-Month USD Libor + 1.9% | May 15, 2024 | 44,625 | | 34,612 | | 27,476 | |
Cottonwood on Highland | Cottonwood on Highland | One-Month USD Libor + 2.75% (1) | December 1, 2024 | 37,000 | | 1,803 | | Cottonwood on Highland | One-Month USD SOFR + 2.55% | May 1, 2029 | 44,250 | | 10,572 | | — | |
| | $ | 118,625 | | $ | 66,174 | | | $ | 125,875 | | $ | 79,911 | | $ | 116,656 | |
| (1) The Libor rate for the Cottonwood on Highland construction loan is subject to a minimum floating index embedded floor rate of 0.5%, resulting in a minimum interest rate of 3.25%. | |
(1) The Sugarmont construction loan was refinanced in January 2022 with a $105.0 million floating rate mortgage. | | (1) The Sugarmont construction loan was refinanced in January 2022 with a $105.0 million floating rate mortgage. |
Unsecured Promissory Notes, Net
CROP issued notes to foreign investors outside of the United States. These notes are unsecured and subordinate to all of CROP's debt. Each note has 2 one-year extension options during which the interest rate will increase 0.25% each additional period.
Information on our unsecured promissory notes are as follows ($ in thousands):
| | | Offering Size | Interest Rate | Maturity Date | March 31, 2022 | | Offering Size | Interest Rate | Maturity Date | June 30, 2022 | December 31, 2021 |
2017 6% Notes | 2017 6% Notes | $ | 35,000 | | 6.00% | December 31, 2022 | $ | 20,818 | | 2017 6% Notes | $ | 35,000 | | 6.00% | December 31, 2022 | $ | 20,818 | | $ | 20,918 | |
2019 6% Notes | 2019 6% Notes | 25,000 | | 6.00% | December 31, 2023 | 22,625 | | 2019 6% Notes | 25,000 | | 6.00% | December 31, 2023 | 22,625 | | 22,625 | |
| | $ | 60,000 | | | $ | 43,443 | | | $ | 60,000 | | | $ | 43,443 | | $ | 43,543 | |
The aggregate maturities, including amortizing principal payments on our debt for years subsequent to March 31,June 30, 2022 are as follows (in thousands):
| Year | Year | Total | Year | Total |
2022 (1) | 2022 (1) | $ | 55,518 | | 2022 (1) | $ | 56,344 | |
2023 (2) | 2023 (2) | 111,344 | | 2023 (2) | 173,293 | |
2024 | 2024 | 22,186 | | 2024 | 541 | |
2025 | 2025 | 2,877 | | 2025 | 2,910 | |
2026 | 2026 | 143,221 | | 2026 | 143,217 | |
Thereafter | Thereafter | 546,494 | | Thereafter | 661,575 | |
| | $ | 881,640 | | | $ | 1,037,880 | |
| (1) $20.8 million of the amount maturing in 2022 relates to the amount outstanding at March 31, 2022 on our 2017 6% Unsecured Promissory Notes. The maturity date on these notes can be extended for 2 one-year periods to a fully-extended maturity date of December 31, 2024. | |
(2) $22.6 million of the amount maturing in 2023 relates to the amount outstanding at March 31, 2022 on our 2019 6% Unsecured Promissory Notes. The maturity date on these notes can be extended for 2 one-year periods to a fully-extended maturity date of December 3,1 2025. | |
(1) $20.8 million of the amount maturing in 2022 relates to the amount outstanding at June 30, 2022 on our 2017 6% Unsecured Promissory Notes. The maturity date on these notes can be extended for 2 one-year periods to a fully-extended maturity date of December 31, 2024. | | (1) $20.8 million of the amount maturing in 2022 relates to the amount outstanding at June 30, 2022 on our 2017 6% Unsecured Promissory Notes. The maturity date on these notes can be extended for 2 one-year periods to a fully-extended maturity date of December 31, 2024. |
(2) $22.6 million of the amount maturing in 2023 relates to the amount outstanding at June 30, 2022 on our 2019 6% Unsecured Promissory Notes. The maturity date on these notes can be extended for 2 one-year periods to a fully-extended maturity date of December 31, 2025. An additional $60.0 million of the amount maturing in 2023 relates to the amount outstanding at June 30, 2022 on our variable rate revolving credit facility. The maturity date on the variable rate revolving credit facility can be extended for 2 one-year periods to a fully-extended maturity date of March 19, 2025, subject to the satisfaction of certain conditions. | | (2) $22.6 million of the amount maturing in 2023 relates to the amount outstanding at June 30, 2022 on our 2019 6% Unsecured Promissory Notes. The maturity date on these notes can be extended for 2 one-year periods to a fully-extended maturity date of December 31, 2025. An additional $60.0 million of the amount maturing in 2023 relates to the amount outstanding at June 30, 2022 on our variable rate revolving credit facility. The maturity date on the variable rate revolving credit facility can be extended for 2 one-year periods to a fully-extended maturity date of March 19, 2025, subject to the satisfaction of certain conditions. |
6. Fair Value of Financial Instruments
We estimate the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate. As of March 31,June 30, 2022 and December 31, 2021, the fair values of cash and cash equivalents, restricted cash, other assets, related party payables, and accounts payable, accrued expenses and other liabilities approximate their carrying values due to the short-term nature of these instruments.
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. Fair value measurements are categorized into one of three levels of the fair value hierarchy based on the lowest level of significant input used. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Considerable judgment and a high degree of subjectivity are involved in developing these estimates. These estimates may differ from the actual amounts that we could realize upon settlement.
The fair value hierarchy is as follows:
Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2 - Other observable inputs, either directly or indirectly, other than quoted prices included in Level 1, including:
•Quoted prices for similar assets/liabilities in active markets;
•Quoted prices for identical or similar assets/liabilities in non-active markets (e.g., few transactions, limited information, non-current prices, high variability over time);
•Inputs other than quoted prices that are observable for the asset/liability (e.g., interest rates, yield curves, volatility, default rates); and
•Inputs that are derived principally from or corroborated by other observable market data.
Level 3 - Unobservable inputs that cannot be corroborated by observable market data.
The table below includes the carrying value and fair value for our financial instruments for which it is practicable to estimate fair value (in thousands):
| | | March 31, 2022 | | December 31, 2021 | | June 30, 2022 | | December 31, 2021 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Financial Asset: | Financial Asset: | | | | | | | | | Financial Asset: | | | | | | | | |
Investments in real-estate related loans | Investments in real-estate related loans | | $ | 13,031 | | | $ | 13,031 | | | $ | 13,035 | | | $ | 13,035 | | Investments in real-estate related loans | | $ | 13,027 | | | $ | 13,027 | | | $ | 13,035 | | | $ | 13,035 | |
| Financial Liability: | Financial Liability: | | Financial Liability: | |
Fixed rate mortgages | Fixed rate mortgages | | $ | 450,431 | | | $ | 448,954 | | | $ | 213,009 | | | $ | 216,566 | | Fixed rate mortgages | | $ | 428,396 | | | $ | 417,869 | | | $ | 213,009 | | | $ | 216,566 | |
Floating rate mortgages | Floating rate mortgages | | $ | 321,592 | | | $ | 320,466 | | | $ | 407,022 | | | $ | 409,377 | | Floating rate mortgages | | $ | 426,130 | | | $ | 422,906 | | | $ | 407,022 | | | $ | 409,377 | |
Variable rate revolving credit facility | Variable rate revolving credit facility | | $ | — | | | $ | — | | | $ | 20,000 | | | $ | 20,000 | | Variable rate revolving credit facility | | $ | 60,000 | | | $ | 60,000 | | | $ | 20,000 | | | $ | 20,000 | |
Construction loans | Construction loans | | $ | 66,174 | | | $ | 66,174 | | | $ | 116,656 | | | $ | 116,656 | | Construction loans | | $ | 79,911 | | | $ | 79,911 | | | $ | 116,656 | | | $ | 116,656 | |
Series 2016 Preferred Stock | Series 2016 Preferred Stock | | $ | 139,838 | | | $ | 139,838 | | | $ | 139,996 | | | $ | 139,996 | | Series 2016 Preferred Stock | | $ | — | | | $ | — | | | $ | 139,996 | | | $ | 139,996 | |
Series 2017 Preferred Stock | Series 2017 Preferred Stock | | $ | — | | | $ | — | | | $ | 2,586 | | | $ | 2,586 | | Series 2017 Preferred Stock | | $ | — | | | $ | — | | | $ | 2,586 | | | $ | 2,586 | |
Series 2019 Preferred Stock | Series 2019 Preferred Stock | | $ | 127,335 | | | $ | 127,335 | | | $ | 111,863 | | | $ | 111,863 | | Series 2019 Preferred Stock | | $ | 127,295 | | | $ | 127,295 | | | $ | 111,863 | | | $ | 111,863 | |
Unsecured promissory notes | Unsecured promissory notes | | $ | 43,443 | | | $ | 43,443 | | | $ | 43,543 | | | $ | 43,543 | | Unsecured promissory notes | | $ | 43,443 | | | $ | 43,443 | | | $ | 43,543 | | | $ | 43,543 | |
Our investments in real-estate related loans, fixed and floating rate mortgages, variable rate revolving credit facility, construction loans, preferred stock and unsecured promissory notes are categorized as Level 3 in the fair value hierarchy.
8.7. Preferred Stock
Information on our preferred stock as of March 31,June 30, 2022 and December 31, 2021 is as follows:
| | | Shares Outstanding at | | Shares Outstanding at |
| | Dividend Rate | Extension Dividend Rate | Redemption Date | Maximum Extension Date | March 31, 2022 | December 31, 2021 | | Dividend Rate | Extension Dividend Rate | Redemption Date | Maximum Extension Date | June 30, 2022 | December 31, 2021 |
Series 2016 Preferred Stock (1) | Series 2016 Preferred Stock (1) | 6.5% | 7.0% | January 31, 2022 | January 31, 2023 | 13,983,810 | | 13,999,560 | | Series 2016 Preferred Stock (1) | 6.5% | 7.0% | January 31, 2022 | January 31, 2023 | — | | 13,999,560 | |
Series 2017 Preferred Stock (2) | Series 2017 Preferred Stock (2) | 7.5% | 8.0% | January 31, 2022 | January 31, 2024 | — | | 258,550 | | Series 2017 Preferred Stock (2) | 7.5% | 8.0% | January 31, 2022 | January 31, 2024 | — | | 258,550 | |
Series 2019 Preferred Stock | Series 2019 Preferred Stock | 5.5% | 6.0% | December 31, 2023 | December 31, 2025 | 12,733,485 | | 11,186,301 | | Series 2019 Preferred Stock | 5.5% | 6.0% | December 31, 2023 | December 31, 2025 | 12,729,485 | | 11,186,301 | |
| (1) As of March 31, 2022, we were in the second extension period on our Series 2016 Preferred Stock resulting in an extension dividend rate of 7.0%. Subsequent to March 31, 2022, we fully redeemed our Series 2016 Preferred Stock on April 18, 2022 for approximately $139.8 million. | |
(2) We fully redeemed our Series 2017 Preferred Stock immediately after the January 31, 2022 redemption date for approximately $2.6 million. | |
(1) We fully redeemed our Series 2016 Preferred Stock on April 18, 2022 for $139.8 million. | | (1) We fully redeemed our Series 2016 Preferred Stock on April 18, 2022 for $139.8 million. |
(2) We fully redeemed our Series 2017 Preferred Stock immediately after the January 31, 2022 redemption date for $2.6 million. | | (2) We fully redeemed our Series 2017 Preferred Stock immediately after the January 31, 2022 redemption date for $2.6 million. |
During the three months ended March 31, 2022 and 2021 we issued approximately $15.4 million and $10.8 million of Series 2019 Preferred Stock, respectively. The Private Offering for our Series 2019 Preferred Stock was fully subscribed and terminated in March 2022. We issued $15.4 million of our Series 2019 Preferred Stock in the first quarter of 2022 prior to the termination of the Private Offering. During the threesix months ended March 31,June 30, 2021 we issued $30.6 million of Series 2019 Preferred Stock. During the six months ended June 30, 2022 and 2021, we incurred approximately $1.7$3.4 million and $0.5$1.2 million in dividends on our Series 2019 Preferred Stock, respectively. During the threesix months ended March 31,June 30, 2022, we incurred approximately $2.4$2.9 million in dividends on our Series 2016 Preferred Stock prior to their full redemption on April 18, 2022, and we incurred an insignificant amount in dividends on our Series 2017 Preferred Stock prior to their full redemption immediately after the January 31, 2022 redemption date. During the period from the CRII Merger closing on May 7, 2021 to June 30, 2021, we incurred $1.5 million and $29,000 in dividends on our Series 2016 Preferred Stock and Series 2017 Preferred Stock, respectively.
NoDuring the six months ended June 30, 2022, we repurchased 4,000 shares of Series 2019 Preferred Stock were repurchased during the three months ended March 31, 2022. Wefor $40,000. Additionally, we fully redeemed our Series 2017 Preferred Stock immediately after the January 31, 2022 redemption date for approximately $2.6 million. During the three months ended March 31, 2022, we repurchased 15,750 shares of Series 2016 Preferred Stock for approximately $152,000. Subsequent to March 31, 2022,million and we fully redeemed our Series 2016 Preferred Stock on April 18, 2022 for approximately $139.8 million. During the six months ended June 30, 2021, we repurchased 10,000 shares of Series 2019 Preferred Stock for $0.1 million and during the period from the CRII Merger closing on May 7, 2021 to June 30, 2021 we repurchased 55,990 shares of Series 2016 Preferred Stock for $0.5 million.
8. Stockholders' Equity
Common Stock
The following table details the movement in the Company's outstanding shares for each class of common stock:
| | | Three Months Ended March 31, 2022 | | Six Months Ended June 30, 2022 |
| | | Class T | | Class I | | Class A | | Class TX | | Total | | Class T | | Class D | | Class I | | Class A | | Class TX | | Total |
December 31, 2021 | December 31, 2021 | | — | | | 151,286 | | | 23,445,174 | | | 17,520 | | | 23,613,980 | | December 31, 2021 | | — | | | — | | | 151,286 | | | 23,445,174 | | | 17,520 | | | 23,613,980 | |
Issuance of common stock | Issuance of common stock | | 1,383,323 | | | 456,277 | | | — | | | — | | | 1,839,600 | | Issuance of common stock | | 2,943,405 | | | 1,019 | | | 1,602,969 | | | — | | | — | | | 4,547,393 | |
Distribution reinvestment | Distribution reinvestment | | 19 | | | 456 | | | 26,120 | | | 5 | | | 26,600 | | Distribution reinvestment | | 1,481 | | | — | | | 1,491 | | | 49,811 | | | 10 | | | 52,793 | |
Repurchases of common stock | Repurchases of common stock | | — | | | — | | | (183,049) | | | — | | | (183,049) | | Repurchases of common stock | | — | | | — | | | — | | | (482,865) | | | — | | | (482,865) | |
March 31, 2022 | | 1,383,342 | | | 608,019 | | | 23,288,245 | | | 17,525 | | | 25,297,131 | | |
June 30, 2022 | | June 30, 2022 | | 2,944,885 | | | 1,019 | | | 1,755,746 | | | 23,012,120 | | | 17,530 | | | 27,731,301 | |
Common Stock Distributions
Distributions on our common stock are determined by the board of directors based on our financial condition and other relevant factors. Common stockholders may choose to receive cash distributions or purchase additional shares through our distribution reinvestment plan. For the threesix months ended March 31,June 30, 2022, we paid aggregate distributions of approximately $4.6$9.8 million, including $4.2$8.8 million distributions paid in cash and approximately $0.4$1.0 million of distributions reinvested through our distribution reinvestment plan. For the three months ended March 31, 2021, we paid aggregate distributions of approximately $1.5 million, all paid in cash due to our distribution reinvestment plan being suspended.
We declared the following monthly distributions for each share of our common stock as shown in the table below:
| Shareholder Record Date | Shareholder Record Date | Monthly Rate | Annually | Shareholder Record Date | Monthly Rate | Annually |
January 31, 2022 | January 31, 2022 | $ | 0.05833333 | | $ | 0.70 | | January 31, 2022 | $ | 0.05833333 | | $ | 0.70 | |
February 28, 2022 | February 28, 2022 | $ | 0.05916667 | | $ | 0.71 | | February 28, 2022 | $ | 0.05916667 | | $ | 0.71 | |
March 31, 2022 | March 31, 2022 | $ | 0.05916667 | | $ | 0.71 | | March 31, 2022 | $ | 0.05916667 | | $ | 0.71 | |
April 30, 2022 | | April 30, 2022 | $ | 0.05916667 | | $ | 0.71 | |
May 31, 2022 | | May 31, 2022 | $ | 0.06000000 | | $ | 0.72 | |
June 30, 2022 | | June 30, 2022 | $ | 0.06083333 | | $ | 0.73 | |
For the three months ended March 31, 2021, distributions were at a daily rate of $0.00013699, or $0.50 annually, per common share.
Repurchases
During the threesix months ended March 31,June 30, 2022, we repurchased 183,049482,865 shares of common stock pursuant to our share repurchase program for approximately $3.1$8.7 million, at an average repurchase price of $16.98. No shares of common stock were repurchased$18.02. We had no unfulfilled repurchase requests during the threesix months ended March 31, 2021.June 30, 2022.
9. Related-Party Transactions
Asset Management Fee
Under the amended and restated advisory agreement entered May 7, 2021 and renewed for an additional one-year term as of May 7, 2022, CROP pays our advisor a monthly management fee equal to 0.0625% of GAV (gross asset value of CROP, calculated pursuant to our valuation guidelines and reflective of the ownership interest held by CROP in such gross assets), subject to a cap of 0.125% of net asset value of CROP. Prior to May 7, 2021, we paid our advisor an annual asset management fee in an amount equal to 1.25% per annum (paid monthly) of the gross book value of our assets as of the last day of the prior month.
Asset management fees to our advisor for the three months ended March 31,June 30, 2022 and 2021 were approximately $3.8$4.3 million and $0.9$1.4 million, respectively. Asset management fees to our advisor for the six months ended June 30, 2022 and 2021 were $8.1 million and $2.3 million, respectively.
Performance Participation Allocation
CC Advisors - SLP, LLC, an affiliate of our advisor and the Special Limited Partner at CROP, holds a performance participation interest in CROP that entitles it to receive an allocation of CROP's total return to its capital account as long as the advisory agreement has not been terminated. Total return is defined as all distributions accrued or paid (without duplication) on the Participating Partnership units (all units in our Operating Partnership with the exception of preferred units) plus the change in the aggregate net asset value of such Participating Partnership units. Under the Operating Partnership agreement, the annual total return will be allocated solely to the Special Limited Partner only after the other unit holders have received a total return of 5% (after recouping any loss carryforward amount) and such allocation will continue until the allocation between the Special Limited Partner and all other unit holders is equal to 12.5% and 87.5%, respectively. Thereafter, the Special Limited Partner will receive an allocation of 12.5% of the annual total return. The allocation of the performance participation interest is ultimately determined at the end of each calendar year, accrues monthly and will be paid in cash or Class I units at the election of the Special Limited Partner after the completion of each calendar year.
On January 31, 2022, the performance participation allocation incurred during the period from the CRII Merger closing on May 7, 2021 to December 31, 2021 of $51.8 million was paid in cash. During the three and six months ended March 31,June 30, 2022, we recognized $19.9$10.1 million and $30.1 million, respectively, of performance participation expense as a result of the increase in the value of our net assets and dividends paid to stockholders. CROP's Operating Partnership agreement was amended with the CRII Merger in May 2021 to provide for the performance participation allocation. Therefore, no performance participation allocation was recognized prior to the CRII Merger.
Block C and Jasper Investments
On June 28, 2022, we, through our indirect subsidiaries, admitted entities affiliated with us and our advisor, Brickyard QOF, LLC (“Brickyard QOF”) and HV Millcreek, LLC (“Millcreek,” and together with Brickyard QOF, the “Affiliated Members”) as members in CW Block C, LLC, a development joint venture with CMOF, and CW Jasper, LLC, a development project owned 100% by CROP (“Jasper”). The Affiliated Members are owned directly or indirectly by our officers or directors , as well as certain employees of CROP and our advisor or its affiliates. In connection with their admission as members, the Affiliated Members made an aggregate capital contribution of $8.5 million and $2.4 million to Block C and Jasper, respectively. The Affiliated Members will participate in the economics of Block C and Jasper on the same terms and conditions as us. The operating agreements of Block C and Jasper were amended in August 2022 to reflect additional terms related to the admission of the Affiliated Members. Block C and Jasper are located in an Opportunity Zone, which provides tax benefits for development programs located in designated areas as established by Congress in the Tax Cuts and Jobs act of 2017.
10. Noncontrolling Interests
Noncontrolling Interests - Limited Partners
Common Limited OP Units and LTIP Units are CROP units not owned by CCIus and collectively referred to as “Noncontrolling Interests – Limited Partners.”
Common Limited OP Units - During the threesix months ended March 31,June 30, 2022, we paid aggregate distributions to noncontrolling OP Unit holders of $5.5$11.0 million. We did not have anyDuring the period from the CRII Merger closing on May 7, 2021 to June 30, 2021, we paid aggregate distributions to noncontrolling OP Unit holders during the three months ended March 31, 2021 as that period was prior to the CRII Merger.of $2.2 million.
LTIP Units - As of March 31,June 30, 2022, there were 806,482673,780 unvested time LTIP awards and 551,368548,138 unvested performance LTIP awards outstanding. Share-based compensation was approximately $0.9$1.6 million and $45,000$0.5 million for the threesix months ended March 31,June 30, 2022 and 2021, respectively. Total unrecognized compensation expense for LTIP Units at March 31,June 30, 2022 is approximately $10.9$10.0 million and is expected to be recognized on a straight-line basis through December 2025.
Noncontrolling Interests - Partially Owned Entities
As of March 31,June 30, 2022, noncontrolling interests in consolidated entities not wholly owned by us ranged from 1% to 81%, with the average being 24%22%.
We consolidated Block C on June 28, 2022, recording the Block C membership interests owned by CMOF and Affiliated Members as noncontrolling interests. Additional noncontrolling interests were recorded with the Affiliated Members contribution to Jasper, an entity that was already consolidated.
11. Commitments and Contingencies
Litigation
We are subject to a variety of legal actions in the ordinary course of our business, most of which are covered by liability insurance. While the resolution of these matters cannot be predicted with certainty, as of March 31,June 30, 2022, we believe the final outcome of such legal proceedings and claims will not have a material adverse effect on our liquidity, financial position or results of operations.
12. Subsequent Events
We evaluate subsequent events up until the date the condensed consolidated financial statements are issued and have determined there are none to be reported or disclosed in the condensed consolidated financial statements other than those mentioned below.
Series 2016 Preferred Stock PayoffMerger with Cottonwood Multifamily Opportunity Fund, Inc.
On July 8, 2022, we, CMOF, Cottonwood Multifamily Opportunity Fund O.P., LP (“CMOF OP”), CROP, and Cottonwood Communities GP Subsidiary, LLC, our wholly owned subsidiary (“Merger Sub”), entered into an Agreement and Plan of Merger (the “CMOF Merger Agreement”). Subject to the terms and conditions of the CMOF Merger Agreement, (i) CMOF will merge with and into Merger Sub, with Merger Sub surviving as our direct, wholly owned subsidiary (the “Company Merger”) and (ii) CMOF OP will merge with and into CROP, with CROP surviving (the “Partnership Merger” and, together with the Company Merger, the “CMOF Merger”). At such time, the separate existence of CMOF and CMOF OP will cease. The CMOF Merger Agreement was entered into after a thorough due diligence and negotiation process conducted by a special committee of CMOF’s board of directors, with the assistance of its advisors, and our conflicts committee, with the assistance of its advisors.
Our Series 2016 Preferred Stock was fully redeemed on April 18, 2022 for approximately $139.8 million, utilizing available cash on hand, cash from asset-level refinances, funds raised inAt the Follow-on Offeringeffective time of the Company Merger, each issued and a $70.0 million draw on our JP Morgan Revolving Credit facility.
Distributions Declared -outstanding share of CMOF’s common stock, $0.01 par value per share (the “CMOF Common Stock
On May 10, 2022, our board of directors declared a gross distribution forStock”) will be converted into the month of May of $0.06000000, or $0.72 annually, for each classright to receive 0.8669 shares of our Class A common stock, $0.01 par value per share. As of June 30, 2022, 5,001,000 shares of CMOF Common Stock were issued and outstanding. Shares of CMOF Common Stock held as of immediately prior to the effective time of the Company Merger by us, any wholly owned subsidiary of ours, or any wholly owned subsidiary of CMOF will be automatically canceled in connection with the Company Merger without receiving payment.
At the effective time of the Partnership Merger, each outstanding common unit of partnership interests in CMOF OP (“CMOF OP Partnership Unit”) will be converted into the right to receive 0.8669 common units of CROP (“CROP Common Units”). CMOF OP Partnership Units held as of immediately prior to the effective time of the Partnership Merger by us, any wholly owned subsidiary of ours, CMOF, or any wholly owned subsidiary of CMOF will be canceled in connection with the Partnership Merger without receiving payment.
The obligations of each party to consummate the CMOF Merger are subject to a number of conditions, including receipt of the approval of the Company Merger by the holders of record on May 31, 2022, to be paid in June. Each classa majority of ourthe outstanding shares of the CMOF common stock will receive the same aggregate gross distribution per share. The net distribution varies for each class based on applicable distribution fees, which are deducted from the monthly distribution per share and paid directly to the applicable distributor.stock.
Distributions Declared - CROP Units
As the sole member of the sole general partner of CROP, we declared distributions on Common Limited OP Units an Preferred OP Units to correspond to the distributions declared on our common stock and preferred stock.
Alpha Mill Transaction
On April 7, 2022, we sold to certain unaffiliated third parties approximately 28.9% of our 57.2% ownership interest in Alpha Mill apartments. We will retain at least a 20% ownership interest in Alpha Mill apartments under the terms of the offering and financing documents, and will also continue to provide property and asset management services. Among other material terms, the offering provides that each purchaser of an interest in Alpha Mill apartments will enter into an option agreement which provides us the right (but not the obligation) to re-acquire such purchasers interest at fair value beginning on October 31, 2023 (but only after any purchaser has owned their interest in Alpha Mill apartments for at least two years). The purchaser may elect to receive limited partnership units in CROP (our operating partnership) or cash in the event we exercise our option.
Financing Activities
On May 5, 2022, we completed a borrow-up on our 2018 Fannie Facility in the amount of $9.2 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
References herein to "Company,"“Company,” “we,” us,“us,” and “our” refer to Cottonwood Communities, Inc. together with its subsidiaries. The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes.
Forward-Looking Statements
This Quarterly Report on Form10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements about our business, including, in particular, statements about our plans, strategies and objectives. You can generally identify forward-looking statements by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. You should not rely on these forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our actual results, performance and achievements may be materially different from those expressed or implied by these forward-looking statements.
The following is a summary of the principal risks that could adversely affect our business, financial condition, results of operations and cash flows and an investment in our common stock.
•We depend on our advisor to identify suitable investments and to manage our investments. There is no assurance that we will be able to successfully achieve our investment objectives.
•Since there is no public trading market for shares of our common stock, the repurchase of shares by us will likely be the only way for our stockholders to dispose of their shares. Our share repurchase program will provide stockholders with the opportunity to request that we repurchase their shares on a monthly basis, but we are not obligated to repurchase any shares and may choose to repurchase only some, or even none, of the shares that have been requested to be repurchased in any particular month in our discretion. In addition, repurchases will be subject to available liquidity and other significant restrictions. Further, our board of directors may modify or suspend our share repurchase program if in its reasonable judgment it deems a suspension to be in our best interest and the best interest of our stockholders, such as when a repurchase request would place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on the company that would outweigh the benefit of the repurchase offer.
•The offering price and repurchase price for shares of our common stock are generally based on our prior month’s NAV (which will be our most recently disclosed NAV per share at such time) plus, in the case of our offering price, applicable upfront selling commissions and dealer manager fees, and are not based on any public trading market. In addition to being up to a month old when share purchases and repurchases take place, our NAV does not currently represent our enterprise value and may not accurately reflect the actual prices at which our assets could be liquidated on any given day, the value a third party would pay for all or substantially all of our shares, or the price that our shares would trade at on a national stock exchange. Furthermore, our board of directors may amend our NAV procedures from time to time. While there will be independent annual appraisals of our properties, the appraisal of properties is inherently subjective and our NAV may not accurately reflect the actual price at which our properties could be liquidated on any given day.
•We have paid distributions from offering proceeds and may continue to fund distributions with offering proceeds. We have not established a limit on the amount of proceeds from our offering that we may use to fund distributions. To the extent we fund distributions from sources other than our cash flow from operations, we will have less funds available for investment in multifamily apartment communities and multifamily real estate-related assets and the overall return to our stockholders may be reduced. Distributions may also be paid from other sources such as borrowings, advances or the deferral of fees and expense reimbursements. During the early stages of our operations, these distributions may constitute a return of capital.
•Certain of our officers and our directors are also officers and directors of our sponsor, advisor and their affiliates and, as a result, are subject to conflicts of interest, including conflicts arising from time constraints and the fact that the fees our advisor receives for services rendered to us are based on our NAV, which our advisor is responsible for determining.
•We pay certain fees and expenses to our advisor and its affiliates. These fees were not negotiated at arm’s length and therefore may be higher than fees payable to unaffiliated third parties.
•Development projects in which we invest will be subject to potential development and construction delays which could result in increased costs and risks and may hinder our operating results and ability to make distributions.
•We may incur significant debt in certain circumstances, including through the issuance of preferred equity that is accounted for as debt. Our use of leverage increases the risk of an investment in us. Loans we obtain may be collateralized by some or all of our investments, which will put those investments at risk of forfeiture if we are unable to pay our debts. Principal and interest payments on these loans and dividend payments on our preferred shares reduce the amount of money that would otherwise be available for other purposes.
•Volatility in the debt markets could affect our ability to obtain financing for investments or other activities related to real estate assets and the diversification or value of our portfolio, potentially reducing cash available for distribution to our stockholders or our ability to make investments. In addition, volatility in the debt markets could negatively impact our loans with variable interest rates.
•Our operating results will be affected by global and national economic and market conditions generally and by the local economic conditions where our properties are located, including inflation,supply chain disruptions, the current economic slowdown, the rising interest rate changesenvironment and supply chain disruptions;inflation; and changes in government rules, regulations and fiscal policies, such as property taxes, zoning laws, limitations on rental rates, and compliance costs with respect to environmental laws.
•There are limits on the ownership and transferability of our shares.
•If we fail to continue to qualify as a REIT, it would adversely affect our operations and our ability to make distributions to our stockholders because we will be subject to United States federal income tax at regular corporate rates with no ability to deduct distributions made to our stockholders.
•The Russian Federation’s invasion of Ukraine has caused increased geopolitical tensions around the world and the United States, the United Kingdom, EU member states, and other countries have imposed economic sanctions on the Russian Federation, parts of Ukraine, as well as various designated parties. As further military conflicts and economic sanctions continue to evolve, it has become increasingly difficult to predict the impact of these events or how long they will last. Depending on direction and timing, the Russian Federation-Ukraine conflict may significantly exacerbate the normal risks associated with an investment in us as it could adversely impact our operations and ability to realize our investment objectives.
•The COVID-19 pandemic, together with the resulting measures imposed to contain the virus, has had a negative impact on the economy and business activity globally. Although we have not seen a material impact on our operations to date, the extent to which the COVID-19 pandemic may impact our operations, the personal financial position of our tenants and the development projects in which we have invested remains uncertain and cannot be predicted with confidence.
Additional risks related to our business are discussed herein under Part II - “Item 1A. Risk Factors” and under the heading “Risk Factors” in our Annual Report on Form 10-K. In light of the significant uncertainties inherent in these forward-looking statements, the inclusion of this information should not be regarded as a representation by us or any other person that our objectives and plans, which we consider to be reasonable, will be achieved. Except as otherwise required by federal securities laws, we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Cottonwood Communities, Inc. invests in a diverse portfolio of multifamily apartment communities and multifamily real estate-related assets throughout the United States. We are externally managed by our advisor, CC Advisors III, LLC (“CC Advisors III”), a wholly-owned subsidiary of our sponsor, Cottonwood Communities Advisors, LLC (“CCA”). We were incorporated in Maryland in 2016. We hold all of our assets through our Operating Partnership. Our Operating Partnership was Cottonwood Communities O.P., LP (“CCOP”) prior to the CRII Merger and is Cottonwood Residential O.P., LP (“CROP”) after the CRII Merger., our operating partnership. We are the sole member of the sole general partner of the Operating PartnershipCROP and own general partner interests in the Operating PartnershipCROP alongside third party limited partners.
We are a non-traded perpetual-life, net asset value (“NAV”), real estate investment trust (“REIT”). We qualified as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2019. We generally will not
be subject to U.S. federal income taxes on our taxable income to the extent we annually distribute all of our net taxable income to stockholders and maintain our qualification as a REIT.
As of March 31,June 30, 2022, we raised approximately $122.0 million from the sale of our common stock in an initial public offering that we conducted from August 2018 through December 2020; we raised gross proceeds of approximately $127.3$127.0 million from the sale of our Series 2019 Preferred Stock in a private offering to accredited investors only; and we raised approximately $36.1$90.3 million in our follow-on offering that we commenced in November 2021 (including shares issued through the distribution reinvestment plan offering). We have primarily used the net proceeds to make investments in multifamily real estate related assets as further described below under Our Investments.and real estate-related assets.
As of March 31,our June 30, 2022 NAV, we had a portfolio of $2.4$2.5 billion in total assets, with 86.2%83.1% of our equity value in operating properties, 7.7%8.4% in development and 6.1%8.5% in real estate-related investments. Refer to the sectionsections entitled “Our Investments” and “Net Asset Value” below for further description of our portfolio.portfolio and NAV.
The 2021 Mergers
On January 26, 2021, we entered into separate agreements with three affiliated REITs and their respective operating partnerships to merge through the exchange of stock-for-stock and units-for-units, respectively. The merger with Cottonwood Residential II, Inc. (“CRII,” the “CRII Merger”) closed on May 7, 2021. The mergers with Cottonwood Multifamily REIT I, Inc. (“CMRI,” the “CMRI Merger”) and with Cottonwood Multifamily REIT II, Inc. (“CMRII,” the “CMRII Merger”) closed on July 15, 2021. We refer to the CRII Merger, the CMRI Merger and the CMRII Merger as the “2021 Mergers.”
Through the 2021 Mergers we acquired interests in 22 stabilized multifamily apartment communities, four multifamily development projects, one structured investment, and land held for development. We also acquired CRII’s property management business and its employees, which currently manage approximately 9,600 units, including 7,300 units we own or have ownership interests in, an advisory contract with Cottonwood Multifamily Opportunity Fund, Inc. (“CMOF”), and personnel who performed certain administrative and other services for us, including legal, accounting, property development oversight and certain services relating to construction management, shareholder relations, human resources, renter insurance and information technology.
CC Advisors III continues to manage our business as our external advisor pursuant to an amended and restated advisory agreement. With the exception of our Chief Legal Officer, Chief Operating Officer, Chief Accounting Officer, and Chief Development Officer, we do not employ our executive officers.
See Note 1 of the consolidated financial statements in this Quarterly Report on Form 10-Q for further description of the 2021 Mergers.
First Quarter ResultsMerger with Cottonwood Multifamily Opportunity Fund, Inc.
On July 8, 2022, we, CROP, Cottonwood Communities GP Subsidiary, LLC, our wholly owned subsidiary (“Merger Sub”), CMOF and Cottonwood Multifamily Opportunity O.P., LP (“CMOF OP”) entered into an Agreement and Plan of Merger (the “CMOF Merger Agreement”) pursuant to which we will acquire CMOF in a stock-for-stock transaction whereby CMOF will be merged with and into Merger Sub.
CMOF is a Maryland corporation that was sponsored by CROP and formed to invest in multifamily development projects and/or make mezzanine loans or preferred equity investments in multifamily construction and development projects.CMOF has investments in two development projects and one investment in a land parcel held for development, all through separate joint ventures with CROP as follows: Park Avenue (development project), Cottonwood on Broadway (development project) and Block C (land held for development) with a percentage ownership interest held by CMOF as of June 30, 2022, of 76.4%, 81.2%, and 63.0%, respectively, and the balance of a majority of the remaining interest held by CROP and some of our officers and directors either directly or indirectly. In addition, Daniel Shaeffer and Chad Christensen are each officers and directors of us and CMOF, and Gregg Christensen is an officer of us and CMOF and also a director of CMOF.The CMOF Merger Agreement was entered into after a thorough due diligence and negotiation process conducted by a special committee of CMOF’s board of directors, with the assistance of its advisors, and our conflicts committee, with the assistance of its advisors.
See “Subsequent Events” herein for additional information about the CMOF Merger Agreement.
Highlights for the Three Months Ended June 30, 2022
The following highlights activities that occurred during the three months ended March 31,June 30, 2022:
•Attained net loss attributable to common stockholders of $0.12$(0.22) per diluted share, representing a 52%56% improvement compared to the same period in the prior year.
•Achieved funds from operations attributable to common stockholders and unit holders ("FFO"(“FFO”) of $0.11$(0.12) per diluted share.share/unit. Core FFO was also $0.06$0.05 per diluted share/unit, compared to $0.10 for the same period in the prior year.
•NAV increased from $19.6324 as of March 31, 2022 to $20.7202 as of June 30, 2022, representing an increase of 5.5%.
•Acquired Cottonwood Lighthouse Point, a 243 unit apartment community in Pompano Beach, FL, for $95.5 million.
•Sold equity method investments in 3800 Main and Alpha Mill, recognizing $7.6 million of gains from these investments. We retained a 28.3% interest in Alpha Mill.
•Recapitalized our Block C and Jasper developments, receiving $10.9 million from affiliated investors and obtaining a controlling interest in Block C.
•Closed an aggregate of $94.9 million in property-level financing and repaid $21.6 million.
•Executed additional draws of $13.7 million on construction loans to further the completion of our development projects.
•Raised $50.0 million of net proceeds from the sale of stock issued under our follow-on offering.
•Fully redeemed our Series 2016 Preferred Stock for $139.8 million.
•Received certificates of occupancy on our Park Avenue development and began lease-up on the projects.
Highlights for the Six Months Ended June 30, 2022
The following highlights activities that occurred during the six months ended June 30, 2022:
•Attained net loss attributable to common stockholders of $(0.34) per diluted share, representing a 100.0% increase53% improvement compared to the same period in the prior year.
•Achieved funds from operations attributable to common stockholders and unit holders (“FFO”) of $(0.01) per diluted share/unit. Core FFO was $0.11 per diluted share/unit, compared to $0.15 per share/unit for the same period in the prior year.
•NAV increased from $17.2839 as of December 31, 2021 to $19.6324$20.7202 as of March 31,June 30, 2022, representing an increase of 13.6%19.9%.
•Acquired Cottonwood Lighthouse Point, a 243 unit apartment community in Pompano Beach, FL, for $95.5 million.
•Sold equity method investments in 3800 Main and Alpha Mill, recognizing $7.6 million of gains from these investments.
•Recapitalized our Block C and Jasper developments, receiving $10.9 million from affiliated investors and obtaining a controlling interest in Block C.
•Closed an aggregate of $369.5$464.4 million in property-level financing and repaid $218.7$231.2 million.
•Construction loanExecuted additional draws equalof $22.9 million on construction loans to $9.2 millionfurther the completion of our development projects. and repaidrefinanced $59.7 million of construction loans with permanent debt upon refinancing.debt.
•Raised $14.2 million of net proceeds from the sale of our Series 2019 Preferred Stock.
•Fully redeemed our 2017 Preferred Stock for $2.7 million.
•Raised $33.4$80.4 million of net proceeds from the sale of stock issued under our Follow-on Offering.
•Realized a promote of $30.3Fully redeemed our Series 2016 Preferred Stock for $139.8 million from an incentive allocation agreement with a real estate firm.and fully redeemed our Series 2017 Preferred Stock for $2.6 million.
•PaidReceived certificates of occupancy on our Park Avenue and Sugarmont developments and began lease-up on the performance participation allocation of $51.8 million that was accrued during 2021.projects.
Our Investments
Information regarding our investments as of March 31,June 30, 2022 is as follows:
Stabilized Properties ($ in thousands)
| Property Name | Property Name | Location | Number of Units | Average Unit Size (Sq Ft) | Purchase Date | Purchase Date Property Value | Mortgage Debt Outstanding (1) | Physical Occupancy Rate | Percentage Owned by CROP | Property Name | Location | Number of Units | Average Unit Size (Sq Ft) | Purchase Date | Purchase Date Property Value | Mortgage Debt Outstanding (1) | Physical Occupancy Rate | Percentage Owned by CROP |
3800 Main | Houston, TX | 319 | | 831 | | May 2021 | $ | 58,100 | | $ | 35,703 | | 91.54% | 50.00% | |
Alpha Mill | Alpha Mill | Charlotte, NC | 267 | | 830 | | May 2021 | 69,500 | | 39,044 | | 94.76% | 57.21% | Alpha Mill | Charlotte, NC | 267 | | 830 | | May 2021 | $ | 69,500 | | $ | 39,044 | | 94.76% | 28.29% |
Cason Estates | Cason Estates | Murfreesboro, TN | 262 | | 1,078 | | May 2021 | 51,400 | | 33,594 | | 97.71% | 100.00% | Cason Estates | Murfreesboro, TN | 262 | | 1,078 | | May 2021 | 51,400 | | 33,594 | | 96.18% | 100.00% |
Cottonwood | Cottonwood | Salt Lake City, UT | 264 | | 834 | | May 2021 | 47,300 | | 21,645 | | 94.70% | 100.00% | Cottonwood | Salt Lake City, UT | 264 | | 834 | | May 2021 | 47,300 | | 35,430 | | 95.08% | 100.00% |
Cottonwood Bayview | Cottonwood Bayview | St. Petersburg, FL | 309 | | 805 | | May 2021 | 95,900 | | 46,953 | | 95.79% | 71.00% | Cottonwood Bayview | St. Petersburg, FL | 309 | | 805 | | May 2021 | 95,900 | | 46,709 | | 97.09% | 71.00% |
Cottonwood Lighthouse Point | | Cottonwood Lighthouse Point | Pompano Beach, FL | 243 | | 996 | | June 2022 | 95,500 | | 47,964 | | 96.30% | 100.00% |
Cottonwood One Upland | Cottonwood One Upland | Boston, MA | 262 | | 1,160 | | March 2020 | 103,600 | | — | | 96.56% | 100.00% | Cottonwood One Upland | Boston, MA | 262 | | 1,160 | | March 2020 | 103,600 | | 36,000 | | 97.33% | 100.00% |
Cottonwood Reserve | Cottonwood Reserve | Charlotte, NC | 352 | | 1,021 | | May 2021 | 77,500 | | 38,187 | | 96.07% | 91.14% | Cottonwood Reserve | Charlotte, NC | 352 | | 1,021 | | May 2021 | 77,500 | | 38,066 | | 97.14% | 91.14% |
Cottonwood Ridgeview | Cottonwood Ridgeview | Plano, TX | 322 | | 1,156 | | May 2021 | 70,000 | | 65,300 | | 95.34% | 90.45% | Cottonwood Ridgeview | Plano, TX | 322 | | 1,156 | | May 2021 | 70,000 | | 65,300 | | 97.20% | 90.45% |
Cottonwood West Palm | Cottonwood West Palm | West Palm Beach, FL | 245 | | 1,122 | | May 2019 | 66,900 | | 35,995 | | 95.92% | 100.00% | Cottonwood West Palm | West Palm Beach, FL | 245 | | 1,122 | | May 2019 | 66,900 | | 47,978 | | 93.06% | 100.00% |
Cottonwood Westside | Cottonwood Westside | Atlanta, GA | 197 | | 860 | | May 2021 | 47,900 | | 25,383 | | 91.88% | 100.00% | Cottonwood Westside | Atlanta, GA | 197 | | 860 | | May 2021 | 47,900 | | 25,264 | | 95.94% | 100.00% |
Enclave on Golden Triangle | Enclave on Golden Triangle | Keller, TX | 273 | | 1,048 | | May 2021 | 51,600 | | 48,400 | | 96.70% | 98.93% | Enclave on Golden Triangle | Keller, TX | 273 | | 1,048 | | May 2021 | 51,600 | | 48,400 | | 96.34% | 98.93% |
Fox Point | Fox Point | Salt Lake City, UT | 398 | | 841 | | May 2021 | 79,400 | | 46,000 | | 96.48% | 52.75% | Fox Point | Salt Lake City, UT | 398 | | 841 | | May 2021 | 79,400 | | 46,000 | | 95.98% | 52.75% |
Heights at Meridian | Heights at Meridian | Durham, NC | 339 | | 997 | | May 2021 | 79,900 | | 36,180 | | 93.81% | 100.00% | Heights at Meridian | Durham, NC | 339 | | 997 | | May 2021 | 79,900 | | 45,341 | | 97.05% | 100.00% |
Melrose | Melrose | Nashville, TN | 220 | | 951 | | May 2021 | 67,400 | | 56,600 | | 93.18% | 100.00% | Melrose | Nashville, TN | 220 | | 951 | | May 2021 | 67,400 | | 56,600 | | 97.73% | 100.00% |
Melrose Phase II | Melrose Phase II | Nashville, TN | 139 | | 675 | | May 2021 | 40,350 | | 32,400 | | 96.40% | 79.82% | Melrose Phase II | Nashville, TN | 139 | | 675 | | May 2021 | 40,350 | | 32,400 | | 92.09% | 79.82% |
Parc Westborough | Parc Westborough | Boston, MA | 249 | | 1,008 | | May 2021 | 74,000 | | — | | 96.79% | 100.00% | Parc Westborough | Boston, MA | 249 | | 1,008 | | May 2021 | 74,000 | | 24,000 | | 95.58% | 100.00% |
Pavilions | Pavilions | Albuquerque, NM | 240 | | 1,162 | | May 2021 | 61,100 | | 58,500 | | 93.33% | 96.35% | Pavilions | Albuquerque, NM | 240 | | 1,162 | | May 2021 | 61,100 | | 58,500 | | 94.17% | 96.35% |
Raveneaux | Raveneaux | Houston, TX | 382 | | 1,065 | | May 2021 | 57,500 | | 47,400 | | 91.62% | 96.97% | Raveneaux | Houston, TX | 382 | | 1,065 | | May 2021 | 57,500 | | 47,400 | | 91.36% | 96.97% |
Regatta | Regatta | Houston, TX | 490 | | 862 | | May 2021 | 48,100 | | 35,367 | | 94.68% | 100.00% | Regatta | Houston, TX | 490 | | 862 | | May 2021 | 48,100 | | 35,367 | | 97.55% | 100.00% |
Retreat at Peachtree City | Retreat at Peachtree City | Peachtree City, GA | 312 | | 980 | | May 2021 | 72,500 | | 48,719 | | 92.95% | 100.00% | Retreat at Peachtree City | Peachtree City, GA | 312 | | 980 | | May 2021 | 72,500 | | 48,719 | | 97.44% | 100.00% |
Scott Mountain | Scott Mountain | Portland, OR | 262 | | 927 | | May 2021 | 70,700 | | 48,373 | | 94.66% | 95.80% | Scott Mountain | Portland, OR | 262 | | 927 | | May 2021 | 70,700 | | 48,373 | | 91.98% | 95.80% |
Stonebriar of Frisco | Stonebriar of Frisco | Frisco, TX | 306 | | 963 | | May 2021 | 59,200 | | 53,600 | | 96.41% | 84.19% | Stonebriar of Frisco | Frisco, TX | 306 | | 963 | | May 2021 | 59,200 | | 53,600 | | 95.42% | 84.19% |
Summer Park | Summer Park | Buford, GA | 358 | | 1,064 | | May 2021 | 75,500 | | 44,620 | | 98.60% | 98.68% | Summer Park | Buford, GA | 358 | | 1,064 | | May 2021 | 75,500 | | 44,620 | | 95.53% | 98.68% |
The Marq Highland Park (2) | The Marq Highland Park (2) | Tampa, FL | 239 | | 999 | | May 2021 | 65,700 | | 34,459 | | 99.16% | 100.00% | The Marq Highland Park (2) | Tampa, FL | 239 | | 999 | | May 2021 | 65,700 | | 34,310 | | 95.82% | 100.00% |
Toscana at Valley Ridge | Toscana at Valley Ridge | Lewisville, TX | 288 | | 738 | | May 2021 | 47,700 | | 30,700 | | 99.31% | 58.60% | Toscana at Valley Ridge | Lewisville, TX | 288 | | 738 | | May 2021 | 47,700 | | 30,700 | | 96.53% | 58.60% |
Total / Weighted-Average | Total / Weighted-Average | | 7,294 | | 962 | | | $ | 1,638,750 | | $ | 963,122 | | 95.34% | | Total / Weighted-Average | | 7,218 | | 969 | | | $ | 1,676,150 | | $ | 1,069,679 | | 95.75% | |
| (1) Mortgage debt outstanding is shown as if CROP owned 100% of the property. | (1) Mortgage debt outstanding is shown as if CROP owned 100% of the property. | (1) Mortgage debt outstanding is shown as if CROP owned 100% of the property. |
(2) Excludes the commercial data in units count and physical occupancy. | (2) Excludes the commercial data in units count and physical occupancy. | (2) Excludes the commercial data in units count and physical occupancy. |
Development Properties ($ in thousands)
| Property Name | Property Name | Location | Units to be Built | Average Unit Size (Sq Ft) | Purchase Date | Estimated Completion Date | Investment Amount | Percentage Owned by CROP | Property Name | Location | Units to be Built | Average Unit Size (Sq Ft) | Purchase Date | Estimated Completion Date | Investment Amount | Percentage Owned by CROP |
Cottonwood on Broadway | Cottonwood on Broadway | Salt Lake City, UT | 254 | 817 | May 2021 | 4Q2022 | $ | 6,020 | | 18.84% (1) | Cottonwood on Broadway | Salt Lake City, UT | 254 | 817 | May 2021 | 4Q2022 | $ | 6,020 | | 18.84% (1) |
Park Avenue | Park Avenue | Salt Lake City, UT | 234 | 714 | May 2021 | 2Q2022 | 8,017 | | 23.57%(1) | Park Avenue | Salt Lake City, UT | 234 | 714 | May 2021 | 2Q2022 | 8,657 | | 23.57%(1) |
Sugarmont | Sugarmont | Salt Lake City, UT | 341 | 904 | May 2021 | 2Q2022 | 69,599 | | 99.00%(3) | Sugarmont | Salt Lake City, UT | 341 | 904 | May 2021 | 2Q2022 | 73,323 | | 99.00%(3) |
Cottonwood on Highland (2) | Cottonwood on Highland (2) | Millcreek, UT | 250 | 757 | May 2021 | 1Q2023 | 8,221 | | 36.93% | Cottonwood on Highland (2) | Millcreek, UT | 250 | 757 | May 2021 | 1Q2023 | 8,221 | | 36.93% |
Total | Total | | 1,079 | | $ | 91,857 | | | Total | | 1,079 | | $ | 96,221 | | |
| (1) Cottonwood Multifamily Opportunity Fund, Inc., a fund sponsored by a subsidiary of CROP, indirectly owns a majority of the remaining interest. | |
(1) CMOF indirectly owns a majority of the remaining interest. On July 8, 2022, we entered the CMOF Merger Agreement, pursuant to which and subject to the terms and conditions of we expect to acquire CMOF in a stock-for-stock transaction. See “Subsequent Events” for additional information on the CMOF Merger Agreement. | | (1) CMOF indirectly owns a majority of the remaining interest. On July 8, 2022, we entered the CMOF Merger Agreement, pursuant to which and subject to the terms and conditions of we expect to acquire CMOF in a stock-for-stock transaction. See “Subsequent Events” for additional information on the CMOF Merger Agreement. |
(2) Intended to qualify as a qualified opportunity zone investment. Excludes the commercial data in unit count. | (2) Intended to qualify as a qualified opportunity zone investment. Excludes the commercial data in unit count. | (2) Intended to qualify as a qualified opportunity zone investment. Excludes the commercial data in unit count. |
(3) The one percent interest not owned by us has limited rights, including the right to control on behalf of the joint venture the prosecution and resolution of all litigation, claims, or causes of action that the joint venture has or may have against certain third parties associated with the design and construction of Sugarmont, as well as the obligation to defend any crossclaims resulting from these actions. | |
(3) The one percent interest not owned by us has limited rights, including the right to control on behalf of the joint venture the prosecution and resolution of all litigation, claims, or causes of action that the joint venture has or may have against certain third parties associated with the design and construction of Sugarmont, as well as the obligation to defend any cross claims resulting from these actions. | | (3) The one percent interest not owned by us has limited rights, including the right to control on behalf of the joint venture the prosecution and resolution of all litigation, claims, or causes of action that the joint venture has or may have against certain third parties associated with the design and construction of Sugarmont, as well as the obligation to defend any cross claims resulting from these actions. |
Structured Investments ($ in thousands)
| | | | | | | | | | | | | | | | | | | | |
Property Name | Location | Investment Type | Date of Initial Investment | Number of Units | Funding Commitment | Amount Funded to Date |
Lector85 | Ybor City, FL | Preferred Equity | August 2019 | 254 | $ | 9,900 | | $ | 9,900 | |
Vernon Boulevard | Queens, NY | Preferred Equity | July 2020 | 534 | 15,000 | | 15,000 | |
Riverfront | West Sacramento, CA | Preferred Equity | November 2020 | 285 | 15,092 | | 15,092 | |
Integra Peaks at Damonte | Reno, NV | Mezzanine Loan | June 2021 | 300 | 13,000 | | 13,000 | |
Total | | | | 1,373 | $ | 52,992 | | $ | 52,992 | |
Land Held for Development ($ in thousands)
| Property Name | Property Name | Location | Purchase Date | Investment Amount | Percentage Owned by CROP | Property Name | Location | Purchase Date | Investment Amount | Percentage Owned by CROP |
Block C (1) | Block C (1) | Salt Lake City, UT | May 2021 | $ | 2,149 | | 37.02% | Block C (1) | Salt Lake City, UT | May 2021 | $ | 25,382 | | 64.49% (1) |
Jasper | Jasper | Salt Lake City, UT | June 2021 | 3,307 | | 100.00% | Jasper | Salt Lake City, UT | June 2021 | 9,513 | | 80.02%(2) |
3300 Cottonwood | 3300 Cottonwood | Salt Lake City, UT | October 2021 | 7,521 | | 100.00% | 3300 Cottonwood | Salt Lake City, UT | October 2021 | 7,521 | | 100.00% |
Total | Total | | $ | 12,977 | | | Total | | $ | 42,416 | | |
| (1) Cottonwood Multifamily Opportunity Fund, Inc., a fund sponsored by a subsidiary of CROP, indirectly owns a majority of the remaining interest. | |
(1) On June 28, 2022, Block C was recapitalized. We provided additional capital contributions to the project and obtained a majority interest. We also admitted two affiliated entities as members in the joint venture (the “Affiliated Members”). The Affiliated Members are owned directly or indirectly by Daniel Shaeffer, Chad Christensen, Gregg Christensen, Enzio Cassinis, Eric Marlin, Susan Hallenberg, Stan Hanks, Glenn Rand and Adam Larson, each of whom are our officers or directors, as well as certain employees of CROP and our advisor or its affiliates. CMOF indirectly owns a 14.5% interest in Block C. On July 8, 2022, we entered the CMOF Merger Agreement, pursuant to which and subject to the terms and conditions of, we expect to acquire CMOF in a stock-for-stock transaction. See PART II. Item 5. “Other Information” for additional information about amendments to the Block C operating agreement to reflect additional terms related to the admission of the Affiliated Members and “Subsequent Events” herein for additional information about the CMOF Merger Agreement. | | (1) On June 28, 2022, Block C was recapitalized. We provided additional capital contributions to the project and obtained a majority interest. We also admitted two affiliated entities as members in the joint venture (the “Affiliated Members”). The Affiliated Members are owned directly or indirectly by Daniel Shaeffer, Chad Christensen, Gregg Christensen, Enzio Cassinis, Eric Marlin, Susan Hallenberg, Stan Hanks, Glenn Rand and Adam Larson, each of whom are our officers or directors, as well as certain employees of CROP and our advisor or its affiliates. CMOF indirectly owns a 14.5% interest in Block C. On July 8, 2022, we entered the CMOF Merger Agreement, pursuant to which and subject to the terms and conditions of, we expect to acquire CMOF in a stock-for-stock transaction. See PART II. Item 5. “Other Information” for additional information about amendments to the Block C operating agreement to reflect additional terms related to the admission of the Affiliated Members and “Subsequent Events” herein for additional information about the CMOF Merger Agreement. |
(2) On June 28, 2022, the Affiliated Members were admitted as members in the Jasper joint venture and provided a capital contribution. See “PART II. Item 5. “Other Information” for information about amendments to the Jasper operating agreement to reflect additional terms related to the admission of the Affiliated Members. | | (2) On June 28, 2022, the Affiliated Members were admitted as members in the Jasper joint venture and provided a capital contribution. See “PART II. Item 5. “Other Information” for information about amendments to the Jasper operating agreement to reflect additional terms related to the admission of the Affiliated Members. |
Results of Operations
Our results of operations for the three and six months ended March 31,June 30, 2022 and 2021 are as follows (in thousands, except share and per share data):
| | | | | Three Months Ended March 31, | | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
Revenues | Revenues | | | | | | | Revenues | | | | | | | | | | | |
Rental and other property revenues | Rental and other property revenues | | $ | 26,820 | | | $ | 3,172 | | | $ | 23,648 | | Rental and other property revenues | $ | 28,603 | | | $ | 16,843 | | | $ | 11,760 | | | $ | 55,423 | | | $ | 20,015 | | | $ | 35,408 | |
Property management revenues | Property management revenues | | 3,124 | | | — | | | 3,124 | | Property management revenues | 2,703 | | | 2,121 | | | 582 | | | 5,826 | | | 2,121 | | | 3,705 | |
Other revenues | Other revenues | | 615 | | | 245 | | | 370 | | Other revenues | 634 | | | 277 | | | 357 | | | 1,249 | | | 523 | | | 726 | |
Total revenues | Total revenues | | 30,559 | | | 3,417 | | | 27,142 | | Total revenues | 31,940 | | | 19,241 | | | 12,699 | | | 62,498 | | | 22,659 | | | 39,839 | |
Operating expenses | Operating expenses | | Operating expenses | |
Property operations expense | Property operations expense | | 9,672 | | | 1,348 | | | 8,324 | | Property operations expense | 10,589 | | | 6,804 | | | 3,785 | | | 20,262 | | | 8,152 | | | 12,110 | |
Property management expense | Property management expense | | 4,952 | | | — | | | 4,952 | | Property management expense | 4,587 | | | 2,552 | | | 2,035 | | | 9,540 | | | 2,552 | | | 6,988 | |
Asset management fee | Asset management fee | | 3,792 | | | 886 | | | 2,906 | | Asset management fee | 4,348 | | | 1,442 | | | 2,906 | | | 8,139 | | | 2,328 | | | 5,811 | |
Performance participation allocation | Performance participation allocation | | 19,934 | | | — | | | 19,934 | | Performance participation allocation | 10,144 | | | 6,455 | | | 3,689 | | | 30,078 | | | 6,455 | | | 23,623 | |
Depreciation and amortization | Depreciation and amortization | | 11,268 | | | 1,338 | | | 9,930 | | Depreciation and amortization | 11,992 | | | 14,482 | | | (2,490) | | | 23,259 | | | 15,820 | | | 7,439 | |
General and administrative expenses | General and administrative expenses | | 3,223 | | | 2,503 | | | 720 | | General and administrative expenses | 3,352 | | | 2,264 | | | 1,088 | | | 6,575 | | | 4,769 | | | 1,806 | |
Total operating expenses | Total operating expenses | | 52,841 | | | 6,075 | | | 46,766 | | Total operating expenses | 45,012 | | | 33,999 | | | 11,013 | | | 97,853 | | | 40,076 | | | 57,777 | |
Loss from operations | Loss from operations | | (22,282) | | | (2,658) | | | (19,624) | | Loss from operations | (13,072) | | | (14,758) | | | 1,686 | | | (35,355) | | | (17,417) | | | (17,938) | |
Equity in earnings of unconsolidated real estate entities | | 2,670 | | | 951 | | | 1,719 | | |
Equity in earnings (losses) of unconsolidated real estate entities | | Equity in earnings (losses) of unconsolidated real estate entities | 4,052 | | | (652) | | | 4,704 | | | 6,723 | | | 299 | | | 6,424 | |
Interest income | Interest income | | 16 | | | — | | | 16 | | Interest income | 8 | | | 136 | | | (128) | | | 23 | | | 137 | | | (114) | |
Interest expense | Interest expense | | (11,117) | | | (1,330) | | | (9,787) | | Interest expense | (11,687) | | | (5,824) | | | (5,863) | | | (22,804) | | | (7,154) | | | (15,650) | |
Gain on sale of unconsolidated real estate entities | | Gain on sale of unconsolidated real estate entities | 7,634 | | | — | | | 7,634 | | | 7,634 | | | — | | | 7,634 | |
Promote from incentive allocation agreement | Promote from incentive allocation agreement | | 30,309 | | | — | | | 30,309 | | Promote from incentive allocation agreement | — | | | — | | | — | | | 30,309 | | | — | | | 30,309 | |
Loss on debt extinguishment | | (551) | | | — | | | (551) | | |
Other income | | 1,530 | | | 27 | | | 1,503 | | |
Gain (loss) on debt extinguishment, net | | Gain (loss) on debt extinguishment, net | 70 | | | — | | | 70 | | | (481) | | | — | | | (481) | |
Other income (expense) | | Other income (expense) | 290 | | | (9) | | | 299 | | | 1,819 | | | 18 | | | 1,801 | |
Income (loss) before income taxes | Income (loss) before income taxes | | 575 | | | (3,010) | | | 3,585 | | Income (loss) before income taxes | (12,705) | | | (21,107) | | | 8,402 | | | (12,132) | | | (24,117) | | | 11,985 | |
Income tax expense | Income tax expense | | (7,463) | | | — | | | (7,463) | | Income tax expense | (288) | | | (293) | | | 5 | | | (7,750) | | | (293) | | | (7,457) | |
Net loss | Net loss | | (6,888) | | | (3,010) | | | (3,878) | | Net loss | (12,993) | | | (21,400) | | | 8,407 | | | (19,882) | | | (24,410) | | | 4,528 | |
Net loss attributable to noncontrolling interests: | Net loss attributable to noncontrolling interests: | | — | | Net loss attributable to noncontrolling interests: | | — | | | — | |
Limited partners | Limited partners | | 3,828 | | | — | | | 3,828 | | Limited partners | 6,752 | | | 12,783 | | | (6,031) | | | 10,580 | | | 12,783 | | | (2,203) | |
Partially owned entities | Partially owned entities | | 55 | | | — | | | 55 | | Partially owned entities | 398 | | | 2,613 | | | (2,215) | | | 453 | | | 2,613 | | | (2,160) | |
Net loss attributable to common stockholders | Net loss attributable to common stockholders | | $ | (3,005) | | | $ | (3,010) | | | $ | 5 | | Net loss attributable to common stockholders | $ | (5,843) | | | $ | (6,004) | | | $ | 161 | | | $ | (8,849) | | | $ | (9,014) | | | $ | 165 | |
| Weighted-average common shares outstanding | Weighted-average common shares outstanding | | 24,654,085 | | | 12,232,289 | | | 12,421,796 | | Weighted-average common shares outstanding | 27,156,490 | | | 12,492,221 | | | 14,664,269 | | | 25,912,200 | | | 12,362,973 | | | 13,549,227 | |
Net loss per common share - basic and diluted | Net loss per common share - basic and diluted | | $ | (0.12) | | | $ | (0.25) | | | $ | 0.13 | | Net loss per common share - basic and diluted | $ | (0.22) | | | $ | (0.48) | | | $ | 0.26 | | | $ | (0.34) | | | $ | (0.73) | | | $ | 0.39 | |
Comparison of the Three Months Ended March 31,June 30, 2022 and 2021
Rental and Other Property Revenues, Property Operations Expense
Due to the 2021 Mergers, our rentalRental and other property revenues increased $11.8 million and property operatingoperations expense increased $3.8 million. The CRII Merger closed on May 7, 2021. Rental and property revenues increased $11.4 million and property operation expenses for theincreased $2.2 million primarily due to a full three months ended March 31,of activity in 2022 and 2021 are not comparable. Thefrom real estate assets acquired with the 2021 Mergers brought additional rentalCRII Merger compared to less than two months of activity for the same period in 2021. This, combined with higher rents and property revenueshigher operating costs across all of $23.2 million corresponding with additional property operation expenses of $6.9 million. The remaining increase relates to improved rents atour portfolio, accounted for the properties we owned prior to the 2021 Mergers.increase.
Property Management Revenues and Property Management Expense
The propertyProperty management revenues of $3.1 million and property management expenseexpenses increased $0.6 million and $2.0 million, respectively. The increase was due to three months of $5.0 million areactivity in 2022 from CRII’sthe property management business acquired with the 2021 Mergers.CRII Merger compared to less than two months of activity for the same period in 2021. This was offset by the loss of a
portfolio of 12 properties which we managed for a third party in February 2022. Our consolidated properties are managed by us. The property management income received from those properties is eliminated with the associated expense at those properties.
Asset Management Fee
Asset management fees prior to May 7, 2021 were 1.25% of gross book value. After May 7, 2021 the asset management fee was the lesser of 0.0625% gross asset value or 0.125% of net asset value each month (0.75% and 1.5% annually), with values updated monthly. The increase in asset management fees of $2.9 million is due to the increase in assets acquired through the 2021 Mergers, the increase in other assets and capital raised, and overall increases in real estate values and NAV in combination with the revised fee structure.
Performance Participation Allocation
An affiliate of the Advisor receivesholds a special limited partner interest in CROP. This special limited partnership interest entitles the holder to receive an allocation of CROP's total return to its capital account of 12.5% over a 5% hurdle with a catch up, so long as the advisory agreement has not been terminated. See Note 99 of the consolidated financial statements for additional information on the allocation. The increase in the performance participation allocation of $19.9$3.7 million is due to the growth of our NAV over the three monththree-month period ended March 31, 2022.June 30, 2022 compared to the growth in NAV for the period from May 7, 2021, the effective date of the amended and restated operating agreement of CROP, to June 30, 2021.
Depreciation and Amortization
DueDepreciation and amortization decreased $2.5 million due to the 2021 Mergers, depreciation andabsence of amortization in 2022 of intangible assets from the CRII Merger. Amortization expense for the three months ended March 31,June 30, 2021 for these intangible assets was $7.9 million. The decrease in amortization was offset by additional depreciation of $5.4 million from three months of depreciation in 2022 on properties acquired with the CRII Merger compared to less than two months of depreciation for the same period in 2021.
Equity in earnings of unconsolidated real estate entities
The $4.7 million increase in equity in earnings of unconsolidated real estate entities is due to three months of earnings in 2022 from the underlying properties of the equity method investments acquired with the CRII Merger compared to less than two months of earnings for the same period in 2021. In addition, earnings from the underlying properties improved from increased rents and 2021 is not comparable. Thethe absence in 2022 of amortization from intangible assets acquired with the 2021 Mergers broughtCRII Merger. We also had additional depreciationincrease in income on preferred equity and amortization of $9.9 million.
General and Administrative Expenses
General and administrative expenses increased $0.7 million for the three months ended March 31, 2022 when compared to the same period in the prior year, primarily due to increased professional services, share-based compensation, legal, and insurance expenses, offset by decreased transaction costs.other investments.
Interest Expense
DueInterest expense increased $5.9 million, of which $4.7 million is primarily due to the 2021 Mergers, interest expense for the three months ended March 31,of interest in 2022 and 2021 is not comparable. Interest from property-levelon debt preferred stock, and unsecured promissory notes acquired with the Mergers totaled $7.6 million. WeCRII Merger compared to less than two months of interest for the same period in 2021, increased leverage on our properties, and higher variable interest rates. Interest expense also incurred additional interest expense of $2.1increased $1.9 million from additional Series 2019 Preferred Stock raised.issued. This was offset by a decrease of $1.0 million of interest on our Series 2016 Preferred Stock, which was redeemed in April 2022.
DuringGain on Sale of Unconsolidated Real Estate Entities
The gain on sale of unconsolidated real estate entities of $7.6 million is from the first quartersale of additional interests in Alpha Mill and the sale of 3800 Main to a third party.
Comparison of the Six Months Ended June 30, 2022 we refinanced debt on multiple stabilized properties from floating rate debt to fixed rate debt, reducing our overall floating rate mortgage balance by $85.4and 2021
Rental and Other Property Revenues, Property Operations Expense
Rental and other property revenues increased $35.4 million and decreasingproperty operations expense increased $12.1 million. Rental and property revenues increased $34.6 million and property operation expenses increased $10.5 million due to a full six months of activity in 2022 from real estate assets acquired with the CRII Merger compared to less than two months of activity for the same period in 2021. The remaining increase relates to improved rents at the properties we owned prior to the 2021 Mergers.
Property Management Revenues and Property Management Expense
Property management revenues and property management expenses increased $3.7 million and $7.0 million, respectively. The increase was due to six months of activity in 2022 from the property management business acquired with the CRII Merger compared to less than two months of activity for the same period in 2021. This was offset by the loss of a portfolio of 12 properties we managed for a third party in February 2022. Our consolidated properties are managed by us. The property management income received from those properties is eliminated with the associated expense at those properties.
Asset Management Fee
The increase in asset management fees of $5.8 million is due to the increase in assets acquired through the 2021 Mergers, the increase in other assets and capital raised, and overall increases in real estate values and NAV in combination with the revised fee structure mentioned above.
Performance Participation Allocation
The increase in the performance participation allocation of $23.6 million is due to the growth of our overall weighted-average fixed interest rateNAV over the six-month period ended June 30, 2022 compared to the growth in NAV for the period from May 7, 2021, the effective date of the amended and restated operating agreement of CROP, to June 30, 2021.
Depreciation and Amortization
Depreciation and amortization increased $7.4 million due to an additional $14.5 million of depreciation from six months of depreciation in 2022 on properties acquired with the CRII Merger compared to less than two months of depreciation for the same period in 2021, offset by 35 basis points.a reduction in amortization expense of $7.0 million due to the absence of amortization of intangible assets from the CRII Merger in 2022.
Equity in earnings of unconsolidated real estate entities
The $6.4 million increase in equity in earnings of unconsolidated real estate entities is due to six months of earnings in 2022 from the underlying properties of the equity method investments acquired with the CRII Merger compared to less than two months of earnings for the same period in 2021. In addition, earnings from the underlying properties improved from increased rents and the absence in 2022 of amortization from intangible assets acquired with the CRII Merger. We also refinanced certainhad additional increase in income on preferred equity and other investments.
Interest Expense
Interest expense increased $15.7 million, of which $10.1 million is primarily due to three months of interest in 2022 on debt acquired with the CRII Merger compared to less than two months of interest for the same period in 2021, increased leverage on our properties, and higher rate variable mortgages, reducing our weighted-average variable interest rate by 42 basis points.rates. Interest expense also increased $4.1 million from additional Series 2019 Preferred Stock issued. Our Series 2016 Preferred Stock, assumed with the CRII Merger, also had less than four months of interest in 2022 compared to less than two months of interest for the same period in 2021, resulting in additional interest of $1.4 million. The Series 2016 Preferred Stock was redeemed in April 2022.
Gain on Sale of Unconsolidated Real Estate Entities
The gain on sale of unconsolidated real estate entities of $7.6 million is from the sale of additional interests in Alpha Mill and the sale of 3800 Main to a third party.
Promote from Incentive Allocation Agreement, , Income Tax Expense
In 2018, weCROP sold a portfolio of twelve properties to an unrelated real estate firm. Under the sales arrangement, weCROP entered into an incentive allocation agreement that entitled us toCROP to participate in distributions from the portfolio should returns exceed certain amounts. TheDuring the first quarter of 2022 the real estate firm sold the portfolio during the first quarter of 2022.properties. Our taxable REIT subsidiary realized a promote distribution of $30.3 million from the sale and recognized income tax expense of $7.3 million. We managed the portfolio on behalf of the real estate firm prior to the portfolio being sold.
Funds from Operations
We believe funds from operations, or FFO, is a beneficial indicator of the performance of an equity REIT and of our company. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT, as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), gains and losses from change in control, impairment losses on real estate assets, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, and after adjustments for our share of unconsolidated partnerships and joint ventures.
We believe FFO facilitates comparisons of operating performance between periods and among other REITs. However, our computation of FFO may not be comparable to other REITs that do not define FFO in accordance with the NAREIT definition or that interpret the current NAREIT definition differently than we do. Our management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and provides a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.
Our management also uses Core FFO as a measure of our operating performance. Core FFO is further adjusted from FFO for the following items included in GAAP net income: amortization of issuance costs associated with investments in real-estate related loans and debt, accretion of discounts on preferred stock, the performance participation allocation, acquisition fees and expenses, and amortization of above or below intangible lease assets and liabilities. Our calculation of Core FFO may differ from the methodology used for calculating Core FFO by other REITs and, accordingly, our Core FFO may not be comparable. We believe these measures are useful to investors because they facilitate an understanding of our operating performance after adjusting for non-cash expenses and other items not indicative of ongoing operating performance.
Neither FFO nor Core FFO is equivalent to net income or cash generated from operating activities determined in accordance with U.S. GAAP. Furthermore, FFO and Core FFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor Core FFO should be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.
The following table presents the calculation of FFO and Core FFO (in thousands, except share and per share data):
| | | | | Three Months Ended March 31, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Net loss attributable to common stockholders | Net loss attributable to common stockholders | | $ | (3,005) | | | $ | (3,010) | | Net loss attributable to common stockholders | $ | (5,843) | | | $ | (6,004) | | | $ | (8,849) | | | $ | (9,014) | |
Adjustments to arrive at FFO: | Adjustments to arrive at FFO: | | Adjustments to arrive at FFO: | |
Real estate related depreciation and amortization | Real estate related depreciation and amortization | | 10,424 | | | 1,338 | | Real estate related depreciation and amortization | 11,157 | | | 14,043 | | | 21,580 | | | 15,382 | |
Depreciation and amortization from unconsolidated real estate entities | Depreciation and amortization from unconsolidated real estate entities | | 2,343 | | | — | | Depreciation and amortization from unconsolidated real estate entities | 2,156 | | | 2,643 | | | 4,499 | | | 2,643 | |
Gain on sale of investments in unconsolidated real estate entities | | Gain on sale of investments in unconsolidated real estate entities | (7,634) | | | — | | | (7,634) | | | — | |
Loss allocated to noncontrolling interests - limited partners | Loss allocated to noncontrolling interests - limited partners | | (3,828) | | | — | | Loss allocated to noncontrolling interests - limited partners | (6,752) | | | (12,783) | | | (10,580) | | | (12,783) | |
Amount attributable to above from noncontrolling interests - partially owned entities | Amount attributable to above from noncontrolling interests - partially owned entities | | 337 | | | — | | Amount attributable to above from noncontrolling interests - partially owned entities | 129 | | | (3,695) | | | 465 | | | (3,695) | |
Funds from operations attributable to common stockholders and unit holders | Funds from operations attributable to common stockholders and unit holders | | 6,271 | | | (1,672) | | Funds from operations attributable to common stockholders and unit holders | (6,787) | | | (5,796) | | | (519) | | | (7,467) | |
Adjustments: | Adjustments: | | | | | Adjustments: | | | | | | | |
Amortization of intangible assets | Amortization of intangible assets | | 844 | | | — | | Amortization of intangible assets | 835 | | | 438 | | | 1,679 | | | 438 | |
Accretion of discount on preferred stock | Accretion of discount on preferred stock | | 1,281 | | | 278 | | Accretion of discount on preferred stock | 1,373 | | | 448 | | | 2,654 | | | 726 | |
Performance participation allocation | Performance participation allocation | | 19,934 | | | — | | Performance participation allocation | 10,144 | | | 6,455 | | | 30,078 | | | 6,455 | |
Promote from incentive allocation agreement (tax effected) | Promote from incentive allocation agreement (tax effected) | | (23,047) | | | Promote from incentive allocation agreement (tax effected) | — | | | — | | | (23,047) | | | — | |
Acquisition fees and expenses (1) | Acquisition fees and expenses (1) | | 73 | | | 1,709 | | Acquisition fees and expenses (1) | 564 | | | 1,037 | | | 637 | | | 2,746 | |
Loss on debt extinguishment | Loss on debt extinguishment | | 551 | | | — | | Loss on debt extinguishment | (71) | | | — | | | 481 | | | — | |
Gains on derivatives | Gains on derivatives | | (1,427) | | | Gains on derivatives | (396) | | | — | | | (1,823) | | | — | |
Other adjustments | Other adjustments | | 76 | | | 71 | | Other adjustments | (2,116) | | | 51 | | | (2,040) | | | 123 | |
Amount attributable to above from unconsolidated real estate entities | Amount attributable to above from unconsolidated real estate entities | | (1,012) | | | — | | Amount attributable to above from unconsolidated real estate entities | (645) | | | 472 | | | (1,657) | | | 472 | |
Amount attributable to above from noncontrolling interests - partially owned entities | Amount attributable to above from noncontrolling interests - partially owned entities | | 53 | | | Amount attributable to above from noncontrolling interests - partially owned entities | 23 | | | (95) | | | 76 | | | (95) | |
Core funds from operations attributable to common stockholders and unit holders | Core funds from operations attributable to common stockholders and unit holders | | $ | 3,597 | | | $ | 386 | | Core funds from operations attributable to common stockholders and unit holders | $ | 2,924 | | | $ | 3,010 | | | $ | 6,519 | | | $ | 3,398 | |
| FFO per common share and unit - basic and diluted | FFO per common share and unit - basic and diluted | | $ | 0.11 | | | $ | (0.14) | | FFO per common share and unit - basic and diluted | $ | (0.12) | | | $ | (0.18) | | | $ | (0.01) | | | $ | (0.34) | |
Core FFO per common share and unit - basic and diluted | Core FFO per common share and unit - basic and diluted | | $ | 0.06 | | | $ | 0.03 | | Core FFO per common share and unit - basic and diluted | $ | 0.05 | | | $ | 0.10 | | | $ | 0.11 | | | $ | 0.15 | |
Weighted-average common shares and units outstanding | Weighted-average common shares and units outstanding | | 56,059,856 | | | 12,232,289 | | Weighted-average common shares and units outstanding | 58,540,840 | | | 31,471,725 | | | 57,307,201 | | | 21,942,268 | |
| (1) Acquisition fees and expenses during the three months ended March 31, 2021 included costs associated with the CRII Merger, the CMRI Merger, and the CMRII Merger. | |
(1) Acquisition fees and expenses during the three and six months ended June 30, 2021 included costs associated with the CRII Merger, the CMRI Merger, and the CMRII Merger. | | (1) Acquisition fees and expenses during the three and six months ended June 30, 2021 included costs associated with the CRII Merger, the CMRI Merger, and the CMRII Merger. |
See "Results“Results of Operations"Operations” above for further detail.
Weighted average common shares and units are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Weighted-average common shares | 27,156,490 | | | 12,492,221 | | | 25,912,200 | | | 12,362,973 | |
Weighted -average limited partnership unit | 31,384,350 | | | 18,979,504 | | | 31,395,001 | | | 9,579,295 | |
Weighted-average common shares and units outstanding | 58,540,840 | | | 31,471,725 | | | 57,307,201 | | | 21,942,268 | |
Net Asset Value
Our board of directors, including a majority of our independent directors, has adopted valuation procedures, as amended from time to time, that contain a comprehensive set of methodologies to be used in connection with the calculation of our net asset value ("NAV"(“NAV”). Pursuant to these valuation procedures, we computed a March 31,June 30, 2022 NAV per share for our outstanding Class T, Class D, Class I, Class A and Class TX shares of $19.6324. As of March 31, 2022, we had no outstanding Class D shares. Until Class D shares are outstanding as of the date our NAV is determined, we will deem the NAV per share of our Class D shares to be the NAV per share of our Class I, Class A and Class TX shares.$20.7202.
The purchase price per share for each class of common stock will vary and will generally equal our prior month’s NAV per share, as determined monthly, plus applicable upfront selling commissions and dealer manager fees. Please see “Net Asset Value Calculation and Valuation Guidelines” in our prospectus for a detailed description of our valuation guidelines.
CROP has certain classes or series of OP Units that are each economically equivalent to a corresponding class of shares. Accordingly, on the last day of each month, for such classes or series of OP Units, the NAV per OP Unit equals the NAV per share of the corresponding class. To the extent CROP has classes of units that do not correspond to a class of our shares, such units will be valued in a manner consistent with our valuation procedures. The NAV of CROP on the last day of each month equals the sum of the NAVs of each fully-diluted outstanding OP Unit on such day. In calculating the fully-diluted outstanding OP Units we include all outstanding vested LTIP Units, unvested time-based LTIP Units and those performance-based LTIP Units that would be earned based on the internal rate of return as of such day.
Our total NAV in the following table includes the NAV of our Class T, Class D, Class I, Class A and Class TX common stockholders, as well as the partnership interests of CROP held by parties other than us. The following table sets forth the components of our NAV as of March 31,June 30, 2022 (in thousands except share data):
| Components of NAV* | Components of NAV* | As of 3/31/2022 | Components of NAV* | As of 6/30/2022 |
Investments in Multifamily Operating Properties | Investments in Multifamily Operating Properties | $ | 1,973,186 | Investments in Multifamily Operating Properties | $ | 2,060,170 |
Investments in Multifamily Development Properties | Investments in Multifamily Development Properties | 220,520 | Investments in Multifamily Development Properties | 237,852 |
Investments in Real-estate Related Structured Investments | Investments in Real-estate Related Structured Investments | 63,832 | Investments in Real-estate Related Structured Investments | 66,030 |
Operating Company, Land and Other Net Current Assets | Operating Company, Land and Other Net Current Assets | 76,021 | Operating Company, Land and Other Net Current Assets | 118,529 |
Cash and Cash Equivalents | Cash and Cash Equivalents | 75,508 | Cash and Cash Equivalents | 14,563 |
Secured Real Estate Financing | Secured Real Estate Financing | (965,051) | Secured Real Estate Financing | (1,070,208) |
Subordinated Unsecured Notes | Subordinated Unsecured Notes | (43,443) | Subordinated Unsecured Notes | (43,443) |
Preferred Equity | Preferred Equity | (267,173) | Preferred Equity | (127,295) |
Accrued Performance Participation Allocation | Accrued Performance Participation Allocation | (19,934) | Accrued Performance Participation Allocation | (30,078) |
NAV | NAV | $ | 1,113,467 | NAV | $ | 1,226,119 |
Fully-diluted Shares/Units Outstanding | Fully-diluted Shares/Units Outstanding | 56,715,620 | Fully-diluted Shares/Units Outstanding | 59,175,010 |
| * Presented as adjusted for the Company's economic ownership percentage in each asset. | * Presented as adjusted for the Company's economic ownership percentage in each asset. | * Presented as adjusted for the Company's economic ownership percentage in each asset. |
The following table provides a breakdown of our total NAV and NAV per share/unit by class as of March 31,June 30, 2022 (in thousands, except share and per share data):
| | | Class | | | Class | |
| | T | | I | | A | | TX | | OP(1) | | Total | | T | | D | | I | | A | | TX | | OP(1) | | Total |
As of March 31, 2022 | | | | | | | | | | | | |
As of June 30, 2022 | | As of June 30, 2022 | | | | | | | | | | | | | |
Monthly NAV | Monthly NAV | $ | 27,158 | | | $ | 12,299 | | | $ | 457,206 | | | $ | 344 | | | $ | 616,460 | | | $ | 1,113,467 | | Monthly NAV | $ | 61,019 | | | $ | 21 | | | $ | 36,719 | | | $ | 476,816 | | | $ | 363 | | | $ | 651,181 | | | $ | 1,226,119 | |
Fully-diluted Outstanding Shares/Units | Fully-diluted Outstanding Shares/Units | 1,383,342 | | | 626,463 | | | 23,288,245 | | | 17,525 | | | 31,400,045 | | | 56,715,620 | | Fully-diluted Outstanding Shares/Units | 2,944,885 | | | 1,019 | | | 1,772,122 | | | 23,012,120 | | | 17,530 | | | 31,427,334 | | | 59,175,010 | |
NAV per Fully-diluted Share/Unit | NAV per Fully-diluted Share/Unit | $ | 19.6324 | | | $ | 19.6324 | | | $ | 19.6324 | | | $ | 19.6324 | | | $ | 19.6324 | | | NAV per Fully-diluted Share/Unit | $ | 20.7202 | | | $ | 20.7202 | | | $ | 20.7202 | | | $ | 20.7202 | | | $ | 20.7202 | | | $ | 20.7202 | | |
| (1) Includes the partnership interests of CROP held by High Traverse Holdings, an entity beneficially owned by Daniel Shaeffer, Chad Christensen, Gregg Christensen and Eric Marlin and other CROP interests, including LTIP Units as described above, held by parties other than us. | (1) Includes the partnership interests of CROP held by High Traverse Holdings, an entity beneficially owned by Daniel Shaeffer, Chad Christensen, Gregg Christensen and Eric Marlin and other CROP interests, including LTIP Units as described above, held by parties other than us. | (1) Includes the partnership interests of CROP held by High Traverse Holdings, an entity beneficially owned by Daniel Shaeffer, Chad Christensen, Gregg Christensen and Eric Marlin and other CROP interests, including LTIP Units as described above, held by parties other than us. |
Set forth below are the weighted averages of the key assumptions that were used by the independent appraisal advisor in the discounted cash flow methodology used in the March 31,June 30, 2022, valuations of our real property assets, based on property types.
| | | Discount Rate | | Exit Capitalization Rate | | Discount Rate | | Exit Capitalization Rate |
Operating Assets | Operating Assets | 5.74% | | 4.44% | Operating Assets | 5.60% | | 4.40% |
Development Assets | Development Assets | 5.92% | | 4.40% | Development Assets | 5.83% | | 4.40% |
| * Presented as adjusted for the Company's economic ownership percentage in each asset, weighted by gross value. | * Presented as adjusted for the Company's economic ownership percentage in each asset, weighted by gross value. | * Presented as adjusted for the Company's economic ownership percentage in each asset, weighted by gross value. |
A change in these assumptions would impact the calculation of the value of our operating and development assets. For example, assuming all other factors remain unchanged, the changes listed below would result in the following effects on our operating and development asset values:
| Sensitivities | Sensitivities | Change | Operating Asset Values | Development Asset Values | Sensitivities | Change | Operating Asset Values | Development Asset Values |
Discount Rate | Discount Rate | 0.25% decrease | 2.5% | 2.2% | Discount Rate | 0.25% decrease | 2.4% | 2.2% |
| | 0.25% increase | (2.5)% | (2.2)% | | 0.25% increase | (2.4)% | (2.1)% |
Exit Capitalization Rate | Exit Capitalization Rate | 0.25% decrease | 4.8% | 4.5% | Exit Capitalization Rate | 0.25% decrease | 4.2% | 4.4% |
| | 0.25% increase | (4.1)% | | 0.25% increase | (3.6)% | (3.9)% |
| * Presented as adjusted for the Company's economic ownership percentage in each asset. | * Presented as adjusted for the Company's economic ownership percentage in each asset. | * Presented as adjusted for the Company's economic ownership percentage in each asset. |
The following table reconciles stockholders’ equity and CROP partners’ capital per our condensed consolidated balance sheet to our NAV (in thousands):
| | | | | |
| March 31,June 30, 2022 |
Stockholders’ equity | $ | 199,143232,936 | |
Non-controlling interests attributable to limited partners | 282,549270,525 | |
Total partners' capital of CROP under U.S. GAAP | 481,692503,461 | |
Adjustments at share: | |
Accumulated depreciation and amortization, consolidated and unconsolidated entities | 94,356108,284 | |
Goodwill | (439) | |
Deferred tax liability | 3,661 | |
Discount on preferred stock | (9,588)(8,232) | |
Unrealized net real estate and debt appreciation | 543,785619,384 | |
NAV | $ | 1,113,4671,226,119 | |
The following details the adjustments to reconcile GAAP stockholders’ equity and CROP partners' capital per our condensed consolidated balance sheet to our NAV:
–Our preferred stock is accounted for as a liability with associated issuance costs deferred and amortized under GAAP. These issuance costs are excluded for purposes of determining our NAV.
–We recorded goodwill for the difference between the transaction price of the CRII Merger and the fair value of identifiable assets acquired, liabilities assumed, and non-controlling interests. Goodwill was not included for purposes of determining our NAV.
–We recorded certain deferred tax liabilities for the tax effects on the difference in the value of certain assets recorded with the CRII Merger and their underlying tax basis. These deferred tax liabilities wereare excluded for purposes of determining our NAV.
–We depreciate our investments in real estate and amortize certain other assets and liabilities in accordance with GAAP. Such depreciation and amortization is not recorded for purposes of determining our NAV.
–Accumulated depreciation and amortization associated with our investments in unconsolidated real estate entities is also not recorded for purposes of determining our NAV.
–We manage properties on behalf of third parties and under certain agreements have contractual rights to receive promotional interests subject to minimum return hurdles. We do not recognize promotes under GAAP until a liquidation transaction is probable, but do include the fair value of promotes, using a hypothetical liquidation valuation method, for purposes of determining our NAV.
–Our investments in real estate are presented under historical cost in our GAAP consolidated financial statements. Additionally, our mortgage notes, revolving credit facility and construction loans ("Debt"(“Debt”) are presented at their carrying value in our consolidated GAAP financial statements. As such, any increases or decreases in the fair market value of our investments in real estate or our Debt are not included in our GAAP results. For purposes of determining our NAV, our investments in real estate and our Debt are recorded at fair value.
Policies Regarding Operating Expenses
Our advisor must reimburse us the amount by which our aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of our average invested assets or 25% of our net income (the 2%/25% Limitation), unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. For the four consecutive quarters ended March 31,June 30, 2022, our total operating expenses exceeded the 2%/25% Limitation.
Based upon a review of unusual and non-recurring factors, including but not limited to outsized performance during this period resulting in increased performance participation allocation expense and the costs of the CRII Merger, the CMRI Merger and the CMRII Merger,2021 Mergers, our independent directors determined that the excess expenses were justified.
Liquidity and Capital Resources
Our principal demands for funds during the short and long-term are and will be for the acquisition of multifamily apartment communities and investments in multifamily real estate-related assets; operating expenses, including the management fee we pay to our advisor and the performance participation allocation, capital expenditures and general and administrative expenses; payments under debt obligations; repurchases of common and preferred stock; and payments of distributions to stockholders. We will obtain the capital required to purchase multifamily apartment communities and make investments in multifamily real estate-related assets and conduct our operations from the proceeds of the Private Offering, the Follow-on Offering, from our credit facilities, other secured or unsecured financings from banks and other lenders, and from any undistributed funds from our operations.
We intend to strengthen our capital and liquidity positions by continuing to focus on our core fundamentals at the property level. Factors which could increase or decrease our future liquidity include but are not limited to operating performance of the properties, owned by our joint ventures, including the impact of COVID-19 on the properties, owned by the joint ventures, volatility in interest rates, and the satisfaction of REIT dividend requirements.
As of March 31,June 30, 2022, we have $450.4$428.4 million of fixed rate debt and $387.8$566.0 million of variable rate debt, which includes $66.2$79.9 million of construction loans. $216.6$318.7 million, or 56% of our variable rate debt is accompanied by interest rate cap hedging instruments. In addition, CROP has issued unsecured promissory notes in several private placement offerings, in an aggregate amount of $43.4 million as of March 31,June 30, 2022.
We have various credit facilities in place that provide us with additional liquidity. Our JP Morgan Revolving Credit Facility has a variable rate and is secured by Cottonwood One Upland and Parc Westborough. We may obtain advances secured against Cottonwood One Upland and Parc Westborough up to $125.0 million on the JP Morgan Revolving Credit Facility. We can draw upon or pay down the JP Morgan Revolving Credit Facility at our discretion, subject to loan-to-value requirements, debt service coverage ratios and other covenants and restrictions as set forth in the loan documents. As of March 31,June 30, 2022, we had no advances of $60.0 million on the JP Morgan Revolving Credit Facility. Additionally, we have three other credit facilities through Fannie Mae that may provide additional liquidity if necessary as long as we maintain certain loan-to-value ratios and other requirements as set forth in the loan documents.
We must redeem the Series 2019 Preferred Stock for cash at a redemption price per share equal to $10.00 plus any accrued and unpaid dividends, to the extent there are funds legally available, on December 31, 2023. This date may be extended by two one-year extension options. In addition, we must redeem the Series 2016 Preferred Stock for cash at a redemption price equal to $10.00 per share plus any accrued and unpaid dividends to the extent there are any funds legally available, on the redemption date. The initial redemption date for the Series 2016 Preferred Stock was January 31, 2021, and it was extended to January 31, 2022. In January 2022, we extended our Series 2016 Preferred Stock redemption date to the maximum extension date of January 31, 2023. Subsequent to March 31, 2022, we fully redeemed the Series 2016 Preferred Stock on April 18, 2022 for approximately $139.8 million, utilizing available cash on hand, funds raised in the Follow-on Offering and a $70.0 million draw on our JP Morgan Revolving Credit facility. Our Series 2017 Preferred Stock was fully redeemed in the first quarter of 2022 immediately following the January 31, 2022 redemption date for approximately $2.6 million. On April 18, 2022, we fully redeemed the Series 2016 Preferred Stock for $139.8 million.
In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to pay offering costs in connection with the Private Offering and the Follow-on Offering, as well as make certain payments to our advisor pursuant to the terms of our advisory management agreement.
To maintain our qualification as a REIT, we will be required to make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (computed without regard to the dividends-paid deduction and excluding net capital gain). Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant.
Cash Flows
The following table provides a breakdown of the net change in our cash and cash equivalents and restricted cash (in thousands):
| | | Three Months Ended March 31, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Net cash used in operating activities | | $ | (14,806) | | | $ | (202) | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | | $ | (7,208) | | | $ | 5,807 | |
Net cash provided by (used in) investing activities | Net cash provided by (used in) investing activities | | 20,084 | | | (3,372) | | Net cash provided by (used in) investing activities | | (58,020) | | | 21,550 | |
Net cash provided by financing activities | Net cash provided by financing activities | | 99,517 | | | 6,360 | | Net cash provided by financing activities | | 160,547 | | | 25,293 | |
Net increase in cash and cash equivalents and restricted cash | Net increase in cash and cash equivalents and restricted cash | | $ | 104,795 | | | $ | 2,786 | | Net increase in cash and cash equivalents and restricted cash | | $ | 95,319 | | | $ | 52,650 | |
Net cash flows used in operating activities were $14.8$7.2 million during the threesix months ended March 31,June 30, 2022. Net cash inflows increased as a result ofdue to the 2021 Mergers which resulted in increased tenant receipts and property management fees income from structured investments and an increase in accounts payable and accrued liabilities,liabilities. These operating cash inflows were fully offset by the performance participation allocation payment of $51.8 million, additional operating expenses including interest expense on our mortgage notes and revolving credit facility and payment of preferred stock interest. Cash flows used inprovided by operating activities for the same period in 2021 were $202,000. Cash inflows came$5.8 million, primarily fromdue to the CRII Merger which resulted in increased tenant receipts and interest income received on the Dolce B-Noteproperty management fees. Operating cash inflows were also due to an increase in accounts payable and ouraccrued liabilities offset by operating expenses, and payment of preferred equity investments, offset primarily with transaction costs from the 2021 Mergers.stock interest.
Cash flows provided byused in investing activities were $20.1$58.0 million during the threesix months ended March 31,June 30, 2022, primarily due to our purchase of Cottonwood Lighthouse Point, investments in development projects and capital improvements, offset partially by a return on capital from investments in unconsolidated entities upon refinance offset by investmentsand proceeds from the sale of 3800 Main and the sale of interests in development projects and capital improvements.Alpha Mill. Cash flows used inprovided by investing activities were $3.4$21.6 million for the same period in 2021 due to additional investmentsthe cash acquired in connection with the CRII Merger and repayment from settlement of the Dolce B-Note, and ouroffset by funding of preferred equity investments.at Riverfront, draws on the Integra Peaks mezzanine loan, and capital improvements and development activities.
Cash flows provided by financing activities were $99.5$160.5 million during the threesix months ended March 31,June 30, 2022, as a result of net proceeds we received from the issuance of common stock, the issuance of Series 2019 Preferred Stock, the issuance of common stock, net borrowings under mortgage notes and term loans, and net draws on our JP Morgan Revolving Credit Facility, partially offset by the full redemption of both our Series 2016 and our Series 2017 Preferred Stock, distributions paid to both common stockholders and noncontrolling interest holders, net repayments made on our JP Morgan Revolving Credit Facility, repayment on construction loans, and repurchases of preferred stock, common stock and OP Units. Cash flows provided by financing activities were $6.4$25.3 million for the same period in 2021, driven mainly by the net proceeds we received from the issuance of our Series 2019 Preferred Stock and proceeds from construction loans, offset partially by distributions paid to both common stockholders and noncontrolling interest holders and net repayments made on our JP Morgan Revolving Credit Facility.
Distributions
The following table shows distributions paid and cash flow provided by (used in) operating activities during the threesix months ended March 31,June 30, 2022 and the year ended December 31, 2021 (in thousands):
| | | Three Months Ended March 31, 2022 | | Year Ended December 31, 2021 | | Six Months Ended June 30, 2022 | | Year Ended December 31, 2021 |
Distributions paid in cash - common stockholders | Distributions paid in cash - common stockholders | $ | 4,174 | | | $ | 9,482 | | Distributions paid in cash - common stockholders | $ | 8,774 | | | $ | 9,482 | |
Distributions paid in cash to noncontrolling interests - limited partners | Distributions paid in cash to noncontrolling interests - limited partners | 5,460 | | | 10,591 | | Distributions paid in cash to noncontrolling interests - limited partners | 11,018 | | | 10,591 | |
Distributions of DRP (reinvested) | Distributions of DRP (reinvested) | 466 | | | 141 | | Distributions of DRP (reinvested) | 979 | | | 141 | |
Total distributions (1) | Total distributions (1) | $ | 10,100 | | | $ | 20,214 | | Total distributions (1) | $ | 20,771 | | | $ | 20,214 | |
| Source of distributions (2) | Source of distributions (2) | | Source of distributions (2) | |
Paid from cash flows provided by operations | Paid from cash flows provided by operations | $ | — | | | $ | 11,044 | | Paid from cash flows provided by operations | $ | 7,598 | | | $ | 11,044 | |
Paid from revolving credit facility | — | | | 5,000 | | |
Paid from additional borrowings | | Paid from additional borrowings | 2,560 | | | 5,000 | |
Paid from offering proceeds | Paid from offering proceeds | 9,634 | | | 4,029 | | Paid from offering proceeds | 9,634 | | | 4,029 | |
Offering proceeds from issuance of common stock pursuant to the DRP | Offering proceeds from issuance of common stock pursuant to the DRP | 466 | | | 141 | | Offering proceeds from issuance of common stock pursuant to the DRP | 979 | | | 141 | |
Total sources | Total sources | $ | 10,100 | | | $ | 20,214 | | Total sources | $ | 20,771 | | | $ | 20,214 | |
| Net cash used in operating activities (2) | $ | (14,806) | | | $ | (2,816) | | |
Net cash provided by (used in) operating activities (2) | | Net cash provided by (used in) operating activities (2) | $ | (7,208) | | | $ | 5,424 | |
| (1) Distributions are paid on a monthly basis. In general, distributions for all record dates of a given month are paid on or about the fifth business day of the following month. | (1) Distributions are paid on a monthly basis. In general, distributions for all record dates of a given month are paid on or about the fifth business day of the following month. | (1) Distributions are paid on a monthly basis. In general, distributions for all record dates of a given month are paid on or about the fifth business day of the following month. |
(2) The allocation of total sources are calculated on a quarterly basis. Generally, for purposes of determining the source of our distributions paid, we assume first that we use positive cash flow from operating activities from the relevant or prior quarter to fund distribution payments. As such, amounts reflected above as distributions paid from cash flows provided by operations may be from prior quarters which had positive cash flow from operations. | (2) The allocation of total sources are calculated on a quarterly basis. Generally, for purposes of determining the source of our distributions paid, we assume first that we use positive cash flow from operating activities from the relevant or prior quarter to fund distribution payments. As such, amounts reflected above as distributions paid from cash flows provided by operations may be from prior quarters which had positive cash flow from operations. | (2) The allocation of total sources are calculated on a quarterly basis. Generally, for purposes of determining the source of our distributions paid, we assume first that we use positive cash flow from operating activities from the relevant or prior quarter to fund distribution payments. As such, amounts reflected above as distributions paid from cash flows provided by operations may be from prior quarters which had positive cash flow from operations. |
For the threesix months ended March 31,June 30, 2022, distributions declared to common stockholders and limited partners were approximately $4.3$9.1 million and $5.5$11.0 million, respectively. For the threesix months ended March 31,June 30, 2022, we paid aggregate distributions to common stockholders and limited partners of approximately $4.2$8.8 million and $5.5$11.0 million. For the threesix months ended March 31,June 30, 2022, our net loss was approximately $6.9$19.9 million. Cash flows used in operating activities for the threesix months ended March 31,June 30, 2022 was approximately $14.8$7.2 million.
Critical Accounting Policies
Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the period ending December 31, 2021 for discussions of our critical accounting estimates. As of March 31,June 30, 2022, our critical accounting estimates have not changed from those described in that report.
Subsequent Events
Series 2016 Preferred Stock PayoffMerger with Cottonwood Multifamily Opportunity Fund, Inc.
Our Series 2016 Preferred Stock was fully redeemed on April 18,On July 8, 2022, for approximately $139.8 million, utilizing available cash on hand, cash from asset-level refinances, funds raised inwe, CMOF, CMOF OP, CROP, and Merger Sub, entered into the Follow-on OfferingCMOF Merger Agreement. Subject to the terms and a $70.0 million draw onconditions of the CMOF Merger Agreement, (i) CMOF will merge with and into Merger Sub, with Merger Sub surviving as our JP Morgan Revolving Credit facility.
Distributions Declared - Common Stockdirect, wholly owned subsidiary (the “Company Merger”) and (ii) CMOF OP will merge with and into CROP, with CROP surviving (the “Partnership Merger” and, together with the Company Merger, the “CMOF Merger”). At such time, the separate existence of CMOF and CMOF OP will cease.
On May 10, 2022, our boardAt the effective time of directors declared a gross distribution for the monthCompany Merger, each issued and outstanding share of May of $0.06000000, or $0.72 annually, for each classCMOF’s common stock, $0.01 par value per share (the “CMOF Common Stock”) will be converted into the right to receive 0.8669 shares of our Class A common stock, to holders of record on May 31, 2022, to be paid in June. Each class of our common stock will receive the same aggregate gross distribution$0.01 par value per share. The net distribution varies for each class based on applicable distribution fees, which are deducted from the monthly distribution per shareAs of June 30, 2022, 5,001,000 shares of CMOF Common Stock were issued and paid directlyoutstanding. Shares of CMOF Common Stock held as of immediately prior to the applicable distributor.effective time of the Company Merger by us, any wholly owned subsidiary of ours, or any wholly owned subsidiary of CMOF will be automatically canceled in connection with the Company Merger without receiving payment.
At the effective time of the Partnership Merger, each outstanding common unit of partnership interests in CMOF OP (“CMOF OP Partnership Unit”) will be converted into the right to receive 0.8669 common units of CROP (“CROP Common Units”). CMOF OP Partnership Units held as of immediately prior to the effective time of the Partnership Merger by us, any wholly owned subsidiary of ours, CMOF, or any wholly owned subsidiary of CMOF will be canceled in connection with the Partnership Merger without receiving payment.
Distributions Declared - CROP Units
AsThe obligations of each party to consummate the sole memberCMOF Merger are subject to a number of conditions, including receipt of the sole general partnerapproval of CROP, we declared distributions on Common Limited OP Units and Preferred OP Units to correspond to the distributions declared on ourCompany Merger by the holders of a majority of the outstanding shares of the CMOF common stock and preferred stock.
Alpha Mill Transaction
On April 7, 2022, we sold to certain unaffiliated third parties approximately 28.9% of our 57.2% ownership interest in Alpha Mill apartments, a 267-unit apartment community located in Charlotte, North Carolina. We will retain at least a 20% ownership interest in Alpha Mill apartments under the terms of the offering and financing documents, and will also continue to provide property and asset management services. Among other material terms, the offering provides that each purchaser of an interest in Alpha Mill apartments will enter into an option agreement which provides us the right (but not the obligation) to re-acquire such purchasers interest at fair value beginning on October 31, 2023 (but only after any purchaser has owned their interest in Alpha Mill apartments for at least two years). The purchaser may elect to receive limited partnership units in CROP (our operating partnership) or cash in the event we exercise our option.
Financing Activities
On May 5, 2022, we completed a borrow-up on our 2018 Fannie Facility in the amount of $9.2 million.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Quantitative and qualitative disclosures about market risk have been omitted as permitted under rules applicable to smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31,June 30, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31,June 30, 2022, our disclosure controls and procedures were effective.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31,June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART 2II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of March 31,June 30, 2022, we were not involved in any material legal proceedings.
Item 1A. Risk Factors
None.Please see the risks discussed below and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.
Risks Related to our Company
We have incurred net losses under GAAP in the past and may incur net losses in the future, and we have an accumulated deficit and may continue to have an accumulated deficit in the future.
For the six months ended June 30, 2022 and for the year ended December 31, 2021, we had consolidated net losses of $19.9 million and $106.9 million, respectively. As of June 30, 2022, we had an accumulated deficit of $64.7 million. These amounts largely reflect the expense of real estate depreciation and amortization in accordance with GAAP, which was $23.3 million for the six months ended June 30, 2022 and $63.4 million for the year ended December 31, 2021. In addition, the six months ended June 30, 2022 and the year ended December 31, 2021 also included $30.1 million and $51.8 million, respectively, of charges related to the performance participation allocation.
Net loss and accumulated deficit are calculated and presented in accordance with GAAP, which, among other things, requires depreciation of real estate investments to be calculated on a straight-line basis. As a result, our operating results imply that the value of our real estate investments will decrease evenly over a set time period. However, we believe that the value of real estate investments will fluctuate over time based on market conditions. Thus, in addition to GAAP financial metrics, management reviews certain non-GAAP financial metrics, funds from operations, or FFO and Core FFO. FFO measures operating performance that excludes gains or losses from sales of depreciable properties, real estate-related depreciation and amortization and after adjustments for our share of consolidated and unconsolidated entities. See Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations– Funds from Operations” for considerations on how to review this metric.
We have paid distributions from offering proceeds. In the future we may continue to fund distributions with offering proceeds. To the extent we fund distributions from sources other than our cash flow from operations, we will have less funds available for investment in multifamily apartment communities and multifamily real estate-related assets and the overall return to our stockholders may be reduced.
Our charter permits us to make distributions from any source, including offering proceeds or borrowings (which may constitute a return of capital), and our charter does not limit the amount of funds we may use from any source to pay such distributions. We intend to make distributions on our common stock on a per share basis with each share receiving the same distribution, subject to any class-specific expenses such as distribution fees on our Class T and Class D shares. If we fund distributions from financings, our offerings or other sources, we will have less funds available for investment in multifamily apartment communities and other multifamily real estate-related assets and the number of real estate properties that we invest in and the overall return to our stockholders may be reduced. If we fund distributions from borrowings, our interest expense and other financing costs, as well as the repayment of such borrowings, will reduce our earnings and cash flow from operations available for distribution in future periods. If we fund distributions from the sale of assets or the maturity, payoff or settlement of multifamily real estate-related assets, this will affect our ability to generate cash flows from operations in future periods.
During the early stages of our operations, it is likely that we will use sources of funds, which may constitute a return of capital to fund distributions. During our offering stage, when we may raise capital more quickly than we acquire income-producing assets, and for some period after, we may not be able to make distributions solely from our cash flow from operations. Further, because we may receive income from our investments at various times during our fiscal year and because we may need cash flow from operations during a particular period to fund capital expenditures and other expenses, we expect that at least during the early stages of our existence and from time to time during our operational stage, we will declare distributions in anticipation of cash flow that we expect to receive during a later period and we will make these distributions in advance of our actual receipt of these funds. In addition, to the extent our investments are in development or redevelopment projects or in properties that have significant capital requirements, our ability to make distributions may be negatively impacted,
especially during our early periods of operation. In these instances, we expect to look to third party borrowings to fund our distributions. We may also fund such distributions from the sale of assets. To the extent distributions exceed cash flow from operations, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize capital gain.
For the six months ended June 30, 2022, and the year ended December 31, 2021, we paid aggregate distributions to common stockholders and limited partnership unitholders of $20.8 million and $20.2 million, including $19.8 million and $20.1 million of distributions paid in cash and $1.0 million and $0.1 million of distributions reinvested through our distribution reinvestment plan, respectively. Our net loss for the six months ended June 30, 2022 and the year ended December 31, 2021 was $19.9 million and $106.9 million, respectively. Cash used in operating activities were $7.2 million for the six months ended June 30, 2022, and cash flows provided by operating activities were $5.4 million for the year ended December 31, 2021. We funded our total distribution paid during the six months ended June 30, 2022, which includes net cash distributions and distribution reinvestment by stockholders, with $7.6 million prior period cash provided by operating activities, $2.6 million from additional borrowings, $9.6 million from offering proceeds, and $1.0 million of offering proceeds from issuance of common stock pursuant to the DRP. We funded our total distributions paid for the year ended December 31, 2021, which includes net cash distributions and distributions reinvested by stockholders, with $11.1 million prior period cash provided by operating activities, $5.0 million from additional borrowings, $4.0 million from offering proceeds, and $0.1 million of offering proceeds from issuance of common stock pursuant to the DRP.
Generally, for purposes of determining the source of our distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments. To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have less funds available for the acquisition of real estate investments, the overall return to our stockholders may be reduced and subsequent investors will experience dilution. In addition, to the extent distributions exceed cash flow from operating activities, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize capital gain.
Repurchases of common stock or CROP units our advisor or the Special Limited Partner elects to receive in lieu of fees or distributions will reduce cash available for distribution to our stockholders.
Our advisor or the Special Limited Partner may choose to receive our common stock or CROP units in lieu of certain fees or distributions. Under certain circumstances CROP units or shares of our common stock received in payment of the management fee are required to be repurchased, in cash at the holder’s election, and there may not be sufficient cash to make such a repurchase payment; therefore, we may need to use cash from operations, borrowings, offering proceeds or other sources to make the payment, which will reduce cash available for distribution to you or for investment in our operations. Repurchases of our shares or CROP units from our advisor paid to our advisor as a management fee are not subject to the monthly and quarterly volume limitations or the early repurchase deduction, and such repurchases may receive priority over other shares submitted for repurchase during such period. Repurchases of our shares or CROP units from the Special Limited Partner distributed to the Special Limited Partner with respect to its performance participation interest are not subject to any requirement that the units be held for at least one year but are subject to the other provisions regarding the exchange right as contemplated by the CROP partnership agreement.
We disclose FFO, a non-GAAP financial measure, in communications with investors, including documents filed with the SEC. However, FFO is not equivalent to our net income or loss as determined under GAAP, and is not a complete measure of our financial position and results of operations.
We use, and we disclose to investors, FFO, which is considered a non-GAAP financial measure. See Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations– Funds from Operations.” FFO is not equivalent to our net income or loss as determined in accordance with GAAP. FFO and GAAP net income differ because FFO excludes gains or losses from sales of property and impairment of depreciable real estate, and adds back real estate-related depreciation and amortization.
No single measure can provide investors with sufficient information and investors should consider all of our disclosures as a whole in order to adequately understand our financial position, liquidity and results of operations. Because of the differences between FFO and GAAP net income or loss, FFO may not be an accurate indicator of our operating performance, especially during periods in which we are acquiring properties. In addition, FFO is not necessarily indicative of cash flow available to fund cash needs and investors should not consider FFO as an alternative to cash flows from operations or an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders. Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments
that we use to calculate FFO. Also, because not all companies calculate this type of measure the same way, comparisons with other companies may not be meaningful.
Our UPREIT structure may result in potential conflicts of interest with limited partners in CROP whose interests may not be aligned with those of our stockholders.
Our directors and officers have duties to our corporation and our stockholders under Maryland law and our charter in connection with their management of the corporation. At the same time, we, as the sole member of the sole general partner, have fiduciary duties under Delaware law to CROP and to the limited partners in connection with the management of CROP. Our duties as general partner of CROP and its partners may come into conflict with the duties of our directors and officers to the corporation and our stockholders. Under Delaware law, a general partner of a Delaware limited partnership owes its limited partners the duties of good faith and fair dealing. Other duties, including fiduciary duties, may be modified or eliminated in the partnership agreement for the partnership. The CROP partnership agreement provides that, for so long as we own a controlling interest in CROP, any conflict that cannot be resolved in a manner not adverse to either our stockholders or the limited partners may be resolved in favor of our stockholders.
Additionally, the CROP partnership agreement expressly limits our liability by providing that we and our officers, directors, agents and employees will not be liable or accountable to CROP for losses sustained, liabilities incurred or benefits not derived if we or our officers, directors, agents or employees acted in good faith. In addition, CROP is required to indemnify us and our officers, directors, employees, agents and designees to the extent permitted by applicable law and to the extent indemnification is not prohibited under Article XVI of our charter, from and against any and all claims arising from operations of CROP, unless it is established that: (1) the act or omission was material to the matter giving rise to the proceeding and either was committed in bad faith or was the result of active and deliberate dishonesty; (2) the indemnified party received an improper personal benefit in money, property or services; or (3) in the case of a criminal proceeding, the indemnified person had reasonable cause to believe that the act or omission was unlawful.
The provisions of Delaware law that allow the fiduciary duties of a general partner to be modified by a partnership agreement have not been tested in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the CROP partnership agreement that purport to waive or restrict our fiduciary duties.
We expect that as of December 31, 2023, we will no longer be an emerging growth company.
We expect to no longer qualify as an emerging growth company as of December 31, 2023. Accordingly, we will become subject to certain disclosure and compliance requirements that apply to other public companies but did not previously apply to us due to our status as an emerging growth company. We expect that the loss of emerging growth company status and compliance with the additional requirements of not being an emerging growth company will increase our legal and financial compliance costs and cause management and other personnel to divert attention from operational and other business matters to devote substantial time to public company reporting requirements.
Supply chain disruptions could create unexpected renovation or maintenance costs or delays and/or could impact our development projects, any of which could have a negative effect on our results of operations.
The construction and building industry, similar to many other industries, has recently experienced worldwide supply chain disruptions due to a multitude of factors that are beyond our control, including the COVID-19 pandemic, and such disruptions may continue to occur. Materials, parts and labor have also increased in cost over the recent past, sometimes significantly and over a short period of time. Our development projects as well as small-scale construction projects, such as building renovations and maintenance or and tenant improvements required under leases are a routine and necessary part of our business. We may incur costs for our development projects or routine maintenance at our properties that exceeds our original estimates due to increased costs for materials or labor or other costs that are unexpected. We also may be unable to complete our development projects on schedule due to supply chain disruptions or labor shortages.
Macroeconomic trends including inflation and rising interest rates may adversely affect our financial condition and results of operations.
Macroeconomic trends, including increases in inflation and rising interest rates, may adversely impact our business, financial condition and results of operations. Inflation in the United States has recently accelerated and is currently expected to continue at an elevated level in the near-term. Rising inflation could have an adverse impact on any floating rate mortgages, credit facility and general and administrative expenses, as these costs could increase at a rate higher than our rental and other revenue.
The Federal Reserve has recently started raising interest rates to combat inflation and restore price stability and it is expected that rates will continue to rise throughout the remainder of 2022. Currently, a greater portion of our debt is fixed-rate and will not reset as interest rates rise. However,borrowings under our floating rate mortgages and variable rate revolving credit facility bear interest at a floating-rate based on LIBOR or SOFR. As a result, to the extent our exposure to increases in interest rates is not eliminated through interest rate protection agreements, such increases will result in higher debt service costs which will adversely affect our cash flows.
The derivative financial instruments that we may use to hedge against interest rate fluctuations may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on your investment.
We may use derivative financial instruments, such as interest rate cap or collar agreements and interest rate swap agreements, to hedge exposures to changes in interest rates on loans secured by our assets, but no hedging strategy can protect us completely. These agreements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements and that these arrangements may not be effective in reducing our exposure to interest rate changes. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses. In addition, the use of such instruments may reduce the overall return on our investments. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the 75% or 95% REIT gross income tests.
CROP may be subject to tax indemnification obligations upon the taxable sale of certain of its properties. CROP will not have control of the assets that will be subject to an in-kind redemption transaction under the CROP Tax Protection Agreement.
Pursuant to the tax protection agreement between CROP and High Traverse Holdings, LLC (“HT Holdings”), a Delaware limited liability company, which is beneficially owned by Daniel Shaeffer, Chad Christensen, Gregg Christensen and Eric Marlin, each of who are our executive officers and some of whom are our directors, (the “CROP Tax Protection Agreement”), CROP has agreed, until May 7, 2031, to indemnify HT Holdings (including Daniel Shaeffer, Chad Christensen, Gregg Christensen and Eric Marlin, as beneficial owners of HT Holdings, and their affiliated trusts and certain other entities) (collectively, the “protected partners”) against certain tax consequences of a taxable transfer of all or any portion of the properties that are owned by CROP or any of its subsidiaries as of the closing date of our merger with CROP, subject to certain conditions and limitations. We estimate the maximum potential liability associated with the CROP Tax Protection Agreement to be $39.9 million. Although this estimate has been made based on the best judgment of our management assuming current tax rates as well as the current state of residence of indemnified parties, both of which may change in the future, no assurances can be provided that the actual amount of any indemnification obligation would not exceed this estimate. These indemnification obligations could prevent CROP from selling its properties at times and on terms that are in the best interest of CROP, us and the respective equity owners of CROP and us and any indemnification payments that may become payable could be a significant expense for CROP and us. In addition, at any time after the closing (including after expiration of the tax protection term), each protected partner and CROP will have the right to exercise an in-kind redemption transaction (i.e., a redemption of all of the protected partner’s interest in CROP in exchange for one or more assets of CROP at the then-current market price). This would eliminate CROP’s indemnification obligations to the protected partner(s). The protected partners will have the right to select the assets of CROP necessary to effectuate the in-kind redemption transaction, subject to certain limitations. If an in-kind redemption transaction is effectuated, CROP’s portfolio may become less geographically diverse and thus subject to greater market risk, and CROP may be required to transfer some of its prime assets to the protected partner(s).
In addition, CROP has entered and may in the future into tax indemnification agreements with certain persons who contributed their interests in properties to CROP in exchange for CROP Common Units. These current agreements provide that CROP will indemnify such contributors against certain tax consequences of a taxable sale of the property contributed by such contributors through 2025, subject to certain conditions and limitations. We estimate the maximum potential liability associated with these tax indemnification agreements to be $31.5 million. Although this estimate has been made based on the best judgment of our management assuming current tax rates as well as the current state of residence of indemnified parties, both of which may change in the future, no assurances can be provided that the actual amount of any indemnification obligation would not exceed this estimate. Future tax indemnification agreements entered by CROP may extend such obligations beyond 2025. The obligations of CROP under these and future indemnification agreements may constrain CROP with respect to deciding to dispose of a particular property and may also result in financial obligations for us.
Changes recently made to the U.S. tax laws could have a negative impact on our business.
The Tax Cuts and Jobs Act, Pub. L. No. 115-97 (December 22, 2017) (the “Tax Act”) made significant changes to the U.S. federal income tax rules for taxation of individuals and corporations, generally effective for taxable years beginning after December 31, 2017. In the case of individuals, the tax brackets have been adjusted, the top federal income rate has been reduced to 37%, special rules reduce taxation of certain income earned through pass-through entities and reduce the top effective rate applicable to ordinary dividends from REITs to 29.6% (through a 20% deduction for ordinary REIT dividends received) and various deductions have been eliminated or limited, including limiting the deduction for state and local taxes to $10,000 per year. Most of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017 and before January 1, 2026. The top corporate income tax rate has been reduced to 21%. The Tax Act includes only minor changes to the REIT rules (other than the 20% deduction applicable to individuals for ordinary REIT dividends received).
The Tax Act makes numerous other changes to the tax laws that may affect REITs and prospective investors directly or indirectly. As a result of the changes to U.S. federal tax laws implemented by the Tax Act, our taxable income and the amount of distributions to our stockholders required in order to maintain our REIT status, and our relative tax advantage as a REIT, could change. As a REIT, we are required to distribute at least 90% of our taxable income to our stockholders annually. In addition, the Tax Act imposes limitations on the deductibility of business interest expense.
In 2020, the several pieces of legislation intended to address the economic impact of the recent outbreak of COVID-19 were enacted (the “COVID-19 Legislation”), including the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136 (the “CARES Act”), which was signed into law on March 27, 2020. The CARES Act makes several changes to the U.S. federal income tax rules for taxation of individuals and corporations, including the allowance of net operating loss (“NOL”) carrybacks for certain tax years, the removal of caps on the application of NOLs for certain tax years, the removal of the cap on excess business loss deductions for certain tax years, and an increase in the cap on the deduction of net interest expenses for businesses.
In addition, the Biden administration and members of Congress have proposed various changes to the U.S. federal tax regime, including an increase in the U.S. federal corporate income tax rate from the current 21% rate to, in various proposals, 26.5% or 28%. Congress is currently working on draft legislation, that may include the proposed or other changes to the U.S. federal tax law; however, it is not yet clear what changes will be made or when, or what impact any such changes will have on the company. Prospective investors are urged to consult with their tax advisors with respect to the status any regulatory or administrative developments and proposals and their potential effect on investment.
Risks Related to the CMOF Merger
The merger consideration will not be adjusted in the event of any change in the relative values of CMOF or us.
Upon the consummation of the CMOF Merger, each outstanding share of CMOF common stock will be converted automatically into the right to receive 0.8669 shares of our Class A common stock. The merger consideration will not be adjusted, other than in the limited circumstances as expressly contemplated in the CMOF Merger Agreement in connection with stock splits, combinations, reclassifications, reorganizations, merger or exchange or similar transaction, or a stock dividend having a record date between the date of the CMOF Merger Agreement and the effective time of the CMOF Merger, such that the issued and outstanding shares of CMOF common stock, CMOF OP partnership units, securities convertible or exchangeable into or exercisable for shares of CMOF common stock or CMOF OP partnership units, our Class A common stock or CROP common units have been changed into a different number of shares or other securities or a different class.
Completion of the CMOF Merger is subject to many conditions and if these conditions are not satisfied or waived, the merger will not be completed, which could result in the expenditure of significant unrecoverable transaction costs.
The completion of the CMOF Merger is subject to many conditions, which must be satisfied or waived in order to complete the CMOF Merger. The mutual conditions of the parties include, among others, (i) the approval by holders of CMOF common stock of the Company Merger, (ii) the absence of any judgment, injunction, order or decree issued by any governmental authority of competent jurisdiction prohibiting the consummation of the CMOF Merger, and the absence of any law that has been enacted, entered, promulgated or enforced by any governmental authority after the date of the CMOF Merger Agreement that prohibits, restrains, enjoins or makes illegal the consummation of the CMOF Merger or the other transactions contemplated by the CMOF Merger Agreement, and (iii) the effectiveness of the Form S-4 to be filed by us for purposes of registering shares of our Class A common stock to be issued in connection with the Company Merger. In addition, each party’s obligation to consummate the CMOF Merger is subject to certain other conditions, including, among others, (a) the accuracy of
the other party’s representations and warranties (subject to customary materiality qualifiers and other customary exceptions), (b) the other party’s compliance with its covenants and agreements contained in the CMOF Merger Agreement (subject to customary materiality qualifiers), (c) the absence of any change, event, circumstance or development arising during the period from the date of the CMOF Merger Agreement until the effective time of the CMOF Merger that has had or would have a material adverse effect on the other party, (d) the receipt of an opinion of counsel for us to the effect that we have been organized and have operated in conformity with the requirements for qualification and taxation as a REIT and (f) the receipt of an opinion of counsel of each party to the effect that the Company merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code.
There can be no assurance that the conditions to closing of the CMOF Merger will be satisfied or waived or that the CMOF Merger will be completed. Failure to consummate the CMOF Merger may adversely affect our results of operations and business prospects for the following reasons, among others, (i) we have incurred and will continue to incur certain transaction costs, regardless of whether the CMOF Merger closes, which could adversely affect our financial condition, results of operations and ability to make distributions to our stockholders and (ii) the CMOF Merger, whether or not it closes, will divert the attention of certain management and other key employees from ongoing business activities, including the pursuit of other opportunities that could be beneficial to us, respectively. In addition, we may terminate the CMOF Merger Agreement under certain circumstances, including, among other reasons, if the merger is not completed by the April 8, 2023.
The pendency of the CMOF Merger, including as a result of the restrictions on the operation of our business during the period between signing the merger agreement and the completion of the CMOF Merger, could adversely affect our business and operations.
In connection with the pending CMOF Merger, some of our business partners or vendors may delay or defer decisions, which could negatively impact our revenues, earnings, cash flows and expenses, regardless of whether the CMOF Merger is completed. In addition, due to operating covenants in the CMOF Merger Agreement, we may be unable, during the pendency of the CMOF Merger, to pursue certain strategic transactions, undertake certain significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions that are not in the ordinary course of business, even if such actions would prove beneficial.
The Company Merger is subject to approval by CMOF stockholders.
In order for the CMOF Merger to be completed, CMOF stockholders must approve the Company Merger, which requires the affirmative vote of the holders of at least a majority of the outstanding shares of CMOF common stock entitled to vote on the Company Merger. If the merger is not approved by the stockholders by April 8, 2023, either party can terminate the CMOF Merger Agreement, in which case the CMOF Merger would not be consummated.
In certain circumstances, either of CMOF or us may terminate the CMOF Merger Agreement.
CMOF or us may terminate the CMOF Merger Agreement by mutual written consent, if the CMOF Merger has not been consummated by April 8, 2023, if a final and non-appealable order is entered permanently restraining or otherwise prohibiting the transaction, upon a material uncured breach by the other party that would cause the closing conditions not to be satisfied, or upon the failure to obtain the required approval of the CMOF stockholders. In addition, CMOF has the right to terminate the CMOF Merger Agreement at any time prior to obtaining the required approval of the CMOF stockholders in order to accept a Superior Proposal (as defined in the CMOF Merger Agreement), provided that CMOF has complied with the terms of the CMOF Merger Agreement regarding termination in this circumstance. CMOF may also terminate the CMOF Merger Agreement if we have failed to consummate the CMOF Merger on or after the closing date within three business days of receipt of written notice by CMOF. We have the right to terminate the merger agreement at any time prior to obtaining the required approval of the CMOF stockholders upon an Adverse Recommendation Change (as defined in the CMOF Merger Agreement) made by the board of directors of CMOF, if CMOF has failed to publicly recommend against any tender offer or exchange offer for CMOF common stock that constitutes an Acquisition Proposal (as defined in the CMOF Merger Agreement) within ten business days of the offer, if the board of directors of CMOF has failed to publicly reaffirm its recommendation in favor of the CMOF Merger within a certain time following the public announcement of an Acquisition Proposal, if CMOF enters into an alternative acquisition agreement, or if CMOF has breached or failed to comply with the non-solicitation provisions in the CMOF Merger Agreement.
We expect to incur substantial expenses related to the merger.
We expect to incur substantial expenses in connection with completing the CMOF Merger. Although we have assumed that a certain level of transaction expenses would be incurred, there are a number of factors beyond our control that could affect the total amount or the timing of such expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. As a result, the transaction expenses associated with the CMOF Merger could, particularly in the near term, exceed the savings that we expect to achieve following the completion of the CMOF Merger.
Litigation challenging the CMOF Merger may increase transaction costs and prevent it from becoming effective or from becoming effective within the expected time frame.
If any stockholder files a lawsuit challenging the CMOF Merger, we can provide no assurances as to the outcome of any such lawsuit, including the costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation or settlement of these claims. If plaintiffs are successful in obtaining an injunction prohibiting us from completing the CMOF Merger on the agreed-upon terms, such an injunction may prevent the completion of the CMOF Merger in the expected time frame or may prevent it from being completed altogether. Whether or not any such plaintiffs’ claims are successful, this type of litigation is often expensive and diverts management’s attention and resources, which could adversely affect the operations of our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
Information about the Private Offering and sales of the Series 2019 Preferred Stock in the Private Offering during the period covered by this Report has been previously furnished under Item 3.02 in Current Reports on Form 8-K as filed with the SEC. The Private Offering was fully subscribed and terminated in March 2022.
Share Repurchase Program
Information regarding the shares available for repurchase underUnder our share repurchase program, to the extent we choose to repurchase shares in any particular month, we will only repurchase shares as of the opening of the last calendar day of that month (a “Repurchase Date”). Repurchases will be made at the transaction price in effect on the Repurchase Date (which will generally be equal to our prior month’s NAV per share), except that depending on the class of shares requested to be repurchased and how long the shares have been outstanding, the shares may be repurchased at a discount to the transaction price (an “Early Repurchase Deduction”) as described in the Share Repurchase Program which is filed as exhibit 99.1 to this report, subject to certain limited exceptions. Settlements of share repurchases will generally be made within three business days of the Repurchase Date.
The total amount of aggregate repurchases of our Class T, Class D, Class I, Class A and Class TX shares (all of our classes of common stock) is limited to no more than 2% of the aggregate NAV of our common stock outstanding per month and no more than 5% of our aggregate NAV of our common stock outstanding per calendar quarter.
Should repurchase requests, in our judgment, place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on the company as a whole, or should we otherwise determine that investing our liquid assets in real properties or other investments rather than repurchasing our shares is in the best interests of the company as a whole, we may choose to repurchase fewer shares in any particular month than have been requested to be repurchased, or none at all. Further, our board of directors may modify and suspend our share repurchase plan if it deems such action to be in our best interest and the price at which we repurchase shares is found in Note 12best interest of our consolidated financial statementsstockholders. In the event that we determine to repurchase some but not all of the shares submitted for repurchase during any month, shares repurchased at the end of the month will be repurchased on a pro rata basis. All unsatisfied repurchase requests must be resubmitted after the start of the next month or quarter, or upon the recommencement of the share repurchase plan, as applicable.
If the transaction price for the period ending December 31, 2021applicable month is not made available by the tenth business day prior to the last business day of the month (or is changed after such date), then no repurchase requests will be accepted for such month and stockholders who wish to have their shares repurchased the following month must resubmit their repurchase requests.
During the three months ended June 30, 2022, we repurchased shares of our common stock in the following amounts at the then-applicable transaction price (reduced as filed withapplicable by the SEC.Early Repurchase Deduction):
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Month of: | | Total Number of Shares Repurchased(1) | | Repurchases as a Percentage of NAV(2) | | Average Price Paid per Share | | Maximum Number of Shares Pending Repurchase Pursuant to Publicly Announced Plans or Programs(3) |
April 2022 | | 29,521 | | 0.1100263 | % | | $18.3703 | | — |
May 2022 | | 81,015 | | 0.2883072 | % | | $18.8746 | | — |
June 2022 | | 189,280 | | 0.6305921 | % | | $18.6312 | | — |
Total | | 299,816 | | | | | | |
|
(1) All shares have been repurchased pursuant to our share purchase program. |
(2) Represents aggregate NAV of the shares repurchased under our share repurchase plan over aggregate NAV of all shares of our common stock outstanding, in each case, based on our NAV as of the last calendar day of the prior month. Pursuant to our share repurchase program, we may repurchase up to 2% of the aggregate NAV of our common stock outstanding per month and 5% of the aggregate NAV of our common stock outstanding per calendar quarter. |
(3) All repurchase requests under our share repurchase plan were satisfied. We funded our repurchases with cash available from operations, financing activities and capital raising activities. |
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Renewal of the Advisory AgreementAmendments to Block C and Jasper Operating Agreements
On May 7,June 28, 2022, we, renewedthrough our indirect subsidiaries, admitted the advisoryAffiliated Members as members in Block C and Jasper. On August 11, 2022, we amended and restated the operating agreement byof Block C (the “Block C Agreement”) and among us, CROPJasper (the “Jasper Agreement,” and our advisor. The renewed advisory agreement is effective through May 7, 2023; however, either party may terminatetogether with the renewed advisory agreement without cause or penalty upon providing 60 days’ written notice. TheBlock C Agreement, the “Agreements”) to reflect additional terms related to the admission of the renewed advisory agreement are identical to those of the advisory agreementAffiliated Members, among other things. The Block C Agreement provides that was previously in effect.
Renewal of ReimbursementBlock C QOF, a joint venture between CROP and Cost Sharing Agreement
Also on May 7, 2022, we renewed the reimbursement and cost sharing agreement between Cottonwood Capital Management, Inc. ("CCMI"and managed by CROP (“Block C QOF”), CROP, CMOF OP and Brickyard QOF will act as co-managers with CROP managing the day-to-day operations of Block C. The Jasper Agreement provides that Block C QOF and Brickyard QOF will act as co-managers with Block C QOF managing the day-to-day operations of Jasper. Each of the Brickyard Agreement and the Jasper Agreement include the following terms. The unanimous consent of the managers is required for company actions, and certain major decisions, including decisions impacting mergers and whether Block C and Jasper maintain their Qualified Opportunity Fund status, also require a majority approval of the members. In addition, after December 31, 2032, a manager may unilaterally require the company to take its development project(s) to market for sale, while the other managers of the company will have the first right of refusal to purchase the development project(s) if triggered before December 31, 2037 or the first right of offer to purchase the development project(s) if triggered on or after December 31, 2037. CROP or its affiliate is entitled to receive a development fee in an amount equal to 3% of the total development hard and soft costs for the development project(s) and CROP Property Management, LLC or its affiliate is entitled to receive a property management fee in an amount equal to 2.5% of the gross revenues of the development project(s).
See footnote 2 to the “Land Held for Development” table included in PART I. Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations — Our Investments” for additional information regarding the ownership in the Affiliated Members and their respective ownership in Block C and Jasper.
Entry Into Coworking Space Design Agreement with APT Cowork, LLC
On August 9, 2022, our conflicts committee approved a form of Coworking Space Design Agreement to be entered by and between the property-owning limited liability company (“Landlord”), which will be a subsidiary of CROP, and Cottonwood Communities Advisors,APT Cowork, LLC (“APT”), an entity in which our officers and directors have a direct or indirect ownership interest as follows: Glenn Rand (21.49%), Daniel Shaeffer (21.46%), Chad Christensen (21.46%), Gregg Christensen (8.89%), Eric Marlin (6.71%), Enzio Cassinis (5.25%), Adam Larson (2.81%), Susan Hallenberg (2.18%), Paul Fredenberg (1.83%), and Stan Hanks (1.06%). The form of agreement provides the parentterms on which APT may design and upgrade the amenities for the common areas at certain of our advisor.multifamily properties. The renewed reimbursementCoworking Space Design Agreement provides that in exchange for advising on coworking improvements at Landlord’s property, Landlord will pay APT a one-time design and cost sharing agreement is effective through May 7, 2023; however, CCMIproject management fee of $60,000, which may ceasebe increased up to make available any or all of its employees upon providing 60 days’ written notice. The terms$75,000 depending on the scope of the renewed reimbursement and cost sharing agreement are identical to thoseproject. Upon approval of the reimbursement and cost sharingform agreement, that was previously in effect.
we entered a Coworking Space Design Agreement with respect to seven of our properties. We expect to enter Coworking Space Design agreements for an additional 18 of our properties over the next six months.
Item 6. Exhibits | | | | | |
Exhibit Number | Exhibit Description |
2.1 | Agreement and Plan of Merger, dated as of January 26, 2021, by and among the Company, Cottonwood Communities O.P., LP, Cottonwood Communities GP Subsidiary, LLC, Cottonwood Residential O.P., LP and Cottonwood Residential II, Inc., incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed February 1, 2021 |
2.2 | Agreement and Plan of Merger, dated as of January 26, 2021, by and among the Company, Cottonwood Communities O.P, LP, Cottonwood Communities GP Subsidiary, LLC, Cottonwood Multifamily REIT I O.P., LP and Cottonwood Multifamily REIT I, Inc., incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed February 1, 2021 |
2.3 | Agreement and Plan of Merger, dated as of January 26, 2021, by and among the Company, Cottonwood Communities O.P., LP, Cottonwood Communities GP Subsidiary, LLC, Cottonwood Multifamily REIT II O.P., LP and Cottonwood Multifamily REIT II, Inc., incorporated by reference to Exhibit 2.3 to the Company’s Current Report on Form 8-K filed February 1, 2021 |
2.4 | Agreement and Plan of Merger, dated as of July 8, 2022, by and among the Company, Cottonwood Multifamily Opportunity Fund, Inc., Cottonwood Multifamily Opportunity O.P., LP, Cottonwood Residential O.P., LP and Cottonwood Communities GP Subsidiary, LLC, incorporated by reference to Exhibit 2.4 to the Company’s Post-Effective Amendment no. 10to its Registration Statement on Form S-11 (No. 333-258754) filed July 12, 2022 |
3.1 | |
3.2 | |
3.3 | |
3.4 | |
3.5 | |
3.6 | |
3.7 | |
3.8 | |
3.9 | |
3.10 | |
3.11 | |
3.12 | |
3.13 | |
3.14 | |
3.15 | |
3.16 | |
3.17 | |
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4.4 | |
10.1 | |
10.2* | |
10.3* | |
10.4* | |
10.5*10.2 | |
31.1* | |
31.2* | |
32.1* | |
32.2* | |
99.1 | |
101.INS* | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| COTTONWOOD COMMUNITIES, INC. |
| | |
| By: | /s/ Daniel Shaeffer |
| | Daniel Shaeffer, Chief Executive Officer |
| | |
| By: | /s/ Adam Larson |
| | Adam Larson, Chief Financial Officer |
Dated: MayAugust 12, 2022