The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
March 31, 2018 and 2017
NOTE 1. ORGANIZATION AND OPERATION
Reven Housing REIT, Inc. is a Maryland
corporation (Reven Housing REIT, Inc., which along with its wholly-owned subsidiaries, are also referred to herein collectively
as the “Company”) which acquires portfolios of occupied and rented single-family residential properties throughout
the United States with the objective of receiving income from rental property activity and future profits from the sale of rental
property at appreciated values.
As of March 31, 2018, the Company owned
826 single-family homes in the Houston, Jacksonville, Memphis, Birmingham and Atlanta metropolitan areas.
NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial
statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”),
as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”),
and the rules and regulations of the Securities Exchange Commission (“SEC”).
Certain information and footnote disclosures
normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. It is suggested that
these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto
included in the 2017 Annual Report on Form 10-K filed with the SEC on March 29, 2018. The results of operations for the period
ended March 31, 2018 are not necessarily indicative of the operating results for the full year.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries, Reven Housing REIT OP, L.P., Reven Housing GP,
LLC, Reven Housing REIT TRS, LLC, Reven Housing Georgia, LLC, Reven Housing Texas, LLC, Reven Housing Texas 2, LLC, Reven Housing
Florida, LLC, Reven Housing Florida 2, LLC, Reven Housing Alabama, LLC and Reven Housing Tennessee, LLC. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial
statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and reported amounts of revenues
and expenses for the periods presented. Accordingly, actual results could differ from those estimates.
Financial Instruments
The carrying value of the Company’s
financial instruments, as reported in the accompanying consolidated balance sheets, approximates fair value due to their short
term nature. The Company’s short term financial instruments consist of cash, rent and other receivables, escrow deposits,
accounts payable and accrued liabilities, and resident security deposits.
The carrying value of the Company’s
notes payable, as reported in the accompanying consolidated balance sheets, approximates fair value due to their floating market
interest rate and because their security and payment terms are similar to other debt instruments currently being issued.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
March 31, 2018 and 2017
NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES (continued)
Investments in Single-Family Residential
Properties
The Company accounts for its investments
in single-family residential properties as asset acquisitions and records these acquisitions at their purchase price. The purchase
price is allocated between land, building, improvements and existing leases based upon their relative fair values at the date of
acquisition. The purchase price for purposes of this allocation is inclusive of acquisition costs, which typically include legal
fees, title fees, property inspection and valuation fees, as well as other closing costs.
Building improvements and buildings are
depreciated over estimated useful lives of approximately 10 to 27.5 years, respectively, using the straight-line method. Lease
origination costs are amortized over the average remaining term of the in-place leases which is generally less than one year. Maintenance
and repair costs are charged to expenses as incurred.
The Company assesses its investments in
single-family residential properties for impairment whenever events or changes in business circumstances indicate that carrying
amounts of the assets may not be fully recoverable. When such events occur, management determines whether there has been impairment
by comparing the asset’s carrying value with its fair value. Should impairment exist, the asset is written down to its estimated
fair value. The Company did not recognize any impairment loss for either the three month periods ended March 31, 2018 or March
31, 2017.
Cash
The Company maintains its cash accounts
at quality financial institutions. The combined account balances at one or more institutions typically exceed the federal insurance
coverage and thus there is a concentration of credit risk related to amounts on deposit in excess of available federal insurance
coverage. The Company believes that the risk is not significant, as the Company does not anticipate the financial institutions’
non-performance.
Rent and Other Receivables
Rent and other receivables represent the
amount of rent receivables, security deposits and net rental funds which are held by the property managers on behalf of the Company,
net of any allowance for amounts deemed uncollectible.
Escrow Deposits
Escrow deposits include refundable and
non-refundable cash and earnest money on deposit with third parties for future property purchases. However, not all of these properties
are certain to be acquired because properties may fall out of escrow through the closing process for various reasons and these
purchases are contingent on the Company’s ability to secure the debt and/or equity financing required to fund the acquisition.
Deferred Loan Fees
Costs incurred in the placement of the
Company’s notes payable are deferred and amortized using the effective interest method over the term of the loans as a component
of interest expense on the consolidated statements of operations. These deferred loan fees are offset against the notes payable
in the accompanying balance sheets.
Deferred Stock Issuance Costs
Deferred stock issuance costs represent
amounts paid for legal, consulting, and other offering expenses in conjunction with the future raising of additional capital to
be completed within one year. These costs are netted against additional paid-in capital as a cost of the stock issuance upon closing
of the respective stock placement. As of March 31, 2018 and December 31, 2017, the Company has incurred $553,296 of deferred stock
issuance costs which it anticipates will be applied against proceeds of a future capital raise to be completed during the year
ending December 31, 2018.
Security Deposits
Security deposits represent amounts deposited
by tenants at the inception of the lease. As of March 31, 2018 and December 31, 2017, the Company had $746,878 and $697,379, respectively,
in resident security deposits. Security deposits are refundable, net of any outstanding charges and fees, upon expiration of the
underlying lease.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
March 31, 2018 and 2017
NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue Recognition
Residential properties are leased to tenants
under short term rental agreements of generally one year and revenue is recognized over the lease term on a straight-line basis.
Income Taxes
The Company currently plans to elect to
be taxed as a real estate investment trust (“REIT”), as defined in the Internal Revenue Code, commencing with the taxable
year ended December 31, 2017 assuming it meets all qualifications allowing it to do so. Accordingly, the Company does not expect
to be subject to federal income tax, provided that it qualifies as a REIT and distributions to the stockholders equal or exceed
REIT taxable income. Should the Company not elect to be taxed as a REIT the Company will not be subject to federal income tax for
the periods ended March 31, 2018 and 2017 due to significant operating losses and net operating loss carry-forwards.
Qualification and taxation as a REIT depends
upon the Company’s ability to meet the various qualification tests imposed under the Internal Revenue Code related to the
percentage of income that are earned from specified sources, the percentage of assets that fall within specified categories, the
diversity of capital stock ownership, and the percentage of earnings that are distributed. Accordingly, no assurance can be given
that the Company will be organized or be able to operate in a manner to qualify or remain qualified as a REIT. If the Company fails
to qualify as a REIT in any taxable year, it will be subject to federal and state income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate tax rates, and the Company may be ineligible to qualify as a REIT for four
subsequent tax years. Even if the Company qualifies as a REIT, it may be subject to certain state or local income taxes.
Incentive Compensation Plan
During 2012, the Company established the
2012 Incentive Compensation Plan, which was subsequently amended and restated in December 2013 (“2012 Plan”). The 2012
Plan allows for the grant of options and other awards representing up to 1,650,000 shares of the Company’s common stock.
Such awards may be granted to officers, directors, employees, consultants and other persons who provide services to the Company
or any related entity. Under the 2012 Plan, options may be granted at an exercise price greater than or equal to the market value
at the date of the grant, for owners of 10% or more of the voting shares, at an exercise price of not less than 110% of the market
value. Awards are exercisable over a period of time as determined by a committee designated by the Board of Directors, but in no
event, longer than ten years.
During January 2018, an additional 35,505
shares were issued to officers, directors and employees as part of their accrued compensation for the year ended December 31, 2017.
A total of 531,864 shares have been issued under the 2012 plan as of March 31, 2018.
Net Loss Per Share
Net loss per share is computed by dividing
the net loss by the weighted average number of shares of common stock outstanding. Warrants, stock options, and common stock issuable
upon the conversion of the Company's preferred stock (if any) are not included in the computation if the effect would be anti-dilutive
and would increase earnings or decrease loss per share. For the three months ended March 31, 2018 and 2017, potentially dilutive
securities excluded from the calculations were 263,588 shares issuable upon exercise of outstanding warrants granted in prior years.
Segment Reporting
The Company has determined that it has
one reportable segment with activities related to leasing and operating single-family homes as rental properties. The Company's
rental properties are geographically dispersed and management evaluates operating performance at the market level and while each
market and its properties are unique, the aggregate market portfolios have similar economic interests and operating performance.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
March 31, 2018 and 2017
NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES (continued)
New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which outlines a new, single comprehensive model for entities to
use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including
industry-specific guidance. The new model will require revenue recognition to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services.
The standard can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date
of adoption. In July 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of
the Effective Date
, which delays the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus
Net)
, which is intended to improve the operability and understandability of the implementation guidance on principal versus
agent considerations. ASU 2014-09, ASU 2015-14 and ASU 2016-08 are herein collectively referred to as the "New Revenue Recognition
Standards". The New Revenue Recognition Standards are effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2017. Early adoption is permitted but not before annual periods beginning after December 15,
2016. The Company has adopted the New Revenue Recognition Standards effective as of January 1, 2018, and has applied the modified
retrospective method. The Company has evaluated its revenue streams, and as they are primarily related to leasing activities which
are scoped out of the New Revenue Recognition Standards, it has determined that the adoption of such standards does not have a
material impact on the consolidated financial statements and thus there is no cumulative translation adjustments upon adoption.
The Company evaluated its real estate sales contracts through March 31, 2018 and 2017 and determined they qualified as sales to
noncustomers. The gain on the sale of real estate for the property sold through March 31, 2017 was recognized on the full accrual
method based on the existing accounting standards and was determined to be a completed contract as of March 31, 2017, therefore
the adoption of the ASU No. 2014-09 did not have an impact on the Company’s real estate sale contracts.
In February 2016, the FASB issued ASU 2016-02,
Leases
, a new lease standard which sets out the principles for the recognition, measurement, presentation and disclosure
of leases for both parties to a contract (i.e. lessees and lessors). Under ASU 2016-02, lessor accounting will be substantially
similar to the current model, but aligned with certain changes to the lessee model and ASU 2014-09. The new standard requires lessors
to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing
leases and operating leases. The Company’s rental revenue is primarily generated from short-term operating leases. The new
standard requires lessees to apply a dual approach, classifying leases as either finance or operating based on the principle of
whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine
whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the
lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than
12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing
guidance for operating leases today. The new standard is expected to impact the Company’s consolidated financial statements
as the Company has an operating office lease arrangement for which it is the lessee. The new standard will be effective for the
Company beginning on January 1, 2019, with early adoption permitted. The new standard must be adopted using a modified retrospective
transition, requiring application of the new guidance at the beginning of the earliest comparative period presented and provides
for certain practical expedients. The Company is currently evaluating the impact on its consolidated financial statements.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
March 31, 2018 and 2017
NOTE 3. INVESTMENTS IN SINGLE-FAMILY
RESIDENTIAL PROPERTIES
The following table summarizes the Company’s
investments in single-family residential properties. The homes are generally leased to individual tenants under leases with terms
of one year or less.
|
|
|
|
|
|
|
|
|
|
|
Investments in
|
|
|
|
|
|
Investments in
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-Family
|
|
|
|
|
|
Single-Family
|
|
|
|
Number
|
|
|
|
|
|
Buildings and
|
|
|
Residential
|
|
|
Accumulated
|
|
|
Residential
|
|
|
|
of Homes
|
|
|
Land
|
|
|
Improvements
|
|
|
Properties, Gross
|
|
|
Depreciation
|
|
|
Properties, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2017
|
|
|
799
|
|
|
$
|
10,996,361
|
|
|
$
|
49,399,791
|
|
|
$
|
60,396,152
|
|
|
$
|
(4,542,707
|
)
|
|
$
|
55,853,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and improvements during 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
27
|
|
|
|
331,800
|
|
|
|
1,349,613
|
|
|
|
1,681,413
|
|
|
|
(493,415
|
)
|
|
|
1,187,998
|
|
Improvements
|
|
|
-
|
|
|
|
-
|
|
|
|
1,133,763
|
|
|
|
1,133,763
|
|
|
|
-
|
|
|
|
1,133,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at March 31, 2018
|
|
|
826
|
|
|
$
|
11,328,161
|
|
|
$
|
51,883,167
|
|
|
$
|
63,211,328
|
|
|
$
|
(5,036,122
|
)
|
|
$
|
58,175,206
|
|
Approximately $892,000 of the 2018 improvements
shown above were for hurricane renovation costs completed this period resulting from casualties incurred during 2017 and were primarily
funded with insurance proceeds..
NOTE 4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
At March 31, 2018 and December 31, 2017,
accounts payable and accrued liabilities consisted of the following:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
53,808
|
|
|
$
|
162,221
|
|
Real estate taxes payable
|
|
|
401,087
|
|
|
|
781,898
|
|
Accrued compensation, board fees and other
|
|
|
166,830
|
|
|
|
416,633
|
|
Interest payable
|
|
|
118,445
|
|
|
|
92,390
|
|
|
|
$
|
740,170
|
|
|
$
|
1,453,142
|
|
NOTE 5. NOTES PAYABLE
On February 16, 2018, Reven Housing Alabama,
LLC, a wholly owned subsidiary of the Company, received additional loan proceeds of $2,736,630 and amended its promissory note
to a total principal amount of $6,530,550 due to a bank, secured by deeds of trust encumbering certain of the Company’s residential
properties located in Birmingham, AL. The entire balance of principal and accrued interest is due and payable January 2023. The
note provides for monthly principal and interest payments amortized over 20 years at a fixed rate of 4.25% per annum. The proceeds
from this note were primarily used to purchase a portfolio of 27 single-family homes, located in the Birmingham, Alabama metropolitan
area for approximately $1,659,000 not including closing and acquisition costs on February 16, 2018.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
March 31, 2018 and 2017
NOTE 5. NOTES PAYABLE (continued)
A summary of the Company’s notes
payable as of March 31, 2018 and December 31, 2017 is as follows:
|
|
2018
|
|
|
2017
|
|
|
Interest
Rate (Fixed)
|
|
|
Maturity Date
|
Note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reven Housing Texas, LLC
|
|
$
|
7,268,889
|
|
|
$
|
7,312,030
|
|
|
|
4.50
|
%
|
|
April, 2020
|
Reven Housing Texas 2, LLC
|
|
|
4,787,879
|
|
|
|
4,890,978
|
|
|
|
4.50
|
%
|
|
January, 2022
|
Reven Housing Tennessee, LLC
|
|
|
3,808,431
|
|
|
|
3,830,791
|
|
|
|
4.50
|
%
|
|
April, 2020
|
Reven Housing Florida, LLC
|
|
|
3,422,890
|
|
|
|
3,442,987
|
|
|
|
4.50
|
%
|
|
April, 2020
|
Reven Housing Florida 2, LLC
|
|
|
4,777,494
|
|
|
|
4,805,389
|
|
|
|
4.50
|
%
|
|
April, 2020
|
Reven Housing Georgia, LLC
|
|
|
1,770,652
|
|
|
|
1,780,765
|
|
|
|
4.50
|
%
|
|
July, 2020
|
Reven Housing Tennessee, LLC
|
|
|
1,142,238
|
|
|
|
1,148,726
|
|
|
|
4.50
|
%
|
|
September, 2020
|
Reven Housing Alabama, LLC
|
|
|
6,507,934
|
|
|
|
3,793,920
|
|
|
|
4.25
|
%
|
|
January, 2023
|
|
|
|
33,486,407
|
|
|
|
31,005,586
|
|
|
|
|
|
|
|
Less deferred loan fees, net
|
|
|
(526,630
|
)
|
|
|
(512,462
|
)
|
|
|
|
|
|
|
Notes payable, net
|
|
$
|
32,959,777
|
|
|
$
|
30,493,124
|
|
|
|
|
|
|
|
Costs incurred in the placement of the
Company’s debt are deferred and amortized using the effective interest method over the term of the loans as a component of
interest expense on the consolidated statements of operations. The amount of unamortized fees are deducted from the remaining principal
amount owed on the corresponding notes payable. Unamortized deferred loan costs and fees totaled $526,630 and $512,462 as of March
31, 2018 and December 31, 2017, respectively.
During the three months ended March 31,
2018 and 2017, the Company incurred $400,592 and $307,520, respectively, of interest expense related to the notes payable, which
includes $50,994 and $32,617, respectively, of amortization of deferred loan fees.
NOTE 6. STOCKHOLDERS’ EQUITY AND STOCK COMPENSATION
On October 16, 2014, the Company issued
425,000 shares of the Company’s common stock under the 2012 Plan to certain officers and consultants of the Company. The
shares issued are subject to restrictions and future vesting conditions based on the Company reaching certain future milestones.
During the year ended December 31, 2016, 106,250 of these shares became vested upon the achievement of certain milestones related
to our public offering of common stock mentioned above. Accordingly, $425,000 of noncash share-based compensation expense was then
recognized based on the value of the shares on the date of grant. None of the remaining 318,750 shares were vested as of the issuance
date. Compensation expense will be recognized in the applicable future periods on these unvested shares should the applicable milestones
be achieved in accordance with the vesting schedule. There is no assurance that these milestones will in fact be achieved and that
the shares will in fact vest in the future.
In January 2018, the Company issued 35,505
shares of the Company’s common stock under the 2012 Plan to certain directors, officers, and consultants of the Company as
payment for accrued 2017 compensation.
The Company has outstanding warrants that
allow holders to purchase up to 263,588 shares at an exercise price of $4.00 per share. The warrants will expire on September
27, 2018, if not exercised prior to that date.
REVEN HOUSING REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
March 31, 2018 and 2017
NOTE 7. INCOME TAXES
The Company currently plans to elect REIT
status effective for the year ended December 31, 2017 assuming it meets all qualifications allowing it to do so. The Company would
then generally not be subject to income taxes assuming it complied with the specific distribution rules applicable to REITs.
The Company has also incurred current and
prior year net operating losses; thus the Company is not expecting to incur current income tax expenses, and due to its currently
planned election of REIT status commencing in 2017, is not expected to realize any future tax benefits from the current years;
or prior years’ operating losses.
Realization of deferred tax assets is dependent
upon sufficient future taxable income during the period that deductible temporary differences and expected carry-forwards are available
to reduce taxable income. The Company records a valuation allowance when, in the opinion of management, it is more likely than
not, that the Company will not realize some or all deferred tax assets. As the achievement of required future taxable income is
uncertain, the Company recorded a valuation allowance equal to the deferred tax asset at March 31, 2018 and December 31, 2017.
At December 31, 2017 the Company had federal and state net operating loss carry-forwards of approximately $5,400,000. The federal
and state tax loss carry-forwards will begin to expire in 2032, unless previously utilized.
Pursuant to Internal Revenue Code Section
382, use of the Company’s net operating loss carry-forwards may be limited if a cumulative change in ownership of more than
50% occurs within a three-year period. Management believes that such an ownership change had occurred but has not yet performed
a study of the limitations on the net operating losses.
NOTE 8. RELATED PARTY TRANSACTIONS
Reven Capital, LLC, which is wholly-owned
by Chad M. Carpenter, a shareholder of the Company and its Chief Executive Officer, currently subleases office space from the Company
on a month to month basis for a monthly rental of $500. For the three months ended March 31, 2018 and 2017, the Company received
income from Reven Capital, LLC of $1,500 and $1,500, respectively.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Legal and Regulatory
The Company is subject to potential liability
under laws and government regulations and various claims and legal actions arising in the ordinary course of the Company’s
business. Liabilities are established for legal claims when payments associated with the claims become probable and the costs
can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts
established for those claims. Based on information currently available, management is not aware of any legal or regulatory claims
that would have a material effect on the Company’s consolidated financial statements and, therefore, no accrual has been
recorded as of the periods ended March 31, 2018 and December 31, 2017.