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TSRE > SEC Filings for TSRE > Form 10-Q on 13-May-2014All Recent SEC Filings

Show all filings for TRADE STREET RESIDENTIAL, INC.

Form 10-Q for TRADE STREET RESIDENTIAL, INC.


13-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.

The following discussion analyzes the financial condition and results of operations of Trade Street Residential, Inc. ("TSRE"), and Trade Street Operating Partnership, L.P. ("TSOP"). A wholly owned subsidiary of TSRE, (Trade Street OP GP, LLC)' is the sole general partner of TSOP. As of March 31, 2014, TSRE owned a 94.0% limited partner interest in TSOP. TSRE conducts all of its business and owns all of its properties through TSOP and TSOP's various subsidiaries. Except as otherwise required by the context, the "Company," "Trade Street," "we," "us" and "our" refer to TSRE and TSOP together, as well as TSOP's subsidiaries, except where the context otherwise requires.

FORWARD-LOOKING STATEMENTS

Certain information presented in this Quarterly Report on Form 10-Q constitutes "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"). Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our business, financial condition, liquidity, results of operations, funds from operations and prospects could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a material difference include the following: changes in general economic conditions, changes in real estate market conditions in general and within our specific submarkets, continued availability of debt or equity capital to finance acquisitions, our ability to locate suitable tenants for our properties, the ability of tenants to make payments under their respective leases, the timing of acquisitions, and sales of properties, the ability to meet development schedules and other risks, uncertainties and assumptions. Any forward-looking statement speaks only as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. We caution investors not to place undue reliance on these forward-looking statements and urge investors to carefully review the disclosures we make concerning risks and uncertainties in the section entitled "Risk Factors" within our Annual Report on Form 10-K for the year ended December 31, 2013 which is accessible on the Securities and Exchange Commission (the "SEC") website at www.sec.gov, as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q and identified in other documents filed by us with the SEC.

Overview of Our Company

We are a vertically integrated and self-managed real estate investment trust ("REIT"), focused on acquiring, owning, operating and managing, high-quality, conveniently located apartment communities in mid-sized cities and suburban submarkets of larger cities primarily in the southeastern United States and Texas. We currently have approximately 150 full-time employees who provide property management, maintenance, landscaping, administrative and accounting services for the properties we own. We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2004.

We seek to own and operate apartment communities in cities that have:

• a stable work force comprised of a large number of "echo boomers" augmented by positive net population migration;

• well-paying jobs provided by a diverse mix of employers across the education, government, healthcare, insurance, manufacturing and tourist sectors;

• a favorable cost of living;

• reduced competition from larger multifamily REITs and large institutional real estate investors who tend to focus on select coastal and gateway markets; and

• a limited supply of new housing and new apartment construction.

We recognize that economic conditions could deteriorate and that the current economic recovery may not be sustainable. However, with the growth in multi-family supply expected to continue below historical averages for the next few years and with employment in our markets steady or increasing, we do not anticipate any significant slowdown in the multi-family sector.

In addition, we believe that attractive acquisition opportunities that meet our investment profile remain available in the market. We believe our expected access to capital and the accordion feature in our revolver along with our extensive industry relationships and management's expertise, will allow us to compete successfully for such acquisitions and enable us to continue to make accretive acquisitions.

One of our core focuses has been to strengthen our balance sheet to (i) allow financial and operational flexibility and (ii) recycle capital through strategic acquisitions and dispositions of our operating properties portfolio. In that regard, we completed various acquisition, capital and financing transactions during the three months ended March 31, 2014.

Acquisition Transactions

On March 18, 2014, we acquired The Avenues of Craig Ranch ("Craig Ranch"), a 334-unit apartment community located in McKinney (Dallas), Texas for a total purchase price of $42.4 million. The purchase price was funded with $21.2 million cash proceeds from the Company's Rights Offering and the related transactions and a new mortgage loan in the amount of $21.2 million. This mortgage loan has a 7-year term, bears interest at 3.78% and requires monthly payments of interest only until maturity.

On March 10, 2014, we acquired Waterstone at Brier Creek ("Brier Creek"), a 232-unit apartment community located in Raleigh, North Carolina for a total purchase price of $32.7 million. The purchase price was funded with $16.4 million cash proceeds from the Company's Rights Offering and the related transactions and a new mortgage loan in the amount of $16.3 million. This mortgage loan has an 8-year term, bears interest at 3.70% and requires monthly payments of interest only until maturity.

On March 10, 2014, we completed foreclosure proceedings and obtained title to the Sunnyside land asset.

On February 6, 2014, we acquired The Aventine Greenville ("Aventine"), a 346-unit apartment community located in Greenville, South Carolina for a total purchase price of $41.9 million. The purchase price was funded with $20.9 million cash proceeds from the Company's Rights Offering and the related transactions and a new mortgage loan in the amount of $21.0 million. This mortgage loan has a 7-year term, bears interest at 3.70% and requires monthly payments of interest only for the first 60 months of the term and then monthly principal and interest payments based on a 30-year amortization schedule until maturity.

On January 21, 2014, we acquired Estates of Wake Forest ("Wake Forest"), a 288-unit apartment community located in Wake Forest (Raleigh), North Carolina for a total purchase price of $37.3 million. The purchase price was funded with $18.6 million of cash proceeds from the Company's Rights Offering and the related transactions and a new mortgage loan in the amount of $18.7 million. This mortgage loan has a 7-year term, bears interest at 3.94% and requires monthly payments of interest only until maturity.

On January 21, 2014, we acquired Miller Creek ("Miller Creek"), a 330-unit apartment community located in Germantown (Memphis), Tennessee, for a total purchase price of $43.8 million. The purchase price was funded with $17.5 million of cash proceeds from the Company's Rights Offering and the related transactions and a new mortgage loan in the amount of $26.3 million. This mortgage loan has a 10-year term, bears interest at 4.60% and requires monthly payments of interest only for the first 36 months of the term and then monthly principal and interest payments based on a 30-year amortization schedule until maturity.

Capital Transactions

On January 16, 2014, we completed our subscription rights offering (the "Rights Offering"). In connection with the Rights Offering, we entered into a Standby Purchase Agreement dated November 12, 2013 with investment entities managed or advised by Senator Investment Group LP (collectively, "Senator") pursuant to which Senator committed to purchase from the Company all of the unsubscribed shares of common stock in the Rights Offering minus the aggregate dollar value of the shares of the Management Purchase Commitment (as defined below) such that the gross proceeds to the Company from the Rights Offering would be $100.0 million (the "Backstop Commitment"). Senator also agreed to purchase an aggregate of $50.0 million in shares of our common stock in addition to shares of common stock purchased pursuant to the Backstop Commitment (the "Additional Purchase Commitment"). Additionally, we agreed to pay Senator a fee of $3.75 million for the Backstop Commitment and a fee of $3.75 million for the Additional Purchase Commitment, in each case payable in unregistered shares of common stock. In addition, we entered into a purchase agreement dated November 12, 2013 (the "Management Purchase Agreement") with former executives of the Company pursuant to which those executives agreed to purchase shares of common stock in connection with the Rights Offering.

Upon completion of the Rights Offering on January 16, 2014, we sold 15,797,789 shares of common stock (including 232,327 shares sold pursuant to the Backstop Commitment and 286,294 shares sold pursuant to the Management Purchase Agreement). We received net proceeds, after deduction of offering expenses and underwriting discounts and commissions, of $96.7 million. In addition, pursuant to the Standby Purchase Agreement, we issued to Senator 9,316,055 shares of our common stock for an aggregate purchase price of $51.5 million (including shares issued as payment of the $3.75 million Backstop Commitment fee and the $3.75 million Additional Purchase Commitment fee). Pursuant to the Management Purchase Agreement, we issued 286,294 shares of common stock for an aggregate purchase price of $1.8 million to certain former executive officers of the Company.

On January 16, 2014, we received net cash proceeds from the sale of shares of our common stock offered in our Rights Offering and the related transactions of approximately $147.3 million after deducting offering expenses of approximately $2.7 million payable by us. We contributed the net proceeds we received from the Rights Offering and the related transactions to our Operating Partnership in exchange for common units of our Operating Partnership. The Operating Partnership used approximately (i) $94.6 million, which include approximately $1.5 million for acquisition costs, to acquire five communities, (ii) $26.0 million to repay short-term borrowings under our new secured revolving credit facility, which were repaid within five business days after initially being borrowed (see "Liquidity and Capital Resources, New Secured Revolving Credit Facility Subsequent to Year End" below), (iii) $16.7 million to pay down, in part, certain indebtedness secured by two communities in conjunction with their refinancing, and (iv) $4.2 million to pay down certain indebtedness secured by land held for sale, leaving approximately $5.8 million for working capital and general corporate purposes.

Financing Transactions

On February 11, 2014, we completed a refinancing of the Estates at Millenia with a mortgage note payable in the amount of $25.0 million with a 7-year term. The mortgage bears a fixed interest rate of 3.83% with monthly payments of interest only for the first 48 months of the term and then monthly payments of principal and interest based on a 30-year amortization schedule until maturity. The mortgage note is secured by the Estates at Millenia property. In conjunction with obtaining this loan, we repaid the existing $35.0 million existing mortgage note payable with the proceeds from this mortgage note payable and $10.0 million from cash proceeds from the Company's Rights Offering and the related transactions.

On January 23, 2014, we completed the refinancing of Fountains Southend with a mortgage note payable in the amount of $23.8 million with a 10-year term. The mortgage loan bears a fixed interest rate of 4.31% with monthly payments of interest only for the initial 36 months and monthly payments of principal and interest thereafter based on a 30-year amortization schedule until maturity. In conjunction with obtaining this loan, we repaid the $30.0 million interim mortgage note payable with the proceeds from this mortgage note payable and $6.2 million from cash proceeds from the Company's Rights Offering and the related transactions.

On January 21, 2014, we paid in full the indebtedness secured by the Estates of Maitland property in the amount of $4.2 million from the cash proceeds from the Company's Rights Offering and the related transactions.

On January 17, 2014 we paid in full the BMO Harris Bank N.A. secured revolving credit facility indebtedness secured by the Arbors River Oaks in the amount of $9.0 million from the cash proceeds from the Company's Rights Offering and the related transactions.

On January 31, 2014, we entered into a new senior secured revolving credit facility (the "Revolver") with Regions Bank as Lead Arranger and U.S. Bank National Association as a participant. The Revolver is comprised of an initial $75.0 million commitment with an accordion feature allowing us to increase borrowing capacity to $250.0 million, subject to certain approvals and meeting certain criteria. The Revolver has an initial three-year term that can be extended at our option for up to two, one-year periods and has a variable interest rate of LIBOR plus a margin of 175 basis points to 275 basis points, depending on our consolidated leverage ratio. In conjunction with the closing of the Revolver, we borrowed approximately $27.0 million to pay down, in full, indebtedness secured by the Park at Fox Trails of $14.9 million, Mercé Apartments of $5.5 million and Post Oak of $5.3 million, as these properties served as collateral on the Revolver, and to pay fees associated therewith. The remainder of the amount borrowed of approximately $0.9 million was used for closing costs and other expenses related to the Revolver and approximately $0.4 million for working capital purposes. On February 7, 2014, we repaid $26.0 million under the Revolver.

See Note M to the Condensed Consolidated Financial Statements for further discussion of completed transactions subsequent to March 31, 2014.

Recent Significant Developments

Management/Director Transition

Effective April 28, 2014, our board of directors appointed Richard Rossto the permanent position of chief executive officer. Since February 2014, Mr. Ross has served as interim chief executive officer and chief financial officer. Mr. Ross will continue to serve as chief financial officer in an interim role. Also in February 2014, Mack Pridgen, chairman of the Company's audit committee and its lead director, was appointed as Chairman of the Company's board of directors. Ryan Hanks, the Company's Chief Investment Officer, was appointed as interim Chief Operating Officer.

Effective March 18, 2014, David Levin tendered his resignation as our President and as Vice Chairman and as a member of the board of directors, and terminated his employment with us, and Richard Ross was appointed interim President.

Effective February 23, 2014, Michael Baumann tendered his resignation as our director andas our Chief Executive Officer and terminated his employment with us. On February 23, 2014, our board of directors appointed Richard Ross, the Company's Chief Financial Officer and Chief Operating Officer, to serve as the interim Chief Executive Officer of the Company in addition to his current role as Chief Financial Officer of the Company. The appointment of Mr. Ross filled the vacancy created by Mr. Baumann's resignation as Chief Executive Officer. Our board of directors also appointed Ryan Hanks, the Company's Chief Investment Officer, to serve as the interim Chief Operating Officer of the Company in addition to his current role as Chief Investment Officer of the Company. Upon the appointment of Mr. Hanks as Chief Operating Officer, Mr. Ross ceased to perform the duties of Chief Operating Officer.

In addition, during the first quarter of 2014, Lewis Gold, Sergio Rok and James Boland resigned from the Company's Board of Directors. Following these departures, the Board of Directors approved a reduction in the size of the board to five members, versus nine previously.

Emerging Growth Company

We are an "emerging growth company" under the federal securities laws and, as such, we have elected to provide reduced public company reporting requirements in this and in future filings. In addition, Section 107 of the JOBS Act also provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with accounting standards newly issued or revised after April 5, 2012. In other words, an "emerging growth company" can delay the adoption of accounting standards until those standards would otherwise apply to private companies.

Our Properties

As of March 31, 2014, our portfolio primarily consisted of 20 operating properties, of which 19 were wholly-owned and one was owned through an unconsolidated joint venture in which the Company has a 50% interest, consisting of an aggregate of 4,985 apartment units, as detailed in the following table:

                                                                                               Average            Average
                                              Year Built        Date        Number of         Unit Size           Physical
    Property Name           Location         Renovated (1)    Acquired        Units           (Sq. Ft.)         Occupancy (2)

The Pointe at Canyon    Sandy Springs, GA
Ridge                                         1986/2007         09/18/08            494               920                 94.9 %
Arbors River Oaks       Memphis, TN           1990/2010         06/09/10            191             1,136                 96.3 %
The Estates at          Augusta, GA
Perimeter (3)                                    2007           09/01/10            240             1,109                 97.0 %
Lakeshore on the Hill   Chattanooga, TN       1969/2005         12/14/10            123             1,168                 94.8 %
The Trails of Signal    Chattanooga, TN
Mountain                                         1975           05/26/11            172             1,185                 97.3 %
Post Oak                Louisville, KY        1982/2005         07/28/11            126               881                 96.9 %
Mercé Apartments        Addison, TX           1991/2007         10/31/11            114               653                 98.1 %
Park at Fox Trails      Plano, TX                1981           12/06/11            286               960                 97.0 %
Estates at Millenia     Orlando, FL              2012           12/03/12            297               952                 90.6 %
Westmont Commons        Asheville, NC         2003/2008         12/12/12            252             1,009                 97.3 %
Bridge Pointe           Huntsville, AL           2002           03/04/13            178             1,047                 98.2 %
St. James at Goose      Goose Creek, SC
Creek                                            2009           05/16/13            244               976                 96.7 %
Creekstone at RTP       Durham, NC               2013           05/17/13            256             1,043                 96.6 %
Talison Row             Charleston, SC           2013           08/26/13            274               989                 88.0 %
Fountains at Southend   Charlotte, NC            2013           09/24/13            208               844                 98.4 %
Miller Creek at         Memphis, TN
Germantown (4)                                2012/2013         01/21/14            330             1,049                    -
Estates at Wake         Wake Forest, NC
Forest (4)                                       2013           01/21/14            288             1,047                    -
Aventine Greenville     Greenville, SC
(4)                                              2013           02/06/14            346               961                    -
Waterstone at Brier     Raleigh, NC
Creek (4)                                     2013/2014         03/10/14            232             1,137                    -
Avenues of Craig        McKinney, TX
Ranch  (4)                                       2013           03/18/14            334             1,006                    -

Total / Weighted
Average                                                                           4,985             1,003                 95.5 %

(1) The extent of the renovations included within the term "renovated" depends on the individual apartment community, but "renovated" generally refers to the replacement of siding, roof, wood, windows or boilers, updating of gutter systems, renovation of leasing centers and interior rehabilitation, including updated appliances, countertops, vinyl plank flooring, fixtures, fans and lighting, or some combination thereof.

(2) Average physical occupancy represents the average occupancy for the three months ended March 31, 2014 of the total number of units occupied at each apartment community during the period divided by the total number of units at each apartment community.

(3) We own a 50% interest in this apartment community through an unconsolidated joint venture.

(4) We acquired these apartment communities during the first quarter of 2014 and, as such, average physical occupancy for these communities has been excluded from this table.

For the three months ended March 31, 2014, the weighted average monthly rent per unit and monthly effective rent per occupied unit for operating properties was $948 and $932, respectively. Average rental rates are the Company's market rents after "loss to lease" and concessions but before vacancy, discounted employee units, model units, and bad debt during the period. Effective rent per occupied unit is equal to the average of gross monthly rent minus any leasing discounts offered for each month during the period divided by the total number of occupied units each month during the period. Discounts include concessions, discounted employee units and model units. Operating properties acquired during the period are not included in these per unit results.

In addition, our Land Investments consist of the parcels described in the table below. During 2014, we anticipate commencing development of our Millenia Phase II land investment with a highly-qualified regional and/or national third party developer and intend to sell the remaining land investments.

Property Name                           Location       Potential Use     Acreage

Venetian (1)                         Fort Myers, FL     Apartments        23.0
Midlothian Town Center - East (2)    Midlothian, VA     Apartments         8.4
The Estates at Maitland (3)           Maitland, FL      Apartments         6.1
Estates at Millenia - Phase II (4)     Orlando, FL      Apartments         7.0
Sunnyside (5)                        Panama City, FL    Apartments        22.0

(1) Venetian was acquired from an insolvent developer after construction began. The site currently has improvements, including a partially completed clubhouse, building pads, roads and utilities. Costs, including the cost of the land, incurred to date as of March 31, 2014, for the property were approximately $4.3 million. In February 2014, we reclassified Venetian as assets held for sale.

(2) Midlothian Town Center-East is currently approved for 246 apartment units and 10,800 square feet of retail space, including a parking deck structure. The project is currently going through a site plan modification process in Chesterfield County, Virginia that will allow the development of 238 apartment units, 10,800 square feet of retail space and the elimination of the parking deck structure. Costs, including the cost of the land, incurred to date as of March 31, 2014 for the property, net of impairment, were approximately $4.2 million. In February 2014, we reclassified Midlothian Town Center as assets held for sale.

(3) The Estates at Maitland is currently approved for a maximum of 330 apartment units and 20,000 square feet of retail space. The City of Maitland, Florida changed its zoning code allowing a higher density in May 2012. The municipal development agreement is currently being modified to include 416 units and 10,000 square feet of retail space. Costs, including the cost of the land, incurred to date as of March 31, 2014 for the property were approximately $9.0 million. In February 2014, we reclassified Estates at Maitland as assets held for sale.

(4) Estates at Millenia-Phase II is currently approved for 403 apartment units and 10,000 square feet of retail space. Costs, including the cost of the land, incurred to date as of March 31, 2014 for the property were approximately $13.0 million.

(5) Sunnyside is currently undeveloped land permitted for 212 apartment units and 20,000 square feet of retail space. Costs, including the cost of the land, incurred to date as of March 31, 2014 for the property were approximately $1.6 million. In February 2014, we reclassified Sunnyside as assets held for sale. On March 10, 2014, the Company completed foreclosure proceedings and obtained title to the Sunnyside asset.

Summary Results of Operations

The following discussion of results of operations for the three months ended March 31, 2014 and 2013 should be read in conjunction with the Condensed Consolidated Statements of Operations of the Company and the related notes thereto included in Item 1 of this Form 10-Q.

Throughout this section, we have provided certain information on a "same store" property basis. We define "same store" properties as properties that were owned and stabilized since January 1, 2013 through March 31, 2014. For newly constructed or lease-up properties or properties undergoing significant redevelopment, we consider a property stabilized at the earlier of
(i) attainment of 90% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment. For comparison of the three months ended March 31, 2014 and 2013, the same store properties included properties owned since January 1, 2013, excluding our land held for future development, land held for sale and properties included in 2013 discontinued operations (see below). No properties owned since January 1, 2013 were under construction or undergoing redevelopment and, as a result, no properties owned since January 1, 2013 were excluded from the same store portfolio.

For the three months ended March 31, 2014, the Company reported net loss attributable to common stockholders of ($15.2) million, compared with a net income attributable to common stockholders of $6.8 million for the comparable prior period.

The principal factors that impacted our results from continuing operations for the three months ended March 31, 2014 included:

· A 6.8% and 6.3% increase in same-store revenues and net operating income, respectively.

· The inclusion in operating income of ten operating properties acquired since March 2013.

· The $1.5 million acquisition costs incurred for the five operating properties acquired during first quarter 2014.

· The $1.6 million loss on early extinguishment of debt incurred related to the refinancing activity.

· The $9.0 million management transition expenses incurred related to the resignation of certain executive officers and other employees.

· The refinancing of the Estates of Millenia and Fountains of Southend during the first quarter of 2014.

. . .

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