RVEN Reven Housing REIT Inc

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the information appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2018. This discussion and analysis contains forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set further under Part I. Item 1A. “Risk Factors” in our most recent Annual Report on Form 10-K as updated by our other periodic reporting.

Overview

We are an internally managed Maryland corporation that engages in the acquisition, ownership and operation of portfolios of leased single-family homes in the United States. We operate our portfolio properties as single-family rentals, or SFRs, and we generate most of our revenue from rental income from the existing tenants of the SFRs we have acquired. We are currently evaluating whether to elect to be taxed as a real estate investment trust (“REIT”), commencing with the taxable year ended December 31, 2018. We have until the extended due date of our December 31, 2018 tax return to formerly make this election. Accordingly, should we elect REIT status, we do not expect to be subject to federal income tax, provided that we continue to qualify as a REIT and distributions to the stockholders equal or exceed REIT taxable income. Should we not elect to be taxed as a REIT, we still would not be subject to federal income tax for periods ended March 31, 2019 and prior due to significant operating losses and net operating loss carry-forwards.

Our principal objective is to generate cash flow and distribute resulting profits to our stockholders in the form of distributions, while gaining home price appreciation, or HPA, at the same time through the ownership of our portfolio properties. With this objective in mind, we have developed our primary business strategy of acquiring portfolios of stabilized or leased SFRs. We believe the execution of this strategy will allow us to generate immediate and steady cash flow from the rental income from the SFRs that we acquire while potentially gaining significant HPA over time. While our goal is to grow our company and generate available cash flow from the rental income of our SFRs that will allow us to pay all of our operating costs for the operation of our portfolio properties and distribute profits to our stockholders in the form of quarterly dividends, there can be no assurance we will be able to do so.

As of March 31, 2019, we have invested an aggregate of approximately $83.6 million and own a total of 989 homes, of which 263 homes are in the Houston, Texas metropolitan area, 252 homes are in the Jacksonville, Florida metropolitan area, 155 homes are in the Memphis, Tennessee metropolitan area, 144 homes are in the Birmingham, Alabama metropolitan area, 128 homes are in the Oklahoma City, Oklahoma metropolitan area, and 47 homes are in the Atlanta, Georgia metropolitan area.

We intend to expand our acquisitions to other select markets in the United States that fit our investment criteria as we continue to evaluate new investment opportunities in different markets. As of March 31, 2019, our portfolio properties were 93.2% occupied. Our portfolio properties have been acquired from available cash and with the proceeds from secured loan transactions pursuant to which we had an outstanding principal amount owed of $61,885,000 as of March 31, 2019. Our loan transactions are secured by first priority liens and related rents on our homes.

In January 2019, we declared a distribution of $0.01 per share on our common shares. The distribution was made on February 15, 2019 to shareholders of record as of January 25, 2018 and totaled $109,652. Subsequent to March 31, 2019, on April 17, 2019, we declared a distribution of $0.01 per share on our common shares. The distribution will be made on May 15, 2019 to shareholders of record as of April 26, 2019 in the amount of $110,387.

We plan to continue to acquire and manage single-family homes with a focus on long term earnings growth and appreciation in asset value. Our ability to identify and acquire single-family properties that meet our investment criteria will be affected by home prices in our markets, the inventory of properties available through our acquisition channels, competition for our target assets, our capital available for investment, and the cost of that capital. We believe the housing market environment in our markets remains attractive for single-family property acquisitions and rentals. Pricing for housing in certain markets remains attractive and demand for housing is growing. At the same time, we continue to face relatively steady competition for new properties and residents from local operators and institutional managers. Housing prices across our markets have appreciated over the past year. Despite these gains, we believe housing in certain of our markets continues to provide attractive acquisition opportunities and remains inexpensive relative to replacement cost and affordability metrics.

We anticipate continued strong rental demand for single-family homes. While new building activity has begun to increase, it remains below historical averages and we believe substantial under-investment in residential housing over the past years will create upward pressure on home prices and rents as demand exceeds supply.

Property Portfolio

The following tables represent our investment in the homes as of March 31, 2019:

For the three months ended March 31, 2019, we had total rental income of $2,755,729 compared to total rental income of $2,179,291 for the three months ended March 31, 2018. The increase is due primarily to an increase in the number of homes owned during the 2019 period when compared to the number of homes owned during the three months ended March 31, 2018. As of March 31, 2019, we owned 989 homes; at March 31, 2018, we owned 826 homes.

As of March 31, 2019, 922, or 93.2%, of our 989 homes were occupied. During the three months ended March 31, 2019, we had 40 home leases turnover, which represented approximately 4.0 % of our end of the quarter portfolio. As of March 31, 2018, 764, or 92.5%, of our 826 homes were occupied. During the quarter ended March 31, 2018, we had 50 home leases turnover, which represented approximately 6.1% of our end of the quarter portfolio.

For the three months ended March 31, 2019, we had property operating and maintenance expenses of $921,788 compared to $618,163 for the corresponding prior year period. Property operating and maintenance expenses consist of insurance, property management fees paid to third parties, repairs and maintenance costs, home owner association fees, and other miscellaneous property costs. Real estate taxes for the three months ended March 31, 2019 were $436,504 compared to $363,371 for the three months ended March 31, 2018. The increase in property operating and maintenance expenses from 2018 to 2019 reflects the corresponding increase in our inventory of single-family homes along with higher than normal increases in our repairs and maintenance activity along with increased insurance costs under our package policy when compared to the prior period. The increase in real estate taxes from 2018 to 2019 is based primarily on an increase in our inventory of single-family homes.

Depreciation and amortization on our home investments increased to $741,529 for the three months ended March 31, 2019 compared to $519,037 in 2018, reflecting the corresponding increase in our inventory of single-family homes.

General and administrative expenses for the three months ended March 31, 2019 totaled $663,717 compared to general and administrative expenses of $616,420 for the corresponding prior year period. General and administrative expenses consist of personnel costs, outside director fees, occupancy fees, public company filing fees, legal, accounting, and other general expenses. The increase in our general and administrative expenses is due primarily to marginal increases in personnel costs and professional fees in 2019 when compared to 2018.

We incurred total operating expenses of $2,802,913 for the three months ended March 31, 2019 resulting in operating loss for the three months ended March 31, 2019 of $47,184, compared to total operating expenses of $2,116,991 for the three months ended March 31, 2018 and a corresponding operating income of $62,300 for the three months ended March 31, 2018.

During the three months ended March 31, 2019, we had a net casualty loss of $25,000 compared to a net casualty gain of $50,376 during the three months ended March 31, 2018. Other income was $30,599 for the three months ended March 31, 2019 as compared to other income of $7,795 for the three months ended March 31, 2018. Interest expense on our notes payable was $728,124 for the three months ended March 31, 2019 compared to $400,592 for the three months ended March 31, 2018. The increase in interest expense is primarily due to higher note payable balances for the three months ended March 31, 2019 when compared to the corresponding period in 2018. This resulted in net other expense of $722,525 for the three months ended March 31, 2019 compared to a net other expense of $342,421 for the three months ended March 31, 2018.

Net loss for the three months ended March 31, 2019 was $769,709. The net loss for the three months ended March 31, 2018 was $280,121. The weighted average number of shares outstanding for the three months ended March 31, 2019 increased marginally to 11,005,223 from 10,758,409 for the three months ended March 31, 2018, resulting in a net loss per share of $0.07 for the three months ended March 31, 2019. The resulting net loss was $0.03 per share for the three months ended March 31, 2018.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, fund and maintain our assets and operations, make interest payments and fund other general business needs. Our liquidity, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control. Our near-term liquidity requirements consist primarily of acquiring properties, funding our operations, and making interest payments.

Our liquidity and capital resources as of March 31, 2019 consisted primarily of cash of $12,981,724. We believe our current liquidity and the expected cash flows from operations will be sufficient to fund the present level of our operations through the 12 months following the date of this report. However, our future acquisition activity will depend primarily on our ability to raise funds from the further issuance of shares of our common stock or units of our operating partnership combined with new loan transactions secured by our current and future home inventories. In order to purchase additional single-family homes, we intend to opportunistically utilize the capital markets to raise additional capital, including through the issuance of debt and equity securities, but there can be no assurance that we will be able to access adequate liquidity sources on favorable terms, or at all.

Credit Facilities

On February 11, 2019, we entered into a loan agreement with Arbor Agency Lending, LLC, an approved seller/servicer for Federal Home Loan Mortgage Corporation (Freddie Mac), which provides for a loan to us in the original principal amount of $10,523,000. The loan is a seven-year, interest-only payable loan with principal due and payable at its seven-year maturity, and accruing interest at a fixed rate of 4.72% per annum. The loan is secured by 143 of our single family homes. Proceeds of approximately $2.9 million were utilized to purchase 12 homes in Oklahoma City, Oklahoma. Additionally, as a result of the loan, the Company received approximately $7.4 million of loan proceeds, net of transaction fees and the purchase of homes noted above, which we intend to use for future acquisitions of single family homes.

On September 28, 2018, we refinanced our entire single-family home portfolio at that time by entering into a $51,362,000 loan with Arbor Agency Lending, LLC, on behalf of the Federal Home Loan Mortgage Corporation (Freddie Mac). The loan is a seven-year, monthly interest-only payable loan accruing interest at 4.74% per annum, with principal due and payable at its maturity on October 1, 2025. The loan is secured by 824 of our currently owned single-family homes and we also guaranteed approximately $12.8 million of the loan balance. Proceeds of approximately $33 million were utilized to pay off and replace our eight previously outstanding notes. We received approximately $17 million of proceeds from the refinancing, net of transaction fees, prepayment fees, and loan payoffs, which has been and is being primarily used for the future acquisitions of single-family homes and for working capital purposes

A summary of our notes payable as of March 31, 2019 and December 31, 2018 is as follows:

Operating Activities

We had net cash used in operating activities of $179,745 for the three months ended March 31, 2019. This resulted from a net loss of $769,709, adding back depreciation and amortization of $741,529, noncash share-based compensation of $39,375, amortization of deferred loan fees of $49,262, and then decreasing the amount by the net change in operating assets and liabilities of $240,202.

We had net cash used in operating activities of $192,134 for the three months ended March 31, 2018. This resulted from a net loss of $280,121, adding back depreciation and amortization of $519,037, amortization of deferred loan fees of $50,994, and then decreasing the amount by the net change in operating assets and liabilities of $482,044.

Investing Activities

During the three months ended March 31, 2019, we invested $4,629,723 in new homes, $553,874 in capital improvements for our homes, and $97,117 in lease origination costs for a total of $5,280,714 of net cash used in investing activities.

During the three months ended March 31, 2018, we invested $1,681,413 in new homes, $1,133,763 in capital improvements for our homes (of which approximately $892,000 were for previous period hurricane renovation costs), and $72,059 in lease origination costs. We received $1,435,298 of insurance proceeds for property damages for a total of $1,451,937 of net cash used in investing activities.

Financing Activities

During the three months ended March 31, 2019, we had net cash provided by financing activities of $10,101,429 derived from $10,523,000 of proceeds from a note payable, less $311,919 of loan fees, less distributions on common stock of $109,652.

During the three months ended March 31, 2018, we had net cash provided by financing activities of $2,415,660 derived from $2,736,630 of proceeds from a note payable, less $255,809 of notes payable principal payments, less $65,161 of loan fees.

Our future acquisition activity relies primarily on our ability to raise funds from the further issuance of common shares combined with new loan transactions secured by our current and future home inventories. We remain focused on acquiring new capital. We believe our current cash balance combined with our estimated future net rental revenue is sufficient to fund our operating activities through the 12 months following the date of this report.

Off Balance Sheet Arrangements

None.

Net Operating Income

We define net operating income (or NOI) as total revenue less property operating and maintenance and real estate taxes. NOI is a non-GAAP measurement that excludes acquisition costs, depreciation and amortization, general and administration, legal and accounting, and interest expenses.

We consider NOI to be a meaningful financial measure when considered with the financial statements determined in accordance with GAAP. We believe NOI is helpful to investors in understanding the amount of income after operating expenses which is generated in a given period.

The following is a reconciliation of our NOI to net loss as determined in accordance with GAAP for the three months ended March 31, 2019 and 2018.

We had net operating income from rentals of $1,397,437 for the three months ended March 31, 2019 compared to net operating income from rentals of $1,197,757 in the corresponding prior year period. This resulted in a net operating income margin of 50.7% in 2019 compared to a net operating income margin of 55.0% in 2018.

NOI should not be considered an alternative to net loss or net cash flows from operating activities, as determined in accordance with GAAP, as indications of our performance or as measures of liquidity. Nor is NOI necessarily indicative of cash available to fund future cash needs or distributions to shareholders. In addition, although we use NOI for comparability in assessing our performance against other REITs, not all REITs compute the same non-GAAP measure of NOI. Accordingly, our basis for computing this non-GAAP measure may not be comparable with that of other REITs. This is due in part to the differences in property operating and maintenance expenses incurred by, and real estate taxes applicable to, different companies and the significant effect these items have on NOI.

Funds From Operations and Core Funds From Operations

Funds From Operations (or FFO) is a non-GAAP financial measure that we believe, when considered with the financial statements determined in accordance with GAAP, is helpful to investors in understanding our performance because it captures features particular to real estate performance by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than do other depreciable assets. The National Association of Real Estate Investment Trusts (or NAREIT) defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of, and impairment losses recognized with respect to, depreciable property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated on the same basis to determine FFO.

Core Funds From Operations (or Core FFO) is a non-GAAP financial measure that we use as a supplemental measure of our performance. We believe that Core FFO is further helpful to investors as it provides a more consistent measurement of our performance across reporting periods by removing the impact of certain items that are not comparable from period to period. We adjust FFO for expensed acquisition fees and costs, share-based compensation, non-cash interest expense related to amortization of deferred financing costs, casualty gains and losses, and certain other non-comparable costs to arrive at Core FFO.

FFO and Core FFO should not be considered alternatives to net income (loss) or net cash flows from operating activities, as determined in accordance with GAAP, as indications of our performance or as measures of liquidity. These non-GAAP measures are not necessarily indicative of cash available to fund future cash needs. In addition, although we use these non-GAAP measures for comparability in assessing our performance against other REITs, not all REITs compute the same non-GAAP measures. Accordingly, there can be no assurance that our basis for computing these non-GAAP measures is comparable with that of other REITs. This is due in part to the differences in capitalization policies used by different companies and the significant effect these capitalization policies have on FFO and Core FFO. Real estate costs which are accounted for as capital improvements are added to the carrying value of the property and depreciated over time, whereas real estate costs that are expenses are accounted for as a current period expense. This affects FFO and Core FFO because costs that are accounted for as expenses reduce FFO and Core FFO. Conversely, real estate costs associated with assets that are capitalized and then subsequently depreciated are added back to net income to calculate FFO and Core FFO.

The following table sets forth a reconciliation of our net loss as determined in accordance with GAAP and our calculations of FFO and Core FFO for the three months ended March 31, 2019 and 2018: