UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)




þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2019




o		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 000-55772

STEADFAST APARTMENT REIT III, INC.

(Exact Name of Registrant as Specified in Its Charter)




Maryland		47-4871012
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)




18100 Von Karman Avenue, Suite 500
Irvine, California		92612
(Address of Principal Executive Offices)		(Zip Code)

(949) 852-0700

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N/A	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 þ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ 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:



Large Accelerated filer o	Accelerated filer o
Non-Accelerated filer þ	Smaller reporting company þ
Emerging growth company þ

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 pursuant to Section 13(a) of the Exchange Act. þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of November 1, 2019, there were 3,466,447 shares of the Registrant’s Class A common stock issued and outstanding, 475,208 shares of the Registrant’s Class R common stock issued and outstanding and 4,628,177 shares of the Registrant’s Class T common stock issued and outstanding.

Table of Contents

STEADFAST APARTMENT REIT III, INC.

INDEX



			Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			2
Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018			2
Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited)			3
Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018 (unaudited)			4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)			6
Condensed Notes to Consolidated Financial Statements as of September 30, 2019 (unaudited)			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			40
Item 3. Quantitative and Qualitative Disclosures About Market Risk			59
Item 4. Controls and Procedures			60

PART II — OTHER INFORMATION
Item 1. Legal Proceedings			61
Item 1A. Risk Factors			61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			61
Item 3. Defaults Upon Senior Securities			62
Item 4. Mine Safety Disclosures			62
Item 5. Other Information			62
Item 6. Exhibits			63
Signatures			65

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

STEADFAST APARTMENT REIT III, INC.

CONSOLIDATED BALANCE SHEETS



	September 30, 2019			December 31, 2018
	(Unaudited)
ASSETS
Assets:
Real Estate:
Land	$	45,908,171		$	45,908,171
Building and improvements	362,143,004			355,780,664
Total real estate, cost	408,051,175			401,688,835
Less accumulated depreciation and amortization	(32,960,809		)	(21,387,012		)
Total real estate, net	375,090,366			380,301,823
Cash and cash equivalents	21,803,455			35,628,660
Restricted cash	3,863,665			3,729,649
Rents and other receivables	1,380,692			515,569
Other assets	647,514			906,700
Total assets	$	402,785,692		$	421,082,401

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued liabilities	$	7,850,899		$	7,520,803
Mortgage notes payable, net	287,517,455			280,086,921
Distributions payable	1,056,993			1,169,815
Due to affiliates	636,953			4,898,804
Total liabilities	297,062,300			293,676,343
Commitments and contingencies (Note 9)
Redeemable common stock	4,149,979			6,570,093
Stockholders’ Equity:
Preferred stock, $0.01 par value per share; 100,000,000 shares authorized, no shares issued and outstanding	—			—
Class A common stock, $0.01 par value per share; 480,000,000 shares authorized, 3,466,447 and 3,516,990 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively	34,666			35,171
Class R common stock, $0.01 par value per share; 240,000,000 shares authorized, 475,208 and 474,076 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively	4,753			4,742
Class T common stock, $0.01 par value per share; 480,000,000 shares authorized, 4,630,865 and 4,620,317 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively	46,310			46,204
Additional paid-in capital	172,930,174			170,763,927
Cumulative distributions and net losses	(71,442,490		)	(50,014,079		)
Total stockholders’ equity	101,573,413			120,835,965
Total liabilities and stockholders’ equity	$	402,785,692		$	421,082,401

See accompanying notes to consolidated financial statements.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenues:
Rental income	$	10,274,865		$	9,851,463		$	30,070,531		$	27,775,041
Other income	237,254			53,548			731,453			191,762
Total revenues	10,512,119			9,905,011			30,801,984			27,966,803
Expenses:
Operating, maintenance and management	3,032,045			2,829,019			7,996,145			7,707,048
Real estate taxes and insurance	1,244,074			1,198,477			4,422,914			3,841,903
Fees to affiliates	1,643,653			1,528,770			5,586,812			4,274,781
Depreciation and amortization	3,965,495			3,866,775			11,574,455			12,804,145
Interest expense	3,077,197			2,998,775			10,014,805			7,909,070
Loss on debt extinguishment	—			—			167,469			—
General and administrative expenses	1,582,320			1,039,453			3,682,249			2,437,314
Total expenses	14,544,784			13,461,269			43,444,849			38,974,261
Loss before other income	(4,032,665		)	(3,556,258		)	(12,642,865		)	(11,007,458		)
Other income:
Other income	875,000			—			875,000			—
Total other income	875,000			—			875,000			—
Net loss	$	(3,157,665	)	$	(3,556,258	)	$	(11,767,865	)	$	(11,007,458	)

Net loss attributable to Class A common stockholders — basic and diluted	$	(1,277,305	)	$	(1,464,767	)	$	(4,772,019	)	$	(4,620,899	)
Net loss per Class A common share — basic and diluted	$	(0.37	)	$	(0.40	)	$	(1.37	)	$	(1.34	)
Weighted average number of Class A common shares outstanding — basic and diluted	3,471,013			3,397,330			3,490,700			3,185,507

Net loss attributable to Class R common stockholders — basic and diluted	$	(174,873	)	$	(190,984	)	$	(649,931	)	$	(566,814	)
Net loss per Class R common share — basic and diluted	$	(0.37	)	$	(0.41	)	$	(1.37	)	$	(1.40	)
Weighted average number of Class R common shares outstanding — basic and diluted	475,208			442,962			475,420			390,744

Net loss attributable to Class T common stockholders — basic and diluted	$	(1,705,487	)	$	(1,900,505	)	$	(6,345,915	)	$	(5,819,746	)
Net loss per Class T common share — basic and diluted	$	(0.37	)	$	(0.46	)	$	(1.37	)	$	(1.54	)
Weighted average number of Class T common shares outstanding — basic and diluted	4,634,576			4,407,966			4,641,994			4,011,955

See accompanying notes to consolidated financial statements.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 (Unaudited)



	Common Stock													Additional Paid-In Capital			Cumulative Distributions & Net Losses			Total Stockholders’ Equity
	Class A					Class R			Class T
	Shares		Amount			Shares	Amount		Shares		Amount
BALANCE, July 1, 2019	3,486,677		$	34,868		475,208	$	4,753	4,641,877		$	46,420		$	172,920,483		$	(65,039,663	)	$	107,966,861
Transfers from redeemable common stock	—		—			—	—		—		—			667,887			—			667,887
Repurchase of common stock	(20,230	)	(202		)	—	—		(11,012	)	(110		)	(667,575		)	—			(667,887		)
Distributions declared ($0.378 per share of common stock)	—		—			—	—		—		—			—			(3,245,162		)	(3,245,162		)
Amortization of stock-based compensation	—		—			—	—		—		—			9,379			—			9,379
Net loss	—		—			—	—		—		—			—			(3,157,665		)	(3,157,665		)
BALANCE, September 30, 2019	3,466,447		$	34,666		475,208	$	4,753	4,630,865		$	46,310		$	172,930,174		$	(71,442,490	)	$	101,573,413



	Common Stock															Additional Paid-In Capital			Cumulative Distributions & Net Losses			Total Stockholders’ Equity
	Class A					Class R					Class T
	Shares		Amount			Shares		Amount			Shares		Amount
BALANCE, January 1, 2019	3,516,990		$	35,171		474,076		$	4,742		4,620,317		$	46,204		$	170,763,927		$	(50,014,079	)	$	120,835,965
Issuance of common stock	15,487		155			1,845		18			31,246		313			1,094,470			—			1,094,956
Transfers from redeemable common stock	—		—			—		—			—		—			2,951,937			—			2,951,937
Repurchase of common stock	(66,030	)	(660		)	(713	)	(7		)	(20,698	)	(207		)	(1,922,409		)	—			(1,923,283		)
Distributions declared ($1.122 per share of common stock)	—		—			—		—			—		—			—			(9,660,546		)	(9,660,546		)
Amortization of stock-based compensation	—		—			—		—			—		—			42,249			—			42,249
Net loss	—		—			—		—			—		—			—			(11,767,865		)	(11,767,865		)
BALANCE, September 30, 2019	3,466,447		$	34,666		475,208		$	4,753		4,630,865		$	46,310		$	172,930,174		$	(71,442,490	)	$	101,573,413

See accompanying notes to consolidated financial statements.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 (Unaudited)



	Common Stock													Additional Paid-In Capital			Cumulative Distributions & Net Losses			Total Stockholders’ Equity
	Class A					Class R			Class T
	Shares		Amount			Shares	Amount		Shares		Amount
BALANCE, July 1, 2018	3,276,197		$	32,764		409,536	$	4,096	4,174,825		$	41,749		$	157,467,255		$	(36,027,454	)	$	121,518,410
Issuance of common stock	223,987		2,238			61,977	620		407,697		4,076			16,534,178			—			16,541,112
Commissions on sales of common stock and related dealer manager fees to affiliates	—		—			—	—		—		—			(1,273,060		)	—			(1,273,060		)
Transfers to redeemable common stock	—		—			—	—		—		—			(1,241,466		)	—			(1,241,466		)
Repurchase of common stock	(2,543	)	(25		)	—	—		(420	)	(4		)	(67,192		)	—			(67,221		)
Other offering costs to affiliates	—		—			—	—		—		—			(735,217		)	—			(735,217		)
Distributions declared ($0.378, $0.361, $0.313 per share of Class A, R, and T common stock, respectively)	—		—			—	—		—		—			—			(2,823,452		)	(2,823,452		)
Amortization of stock-based compensation	—		—			—	—		—		—			35,613			—			35,613
Net loss	—		—			—	—		—		—			—			(3,556,258		)	(3,556,258		)
BALANCE, September 30, 2018	3,497,641		$	34,977		471,513	$	4,716	4,582,102		$	45,821		$	170,720,111		$	(42,407,164	)	$	128,398,461



	Common Stock															Additional Paid-In Capital			Cumulative Distributions & Net Losses			Total Stockholders’ Equity
	Class A					Class R					Class T
	Shares		Amount			Shares		Amount			Shares		Amount
BALANCE, January 1, 2018	2,887,731		$	28,878		309,518		$	3,096		3,369,991		$	33,700		$	131,822,585		$	(23,683,752	)	$	108,204,507
Issuance of common stock	627,053		6,271			165,603		1,656			1,213,848		12,138			47,966,611			—			47,986,676
Commissions on sales of common stock and related dealer manager fees to affiliates	—		—			—		—			—		—			(3,673,948		)	—			(3,673,948		)
Transfers to redeemable common stock	—		—			—		—			—		—			(2,804,736		)	—			(2,804,736		)
Repurchase of common stock	(17,143	)	(172		)	(3,608	)	(36		)	(1,737	)	(17		)	(513,836		)	—			(514,061		)
Other offering costs to affiliates	—		—			—		—			—		—			(2,140,104		)	—			(2,140,104		)
Distributions declared ($1.122, $1.070, $0.928 per share of Class A, R, and T common stock, respectively)	—		—			—		—			—		—			—			(7,715,954		)	(7,715,954		)
Amortization of stock-based compensation	—		—			—		—			—		—			63,539			—			63,539
Net loss	—		—			—		—			—		—			—			(11,007,458		)	(11,007,458		)
BALANCE, September 30, 2018	3,497,641		$	34,977		471,513		$	4,716		4,582,102		$	45,821		$	170,720,111		$	(42,407,164	)	$	128,398,461

See accompanying notes to consolidated financial statements.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended September 30,
	2019			2018
Cash Flows from Operating Activities:
Net loss	$	(11,767,865	)	$	(11,007,458	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	11,574,455			12,804,145
Amortization of deferred financing costs	192,333			174,120
Amortization of stock-based compensation	42,249			63,539
Amortization of stock-based annual compensation	—			13,750
Loss on debt extinguishment	167,469			—
Change in fair value of interest rate cap agreements	375,637			(665,445		)
Insurance claim recoveries	(217,188		)	—
Changes in operating assets and liabilities:
Rents and other receivables	(940,123		)	(145,202		)
Other assets	(75,869		)	(183,634		)
Accounts payable and accrued liabilities	553,799			764,990
Due to affiliates	(574,806		)	(1,520,404		)
Net cash (used in) provided by operating activities	(669,909		)	298,401
Cash Flows from Investing Activities:
Acquisition of real estate investments	—			(30,118,698		)
Additions to real estate investments	(6,101,689		)	(3,967,275		)
Escrow deposits for pending real estate acquisitions	—			(1,000,000		)
Proceeds from insurance claims	292,188			—
Cash used in investing activities	(5,809,501		)	(35,085,973		)
Cash Flows from Financing Activities:
Proceeds from issuance of mortgage notes payable	94,861,000			21,545,000
Principal payments on notes payable	(87,148,994		)	—
Proceeds from issuance of Class A common stock	—			14,012,729
Proceeds from issuance of Class R common stock	—			3,597,999
Proceeds from issuance of Class T common stock	—			26,788,418
Payments of commissions on sale of common stock and related dealer manager fees	—			(3,548,440		)
Reimbursement of other offering costs to affiliates	(3,680,816		)	(1,810,661		)
Payment of deferred financing costs	(641,104		)	(163,083		)
Payment of debt extinguishment costs	(170		)	—
Distributions to common stockholders	(8,678,412		)	(3,919,077		)
Repurchase of common stock	(1,923,283		)	(514,061		)
Net cash (used in) provided by financing activities	(7,211,779		)	55,988,824
Net (decrease) increase in cash, cash equivalents and restricted cash	(13,691,189		)	21,201,253
Cash, cash equivalents and restricted cash, beginning of period	39,358,309			19,878,953
Cash, cash equivalents and restricted cash, end of period	$	25,667,120		$	41,080,206

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)



	Nine Months Ended September 30,
	2019		2018
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	9,543,472	$	8,060,622
Supplemental Disclosures of Noncash Flow Transactions:
Distributions payable	$	1,056,993	$	952,683
Amounts receivable from transfer agent for Class A common stock	$	—	$	45,100
Amounts payable to affiliates for other offering costs	$	—	$	735,217
Distributions paid to common stockholders through common stock issuances pursuant to the distribution reinvestment plan	$	1,094,956	$	3,590,554
Redeemable common stock	$	4,149,979	$	5,714,167
Redemptions payable	$	64,000	$	81,708
Accounts payable and accrued liabilities from additions to real estate investments	$	534,961	$	104,915
Due to affiliates from additions to real estate investments	$	16,746	$	21,884
Due to affiliates from distribution and shareholder servicing fee	$	—	$	3,063,646
Operating lease right-of-use assets, net	$	38,794	$	—
Operating lease liabilities, net	$	41,240	$	—

See accompanying notes to consolidated financial statements.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

1. Organization and Business

Steadfast Apartment REIT III, Inc. (the “Company”) was formed on July 29, 2015, as a Maryland corporation that elected to be taxed as, and qualifies as, a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2016. On August 24, 2015, the Company was initially capitalized with the sale of 8,000 shares of Class A common stock to Steadfast Apartment Advisor III, LLC (the “Advisor”), a Delaware limited liability company, at a purchase price of $25.00 per share for an aggregate purchase price of $200,000.

The Company owns and operates a portfolio of multifamily properties located in targeted markets throughout the United States. As of September 30, 2019, the Company owned ten multifamily properties comprising a total of 2,775 apartment homes. For more information on the Company’s real estate portfolio, see Note 3 (Real Estate).

Public Offering

On February 5, 2016, the Company commenced its initial public offering to offer a maximum of $1,000,000,000 in shares of common stock for sale to the public in the primary offering (the “Primary Offering”). The Company initially offered Class A shares and Class T shares in the Public Offering at an initial price of $25.00 for each Class A share ($500,000,000 in Class A shares) and $23.81 for each Class T share ($500,000,000 in Class T shares), with discounts available for certain categories of purchasers. The Company also registered up to $300,000,000 in shares pursuant to the Company’s distribution reinvestment plan (the “DRP,” and together with the Primary Offering, the “Public Offering”) at an initial price of $23.75 for each Class A share and $22.62 for each Class T share.

Commencing on July 25, 2016, the Company revised the terms of its Public Offering to include Class R shares. The Company subsequently offered a maximum of $1,000,000,000 in shares of common stock for sale to the public at an initial price of $25.00 for each Class A share ($400,000,000 in Class A shares), $22.50 for each Class R share ($200,000,000 in Class R shares) and $23.81 for each Class T share ($400,000,000 in Class T shares), with discounts available for certain categories of purchasers. Up to $300,000,000 in shares were offered pursuant to the DRP at an initial price of $23.75 for each Class A share, $22.50 for each Class R share and $22.62 for each Class T share.

As of August 31, 2018, the date the Company terminated its Primary Offering, it had issued 3,483,706 shares of Class A common stock, 474,357 shares of Class R common stock and 4,572,889 shares of Class T common stock in the Public Offering for gross proceeds of $85,801,001, $10,672,273 and $108,706,960, respectively, and $205,180,234 in the aggregate, including 111,922 shares of Class A common stock, 8,450 shares of Class R common stock and 145,838 shares of Class T common stock issued pursuant to the DRP for gross offering proceeds of $2,658,156, $190,125 and $3,298,847, respectively. The Company suspended the DRP on February 5, 2019, effective beginning with distributions that accrued on February 1, 2019. As of September 30, 2019, the Company had issued 3,528,797 shares of Class A common stock, 479,529 shares of Class R common stock and 4,654,978 shares of Class T common stock in the Public Offering for gross proceeds of $86,834,671, $10,788,788 and $110,559,107, respectively, and $208,182,566 in the aggregate, including 157,012 shares of Class A common stock, 13,622 shares of Class R common stock and 227,925 shares of Class T common stock issued pursuant to the DRP for gross offering proceeds of $3,691,826, $306,640 and $5,150,991, respectively.

On October 9, 2018, the Company’s board of directors approved an estimated value per share for each of the Company’s Class A common stock, Class R common stock and Class T common stock of $22.54 as of June 30, 2018. In connection with the determination of an estimated value per share, the Company’s board of directors approved a price per share for the DRP for each of the Company’s Class A common stock, Class R common stock and Class T common stock of $22.54, effective November 1, 2018.

The business of the Company is externally managed by the Advisor pursuant to the Amended and Restated Advisory Agreement dated July 25, 2016, by and among the Company, Steadfast Apartment REIT III Operating Partnership, L.P. (the “Operating Partnership”) and the Advisor (as amended, the “Advisory Agreement”). The Advisory Agreement is subject to

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

annual renewal by the Company’s board of directors. The current term of the Advisory Agreement expires on February 5, 2020. Subject to certain restrictions and limitations, the Advisor manages the Company’s day-to-day operations, manages the Company’s portfolio of properties and real estate-related assets, sources and presents investment opportunities to the Company’s board of directors and provides investment management services on the Company’s behalf. The Advisor has also entered into an Advisory Services Agreement with Crossroads Capital Advisors, LLC (“Crossroads Capital Advisors”), whereby Crossroads Capital Advisors provides advisory services to the Company on behalf of the Advisor. The Company has retained Stira Capital Markets Group, LLC (formerly known as Steadfast Capital Markets Group, LLC) (the “Dealer Manager”), an affiliate of the Advisor, which served as the dealer manager for the Public Offering. The Advisor, along with the Dealer Manager, also provides marketing, investor relations and other administrative services on the Company’s behalf.

Substantially all of the Company’s business is conducted through the Operating Partnership. The Company is the sole general partner of the Operating Partnership and owns a 99.99% partnership interest in the Operating Partnership. The Advisor is the sole limited partner of and owns the remaining 0.01% partnership interest in the Operating Partnership. The Company and the Advisor entered into the Amended and Restated Agreement of Limited Partnership of the Operating Partnership on July 25, 2016 (as amended, the “Partnership Agreement”). As the Company accepted subscriptions for shares of its common stock in the Public Offering, the Company transferred substantially all of the net offering proceeds from the Public Offering to the Operating Partnership as a contribution in exchange for partnership interests and the Company’s percentage ownership in the Operating Partnership increased proportionately.

The Partnership Agreement provides that the Operating Partnership is operated in a manner that will enable the Company to (1) satisfy the requirements for being classified as a REIT for tax purposes, (2) avoid any federal income or excise tax liability and (3) ensure that the Operating Partnership will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), which classification could result in the Operating Partnership being taxed as a corporation. In addition to the administrative and operating costs and expenses incurred by the Operating Partnership in acquiring and operating real properties, the Operating Partnership pays all of the Company’s administrative costs and expenses, and such expenses are treated as expenses of the Operating Partnership.

The Company commenced its real estate operations on May 19, 2016, upon acquiring a fee simple interest in Carriage House Apartment Homes, a multifamily property located in Gurnee, Illinois.

Pending Merger with Steadfast Apartment REIT, Inc.

On August 5, 2019, the Company, Steadfast Apartment REIT, Inc. (“STAR”), a public non-traded REIT sponsored by the Sponsor, the Operating Partnership, Steadfast Apartment REIT Operating Partnership, L.P., the operating partnership of STAR (“STAR Operating Partnership”), and SIII Subsidiary, LLC, a wholly-owned subsidiary STAR (“STAR III Merger Sub”), entered into an Agreement and Plan of Merger (the “STAR III Merger Agreement”). Subject to the terms and conditions of the STAR III Merger Agreement, STAR III will merge with and into STAR III Merger Sub (the “Merger”), with STAR III Merger Sub surviving the Merger, such that following the Merger, the surviving entity will continue as a wholly-owned subsidiary of STAR. In accordance with the applicable provisions of the Maryland General Corporation Law (the “MGCL”), the separate existence of STAR III shall cease.

At the effective time of the Merger and subject to the terms and conditions of the STAR III Merger Agreement, each issued and outstanding share of the Company’s common stock (or a fraction thereof), $0.01 par value per share, will be converted into the right to receive 1.430 shares of STAR common stock, $0.01 par value per share (“STAR Common Stock”).

The obligation of each party to consummate the Merger is subject to a number of conditions, including receipt of the approval of the Merger and of an amendment to the Company’s Second Articles of Amendment and Restatement (the “Charter”) to delete certain provisions regarding roll-up transactions by the holders of a majority of the outstanding shares of the Company’s Common Stock (the “STAR III Stockholder Approval”).

The Company (with the prior approval of the special committee of its board of directors) may terminate the STAR III Merger Agreement in order to enter into an “Alternative Acquisition Agreement” with respect to a “Superior Proposal” (each as

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PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

defined in the STAR III Merger Agreement) at any time prior to receipt by the Company of the STAR III Stockholder Approval pursuant to the terms of the STAR III Merger Agreement. STAR may terminate the STAR III Merger Agreement at any time prior to the receipt of the STAR III Stockholder Approval, in certain limited circumstances, including upon an “Adverse Recommendation Change” (as defined in the STAR III Merger Agreement).

If the STAR III Merger Agreement is terminated in connection with the Company’s acceptance of a Superior Proposal or making an Adverse Recommendation Change, the Company must pay STAR a termination fee $5,320,000.

On August 5, 2019, STAR, Steadfast Income REIT, Inc. (“SIR”), a public non-traded REIT sponsored by the Sponsor, STAR Operating Partnership, Steadfast Income REIT Operating Partnership, L.P., the operating partnership of SIR (“SIR Operating Partnership”), and SI Subsidiary, LLC, a wholly-owned subsidiary of STAR (“SIR Merger Sub”), entered into an Agreement and Plan of Merger (the “SIR Merger Agreement”). Subject to the terms and conditions of the SIR Merger Agreement, SIR will merge with and into SIR Merger Sub (the “SIR Merger”), with SIR Merger Sub surviving the SIR Merger, such that following the SIR Merger, the surviving entity will continue as a wholly-owned subsidiary of STAR. In accordance with the applicable provisions of the MGCL, the separate existence of SIR shall cease.

The consummation of the Merger is not contingent upon the completion of the SIR Merger and the consummation of the SIR Merger is not contingent upon the consummation of the Merger.

The combined company after the mergers (the “Combined Company”) will retain the name “Steadfast Apartment REIT, Inc.” Each merger is intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code.

Concurrently with the entry into the STAR III Merger Agreement, the Company entered into an amendment (the “First Amendment”) to the Partnership Agreement. The First Amendment will become effective at the earlier of (i) the date that STAR III merges with and into STAR III Merger Sub and (ii) upon payment of certain consideration owed to the Advisor in connection with consummation of a Superior Proposal. The purpose of the First Amendment is to revise the economic interests of the Advisor by providing that the Advisor will not receive any special allocations with respect to a “Special Limited Partner Interest” (as defined in the Partnership Agreement) pursuant to the Partnership Agreement.

Concurrently with the entry into the STAR III Merger Agreement, the Company and the Advisor entered into a termination letter agreement (the “Termination Agreement”), effective as of August 5, 2019. Pursuant to the Termination Agreement, the Advisory Agreement will be terminated at the effective time of the Merger. Also pursuant to the Termination Agreement, the Advisor agreed to waive any disposition fee it otherwise would be entitled to pursuant to the Advisory Agreement related to the Merger and agreed to reimburse STAR III for its costs if the STAR III stockholders reject the Merger at a meeting of stockholders.

2. Summary of Significant Accounting Policies

There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2018, other than Accounting Standards Update (“ASU”) 2016-02, and the Securities and Exchange Commission’s (the “SEC”) Disclosure Update and Simplification rule (Release 33-10532), as further described and defined below. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company, the consolidated variable interest entity (“VIE”) that the Company controls and of which the Company is the primary beneficiary, and the Operating Partnership’s subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. The financial statements of the Company’s subsidiaries are prepared using accounting policies consistent with those of the Company. The Operating

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Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

Partnership is a VIE because the Advisor, as the limited partner, lacks substantive kick-out rights and substantive participating rights. The Company is the primary beneficiary of, and consolidates, the Operating Partnership.

The accompanying unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments that are of a normal and recurring nature and necessary for a fair and consistent presentation of the results of such periods. Operating results for the three and nine months ended September 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The unaudited consolidated financial statements in this Quarterly Report on Form 10-Q (the “Quarterly Report”) should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Fair Value Measurements

Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other assets and liabilities at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:


•	Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;


•	Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and


•	Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and will classify such items in Level 1 or Level 2. In instances where the market is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and will establish a fair value by assigning weights to the various valuation sources.

The following describes the valuation methodologies used by the Company to measure fair value, including an indication of the level in the fair value hierarchy in which each asset or liability is generally classified.

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PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

Interest rate cap agreements - The Company has entered into certain interest rate cap agreements. These derivatives are recorded at fair value. Fair value was based on a model-driven valuation using the associated variable rate curve and an implied market volatility, both of which were observable at commonly quoted intervals for the full term of the interest rate cap agreements. Therefore, the Company’s interest rate cap agreements were classified within Level 2 of the fair value hierarchy and are included in other assets in the accompanying consolidated balance sheets. Changes in the fair value of the interest rate cap agreements are recorded as interest expense in the accompanying consolidated statements of operations.

The following tables reflect the Company’s assets required to be measured at fair value on a recurring basis on the consolidated balance sheets:



	September 30, 2019
	Fair Value Measurements Using
	Level 1		Level 2		Level 3
Assets:
Interest rate cap agreements	$	—	$	1,819	$	—



	December 31, 2018
	Fair Value Measurements Using
	Level 1		Level 2		Level 3
Assets:
Interest rate cap agreements	$	—	$	377,456	$	—

Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.

Fair Value of Financial Instruments

The accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, rents and other receivables, accounts payable and accrued liabilities, due to affiliates, distributions payable and mortgage notes payable, net.

The Company considers the carrying value of cash and cash equivalents, restricted cash, rents and other receivables, accounts payable and accrued liabilities and distributions payable to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization. The fair value of amounts due to affiliates is not determinable due to the related party nature of such amounts. The Company has determined that its mortgage notes payable, net are classified as Level 3 within the fair value hierarchy.

The fair value of the mortgage notes payable, net is estimated using a discounted cash flow analysis using borrowing rates available to the Company for debt instruments with similar terms and maturities. As of September 30, 2019 and December 31, 2018, the fair value of the mortgage notes payable, net was $289,032,608 and $279,945,659, respectively, compared to the carrying value of $287,517,455 and $280,086,921, respectively.

Distribution Policy

The Company elected to be taxed as, and qualifies as, a REIT commencing with the Company’s taxable year ended December 31, 2016. To maintain its qualification as a REIT, the Company intends to make distributions each taxable year equal to at least 90% of its REIT taxable income (which is determined without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). The Company’s board of directors authorized a distribution to the holders of Class A shares and Class T shares, which began to accrue on May 19, 2016.

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Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

The Company’s board of directors also authorized a distribution to the holders of Class R shares, which began to accrue on August 2, 2016.

Distributions declared during the period from January 1, 2018 to September 30, 2018, were based on daily record dates and calculated at a rate of $0.004110 per Class A share per day, $0.00394521 per Class R share per day subject to an annual distribution and shareholder servicing fee of 0.27%, and in some instances, $0.00369863 per Class R share per day subject to an annual distribution and shareholder servicing fee of 0.67% and $0.003376 per Class T share per day subject to an annual distribution and shareholder servicing fee of 1.125%, and in some instances, $0.003457 per Class T share per day subject to an annual distribution and shareholder servicing fee of 1.0%.

Distributions declared during the period from January 1, 2019 to September 30, 2019, were based on daily record dates and calculated at a rate of $0.004110 per Class A share, Class R share and Class T share per day. Each day during the period from May 19, 2016 to September 30, 2019, was a distribution record date with respect to Class A shares and Class T shares. Each day during the period from August 2, 2016 to September 30, 2019, was a distribution record date with respect to Class R shares.

Distributions to stockholders are determined by the board of directors of the Company and are dependent upon a number of factors relating to the Company, including funds available for the payment of distributions, financial condition, the timing of property acquisitions, capital expenditure requirements and annual distribution requirements in order for the Company to qualify as a REIT under the Internal Revenue Code. During the three and nine months ended September 30, 2019, the Company declared distributions totaling $0.378 and $1.122 per Class A, R and T shares of common stock, respectively. During the three and nine months ended September 30, 2018, the Company declared distributions totaling $0.378 and $1.122 per Class A share of common stock, $0.361 and $1.070 per Class R share of common stock and $0.313 and $0.928 per Class T share of common stock, respectively.

Per Share Data

Basic loss per share attributable to common stockholders for all periods presented are computed by dividing net loss by the weighted average number of shares of the Company’s common stock outstanding for each class of shares outstanding during the period. Diluted loss per share is computed based on the weighted average number of shares of the Company’s common stock and all potentially dilutive securities, if any. Distributions declared per common share assume each share was issued and outstanding each day during the period. Nonvested shares of the Company’s restricted common stock give rise to potentially dilutive shares of the Company’s common stock but such shares were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during the period.

In accordance with FASB ASC Topic 260-10-45, Earnings Per Share, the Company uses the two-class method to calculate earnings per share. Basic earnings per share is calculated based on dividends declared and the rights of common shares and participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends declared during the period. The undistributed earnings are allocated to all outstanding common shares based on the relative percentage of each class of shares to the total number of outstanding shares. The Company does not have any participating securities outstanding but does have multiple classes of common stock, which at times had different dividend rates and an unvested portion of restricted Class A common stock. Earnings attributable to the unvested restricted Class A common stock are deducted from earnings in the computation of per share amounts where applicable.

Segment Disclosure

The Company has determined that it has one reportable segment with activities related to investing in multifamily properties. The Company’s investments in real estate are in different geographic regions, and management evaluates operating performance on an individual asset level. However, as each of the Company’s assets has similar economic characteristics, tenants and products and services, its assets have been aggregated into one reportable segment.

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PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

Reclassification

Certain amounts in the Company’s prior period consolidated financial statements were reclassified to conform to the current presentation. These reclassifications did not change the results of operations of prior periods. On January 1, 2019, the Company adopted ASU 2016-02, as further described below. As a result, all income earned pursuant to tenant leases is reflected as one line item, “Rental Income,” in the consolidated statements of operations. To facilitate comparability, the Company has reclassified prior period’s lease and non-lease income consistently with the current periods presented.

The table below provides a reconciliation of the prior period presentation of the income statement line items that were reclassified in the Company’s consolidated statements of operations to conform to the current period presentation, pursuant to the adoption of the new lease accounting standard and election of the single component practical expedient:



	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Rental income (presentation prior to January 1, 2019)	$	8,766,978	$	24,742,738
Tenant reimbursements⁽¹⁾ (presentation prior to January 1, 2019)	1,084,485		3,032,303
Rental income (presentation effective January 1, 2019)	$	9,851,463	$	27,775,041

____________

(1) Tenant reimbursements include reimbursements for recoverable costs.

Recent Accounting Pronouncements

In February 2016, the FASB established ASC Topic 842 , Leases (“ASC 842”), by issuing ASU 2016-02, which requires lessees to recognize right-of-use assets and lease liabilities for operating leases on the balance sheet and disclose key information about leasing arrangements. ASC 842 also makes targeted changes to lessor accounting. ASC 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842 (“ASU 2018-01”), ASU 2018-10, Codification Improvements to Topic 842 (“ASU 2018-10”), ASU 2018-11, Targeted Improvements (“ASU 2018-11”) and ASU 2018-20, Leases (Topic 842), Narrow-scope Improvements for Lessors (“ASU 2018-20”). ASC 842 requires a modified retrospective transition approach that was effective in the first quarter of 2019, subject to early adoption. The Company elected an optional transition method that allows entities to initially apply ASC 842 at the adoption date (January 1, 2019) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company evaluated the impact of ASC 842 on its leases both as it relates to the Company acting as a lessee and as a lessor. Based on its evaluation, as it relates to the former, the Company elected to apply each of the practical expedients described in ASC 842-10-65-1(f) that allowed, among other things, to not reassess lease classification conclusions or initial direct cost accounting as of December 31, 2018, therefore these leases continue to be accounted for as operating leases. The Company also elected the practical expedient described in ASC 842-20-25-2 not to apply the recognition requirements in ASC 842 to short-term leases and instead, to recognize lease payments in the consolidated statement of operations on a straight-line basis over the lease term. The Company did not experience a material impact on the recognition of leases in the consolidated financial statements because the quantity of leased equipment by the Company is limited and immaterial to the consolidated financial statements. Upon adoption, the Company recognized an initial operating lease right-of-use asset, net, of $18,629 and an operating lease liability, net, of $18,629.

As it relates to the Company as lessor, the Company did not experience a material impact on the recognition of leases in the consolidated financial statements because under ASC 842, lessors continue to account for leases using an approach that is substantially equivalent to historical guidance for sales-type leases, direct financing leases, and operating leases. The Company elected a practical expedient which allows lessors to not separate non-lease components from the lease component when the timing and pattern of transfer for the lease components and non-lease components are the same and if the lease component is classified as an operating lease. As a result, on January 1, 2019, the Company began presenting all rentals and reimbursements from tenants as a single line item rental income within the consolidated statements of operations. As of January 1, 2019, the

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PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

Company implemented changes to its business processes and controls related to accounting for and the presentation and disclosure of leases, including the reclassification of tenant reimbursements, previously disclosed as part of tenant reimbursements and other, to rental income, in the consolidated statements of operations.

Under ASC 842, beginning on January 1, 2019, changes in the probability of collecting tenant rental income could result in direct adjustments of rental income and tenant receivables. The Company did not experience a material impact on its rental income and tenant receivables as of the adoption date.

The Company’s rental income consists of fixed rental payments from tenants under operating leases and is recognized on a straight-line basis over the respective operating lease terms. The Company recognizes minimum rent, including rental abatements, concessions and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the non-cancelable term of the related lease. The Company’s rental income that relates to variable lease payments consists of tenant reimbursements and includes reimbursements for recoverable costs, which are recognized as revenue in the period during which the applicable expenses are incurred and the tenant’s obligation to reimburse the Company arises.

The Company recognized $9,142,782 and $26,886,766 of rental income related to operating lease payments of which $9,142,782 and $26,886,766 was for variable lease payments for the three and nine months ended September 30, 2019.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASU 2016-13”). ASU 2016-13 requires more timely recording of credit losses on loans and other financial instruments that are not accounted for at fair value through net income (loss), including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in ASU 2016-13 require the Company to measure all expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets and eliminates the “incurred loss” methodology in current GAAP. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses (“ASU 2018-19”), which clarifies that operating lease receivables accounted for under ASC 842 Leases, are not in the scope of the new credit losses guidance. The effective date and transition requirements for this guidance are the same as for ASU 2016-13. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures and does not expect a material impact on its consolidated financial statements and related disclosures from its adoption.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The FASB issued ASU 2018-13 to improve the effectiveness of fair value measurement disclosures by adding, eliminating, and modifying certain disclosure requirements. The issuance of ASU 2018-13 is part of a disclosure framework project. The disclosure framework project’s objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP that is most important to users of each entity's financial statements. Achieving the objective of improving the effectiveness of the notes to financial statements includes: (1) the development of a framework that promotes consistent decisions by the FASB board about disclosure requirements and (2) the appropriate exercise of discretion by reporting entities. The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting-Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. ASU 2018-13 removed certain disclosure requirements under Topic 820 such as the disclosure requirements of the valuation process for level 3 fair value measurements and modified and added certain of the disclosure requirements in Topic 820. ASU 2018-13 requires prospective and retrospective application depending on the amendment and is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact ASU 2018-13 will have on its consolidated financial statements and related disclosures and believes that

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Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

certain disclosures of interest rate cap agreements in its consolidated financial statements may be impacted by the adoption of ASU 2018-13.

The SEC’s Disclosure Update and Simplification rule (Release 33-10532) amends the interim financial statement requirements to require a reconciliation of changes in stockholders’ equity in the notes or as a separate statement. This analysis should reconcile the beginning balance to the ending balance of each caption in stockholders’ equity for each period for which an income statement is required to be filed and comply with the remaining content requirements of Rule 3-04 of Regulation S-X. As a result, registrants will have to provide the reconciliation for both the year-to-date and quarterly periods and comparable periods in Form 10-Q but only for the year-to-date periods in registration statements. The rule does not prescribe the format of the presentation as long as the appropriate periods are provided. Per a Compliance and Disclosure Interpretation (Q 105.09, Exchange Act Forms, 10-Q), “the amendments are effective for all filings made on or after November 5, 2018. In light of the timing of effectiveness of the amendments and proximity of effectiveness to the filing date for most filers’ quarterly reports, the staff would not object if the filer’s first presentation of the changes in the shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments.” This allowed the Company to adopt the amendment for the Company’s Form 10-Q for the period ended March 31, 2019. The Company adopted this guidance in the nine months ended September 30, 2019 by presenting a reconciliation of changes in stockholders’ equity for the current and prior period as a separate statement.

3. Real Estate

As of September 30, 2019, the Company owned 10 multifamily properties comprised of a total of 2,775 apartment homes. The total acquisition price of the Company’s real estate portfolio was $400,252,928. As of September 30, 2019 and December 31, 2018, the Company’s portfolio was approximately 93.7% and 92.4% occupied and the average monthly rent was $1,183 and $1,136, respectively.

As of September 30, 2019 and December 31, 2018, accumulated depreciation and amortization related to the Company’s consolidated real estate properties were as follows:



	September 30, 2019
	Assets
	Land		Building and Improvements			Total Real Estate
Investments in real estate	$	45,908,171	$	362,143,004		$	408,051,175
Less: Accumulated depreciation and amortization	—		(32,960,809		)	(32,960,809		)
Net investments in real estate	$	45,908,171	$	329,182,195		$	375,090,366



	December 31, 2018
	Assets
	Land		Building and Improvements			Total Real Estate
Investments in real estate	$	45,908,171	$	355,780,664		$	401,688,835
Less: Accumulated depreciation and amortization	—		(21,387,012		)	(21,387,012		)
Net investments in real estate	$	45,908,171	$	334,393,652		$	380,301,823

Depreciation and amortization expense was $3,965,495 and $11,574,455 for the three and nine months ended September 30, 2019, and $3,866,775 and $12,804,145 for the three and nine months ended September 30, 2018, respectively.

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PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

Depreciation of the Company’s buildings and improvements was $3,965,276 and $11,573,797 for the three and nine months ended September 30, 2019, and $3,638,560 and $10,304,728 for the three and nine months ended September 30, 2018, respectively.

Amortization of the Company’s tenant origination and absorption costs was $0 and $0 for the three and nine months ended September 30, 2019, and $228,215 and $2,499,417 for the three and nine months ended September 30, 2018, respectively. Tenant origination and absorption costs had a weighted-average amortization period as of the date of acquisition of less than one year. At December 31, 2018, all tenant origination and absorption costs were fully amortized and written off.

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PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

Operating Leases

As of September 30, 2019, the Company’s real estate portfolio comprised 2,775 apartment homes and was approximately 96.4% leased by a diverse group of residents. The residential lease terms consist of lease durations equal to twelve months or less.

Some residential leases contain provisions to extend the lease agreements, options for early termination after paying a specified penalty and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in accounts payables and accrued liabilities in the accompanying consolidated balance sheets and totaled $1,175,698 and $1,015,187 as of September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019 and 2018, no tenant represented over 10% of the Company’s annualized base rent.

4. Other Assets

As of September 30, 2019 and December 31, 2018, other assets consisted of:



	September 30, 2019		December 31, 2018
Prepaid expenses	$	351,610	$	262,850
Operating lease right-of-use assets, net	44,696		—
Interest rate cap agreements	1,819		377,456
Deposits	249,389		266,394
Other assets	$	647,514	$	906,700

Amortization of the Company’s operating lease initial direct costs was $219 and $658 for the three and nine months ended September 30, 2019, respectively. The Company had no operating lease initial direct costs for the three and nine months ended September 30, 2018.

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PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

5. Debt

Mortgage Notes Payable

The following is a summary of mortgage notes payable, net secured by real property as of September 30, 2019 and December 31, 2018.



	September 30, 2019
			Interest Rate Range				Weighted Average Interest Rate
Type	Number of Instruments	Maturity Date Range	Minimum		Maximum		Weighted Average Interest Rate	Principal Outstanding
Variable rate⁽¹⁾	3	6/1/2026 - 9/1/2027	1-Mo LIBOR + 2.195%		1-Mo LIBOR + 2.47%		4.29%	$	69,743,006
Fixed rate	7	8/1/2024 - 6/1/2029	3.73	%	4.66	%	3.91%	219,535,000
Mortgage notes payable, gross	10						4.00%	289,278,006
Deferred financing costs, net⁽²⁾								(1,760,551		)
Mortgage notes payable, net								$	287,517,455



	December 31, 2018
			Interest Rate Range				Weighted Average Interest Rate
Type	Number of Instruments	Maturity Date Range	Minimum		Maximum		Weighted Average Interest Rate	Principal Outstanding
Variable rate⁽¹⁾	6	6/1/2026 - 9/1/2027	1-Mo LIBOR + 2.195%		1-Mo LIBOR + 2.52%		4.86%	$	156,892,000
Fixed rate	4	8/1/2024 - 6/1/2028	3.82	%	4.66	%	4.02%	124,674,000
Mortgage notes payable, gross	10						4.49%	281,566,000
Deferred financing costs, net⁽²⁾								(1,479,079		)
Mortgage notes payable, net								$	280,086,921

_________


(1)	See Note 10 (Derivative Financial Instruments) for a discussion of the interest rate cap agreements used to manage the exposure to interest rate movement on the Company’s variable rate loans.


(2)	Accumulated amortization related to deferred financing costs, net as of September 30, 2019 and December 31, 2018, was $490,533 and $361,008, respectively.

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PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

Refinancing Transactions

On May 31, 2019 (the “Closing Date”), three indirect wholly-owned subsidiaries of the Company (each, a “Borrower” and collectively the “Borrowers”) terminated the existing mortgage loans with their lenders for an aggregate principal amount of $87,122,000 and entered into new loan agreements (each, a “Loan Agreement”) with, as applicable, PNC Bank, National Association (“PNC Bank”) and Newmark Knight Frank (“Newmark” and, together with PNC Bank, the “Lenders”) for an aggregate principal amount of $94,861,000 (the “Refinancing Transactions”). Each Borrower entered into a Loan Agreement with the applicable Lender pursuant to the Fannie Mae’s Green Execution Program (the “GEP”), as evidenced by a multifamily note. Pursuant to the GEP, the applicable Lender originates the mortgage loan and then transfers the loan to Fannie Mae. Each Loan Agreement provides for a term loan with a maturity date of June 1, 2029 (the “Maturity Date”), unless the Maturity Date is accelerated in accordance with the Loan terms. Each Loan with Newmark (each a “Newmark Loan” and, collectively the “Newmark Loans”) accrues interest at a fixed rate of 3.73% per annum. The loan with PNC Bank accrues interest at a fixed rate of 3.82% per annum. The entire outstanding principal balance and any accrued and unpaid interest on each of the Loans are due on the Maturity Date. Interest and principal payments on the Newmark Loans are payable monthly in arrears on specified dates as set forth in each Loan Agreement. Monthly payments are due and payable on the first day of each month, commencing July 1, 2019. The Company paid $491,655 in the aggregate in loan origination fees to the Lenders in connection with the Refinancing Transactions, and paid the Advisor a loan coordination fee of $711,459. The Loans are included in the mortgage notes payable table above as of September 30, 2019.

Maturity and Interest

The following is a summary of the Company’s aggregate maturities as of September 30, 2019:



					Maturities During the Years Ending December 31,
Contractual Obligations	Total		Remainder of 2019		2020		2021		2022		2023		Thereafter
Principal payments on outstanding debt obligations⁽¹⁾	$	289,278,006	$	26,994	$	374,945	$	1,835,900	$	2,611,190	$	3,305,764	$	281,123,213

_________


(1)	Scheduled principal payments on outstanding debt obligations are based on the terms of the notes payable agreements. Amounts exclude the deferred financing costs, net, associated with the notes payable.

The Company’s mortgage notes payable contain customary financial and non-financial debt covenants. At September 30, 2019, the Company was in compliance with all debt covenants.

For the three and nine months ended September 30, 2019, the Company incurred interest expense of $3,077,197 and $10,014,805, respectively. Interest expense for the three and nine months ended September 30, 2019, includes amortization of deferred financing costs of $70,830 and $192,333, net unrealized losses from the change in fair value of interest rate cap agreements of $11,021 and $375,637, loan fees of $0 and $171,162 and interest rate cap proceeds of $0 and $1,668, respectively.

For the three and nine months ended September 30, 2018, the Company incurred interest expense of $2,998,775 and $7,909,070, respectively. Interest expense for the three and nine months ended September 30, 2018, includes amortization of deferred financing costs of $61,018 and $174,120 and net unrealized gains from the change in fair value of interest rate cap agreements of $120,720 and $665,445, respectively.

Interest expense of $968,011 and $1,064,648 was payable as of September 30, 2019 and December 31, 2018, respectively, and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

6. Stockholders’ Equity

General

Under the Charter, the total number of shares of capital stock authorized for issuance is 1,300,000,000, consisting of 1,200,000,000 shares of common stock, $0.01 par value per share, of which 480,000,000 shares are classified as Class A common stock, 240,000,000 shares are classified as Class R common stock and 480,000,000 shares are classified as Class T common stock, and 100,000,000 shares of preferred stock, $0.01 par value per share. The Company’s board of directors may amend the Charter from time to time to increase or decrease the aggregate number of shares of capital stock or the number of shares of capital stock of any class or series that it has authority to issue.

Common Stock

The shares of the Company’s common stock entitle the holders to one vote per share on all matters upon which stockholders are entitled to vote, to receive dividends and other distributions as authorized by the Company’s board of directors in accordance with the MGCL and to all rights of a stockholder pursuant to the Maryland General Corporation Law. The common stock has no preferences or preemptive, conversion or exchange rights.

On August 24, 2015, the Company issued 8,000 shares of Class A common stock for $200,000 to the Advisor.

The following table reflects information regarding shares of common stock sold in the Public Offering from inception through September 30, 2019:



	September 30, 2019
	Class A		Class R		Class T		Total
Shares of common stock issued - Primary Offering	3,371,785		465,907		4,427,053		8,264,745
Shares of common stock issued - DRP	157,012		13,622		227,925		398,559
Total shares of common stock issued - Public Offering	3,528,797		479,529		4,654,978		8,663,304
Gross offering proceeds - Primary Offering	$	83,142,845	$	10,482,148	$	105,408,116	$	199,033,109
Gross offering proceeds - DRP	3,691,826		306,640		5,150,991		9,149,457
Total offering proceeds - Public Offering	$	86,834,671	$	10,788,788	$	110,559,107	$	208,182,566
Offering costs, before distribution and shareholder servicing fees							(27,624,273		)
Offering proceeds, net of offering costs							$	180,558,293

On August 9, 2018, the Company granted 1,000 shares of restricted Class A common stock to each of its three independent directors pursuant to the Company’s independent directors’ compensation plan at a fair value of $25.00 per share in connection with their re-election to the board of directors at the Company’s 2018 annual meeting of stockholders. The shares of restricted common stock vest and become non-forfeitable in four equal annual installments, beginning on the date of grant and ending on the third anniversary of the date of grant; provided, however, that the shares of restricted common stock will become fully vested on the earlier to occur of (1) the termination of the independent director’s service as a director due to his or her death or disability or (2) a change in control of the Company.

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PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

The issuance and vesting activity for the nine months ended September 30, 2019, and year ended December 31, 2018, for the restricted common stock issued to the Company’s independent directors pursuant to the independent directors’ compensation plan is as follows:



	Nine Months Ended September 30, 2019		Year Ended December 31, 2018
Nonvested shares at the beginning of the period	5,250		5,250
Granted shares	—		3,000
Vested shares	(3,000	)	(3,000	)
Nonvested shares at the end of the period	2,250		5,250

Included in general and administrative expenses is $9,379 and $42,249 for the three and nine months ended September 30, 2019, and $35,613 and $63,539 for the three and nine months ended September 30, 2018, respectively, for compensation expense related to the issuance of restricted common stock. As of September 30, 2019, the compensation expense related to the issuance of the restricted common stock not yet recognized was $50,762. The weighted average remaining term of the restricted common stock was 1.19 years as of September 30, 2019. As of September 30, 2019, no shares of restricted common stock issued to the independent directors had been forfeited.

Preferred Stock

The Charter also provides the Company’s board of directors with the authority to issue one or more classes or series of preferred stock, and prior to the issuance of such shares of preferred stock, the board of directors shall have the power from time to time to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights and privileges of such shares of preferred stock. The Company’s board of directors is authorized to amend the Charter without the approval of the stockholders to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue. As of September 30, 2019 and December 31, 2018, no shares of the Company’s preferred stock were issued and outstanding.

Distribution Reinvestment Plan

The Company’s board of directors approved the DRP through which common stockholders could elect to reinvest an amount equal to the distributions declared on their shares of common stock in additional shares of the Company’s common stock in lieu of receiving cash distributions. The purchase price per Class A, Class R and Class T share of common stock under the DRP was initially $23.75, $22.50 and $22.62, respectively. On October 9, 2018, the Company’s board of directors approved a price per Class A, Class R and Class T share of common stock for the DRP of $22.54, effective November 1, 2018. The Company’s board of directors elected to suspend the DRP with respect to distributions that accrue after February 1, 2019. As a result, all distributions beginning with distributions that accrued in February 2019 are paid in cash. The Company’s board of directors may, from time to time in its sole discretion, reinstate the DRP, although there is no assurance as to if or when this will happen.

No sales commissions or dealer manager fees were payable on shares sold through the DRP. The Company’s board of directors may amend, suspend or terminate the DRP at its discretion at any time upon ten days’ notice to the Company’s stockholders.

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PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

Share Repurchase Program and Redeemable Common Stock

The Company’s share repurchase program may provide an opportunity for stockholders to have their shares of common stock repurchased by the Company, subject to certain restrictions and limitations. No shares can be repurchased under the Company’s share repurchase program until after the first anniversary of the date of purchase of such shares; provided, however, that this holding period shall not apply to repurchases requested within 270 days after the death or disability of a stockholder.

Prior to the date the Company announced an estimated value per share of its common stock, the purchase price for shares repurchased under the Company’s share repurchase program was as follows:



Share Purchase Anniversary		Repurchase Price on Repurchase Date⁽¹⁾
Less than 1 year		No Repurchase Allowed
1 year		92.5% of Purchase Price
2 years		95.0% of Purchase Price
3 years		97.5% of Purchase Price
4 years		100.0% of Purchase Price
In the event of a stockholder’s death or disability		Average Issue Price for Shares⁽²⁾

_______________

(1) As adjusted for any stock dividends, combinations, splits, recapitalizations or any similar transaction with respect to the shares of common stock. Repurchase price includes the full amount paid for each share, including all sales commissions and dealer manager fees.

(2) The purchase price per share for shares repurchased upon the death or disability of a stockholder will be equal to the average issue price per share for all of the stockholder’s shares. The required one-year holding period does not apply to repurchases requested within 270 days after the death or disability of a stockholder.

Beginning October 12, 2018, the date the Company first published its estimated value per share of its common stock, the purchase price for shares repurchased under the Company’s share repurchase program is as follows:



Share Purchase Anniversary		Repurchase Price on Repurchase Date⁽¹⁾⁽²⁾
Less than 1 year		No Repurchase Allowed
1 year		92.5% of the Lesser of Purchase Price or Estimated Value per Share
2 years		95.0% of the Lesser of Purchase Price or Estimated Value per Share
3 years		97.5% of the Lesser of Purchase Price or Estimated Value per Share
4 years		100.0% of the Lesser of Purchase Price or Estimated Value per Share
In the event of a stockholder’s death or disability		Average Issue Price for Shares⁽³⁾

_______________

(2) For purposes of the share repurchase program, the “Estimated Value per Share” equals the most recent publicly disclosed estimated value per share determined by the Company’s board of directors. On October 12, 2018, the Company publicly disclosed an estimated value per share of $22.54 for each class of shares of its common stock based on valuations by independent third-party appraisers or qualified valuation experts.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

(3) The purchase price per share for shares repurchased upon the death or disability of a stockholder will be equal to the average issue price per share for all of the stockholder’s shares. The required one-year holding period does not apply to repurchases requested within 270 days after the death or disability of a stockholder.

The purchase price per share for shares repurchased pursuant to the Company’s share repurchase program will be further reduced by the aggregate amount of net proceeds per share, if any, distributed to the Company’s stockholders prior to the repurchase date as a result of the sale of one or more of the Company’s assets that constitutes a return of capital distribution as a result of such sales.

Repurchases of shares of the Company’s common stock will be made quarterly upon written request to the Company at least 15 days prior to the end of the applicable quarter. Repurchase requests will be honored approximately 30 days following the end of the applicable quarter (the “Repurchase Date”). Stockholders may withdraw their repurchase request at any time up to three business days prior to the Repurchase Date.

The following table reflects repurchase activity for the three and nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30, 2019								Nine Months Ended September 30, 2019
	Class A		Class R		Class T		Total		Class A		Class R		Class T		Total
Repurchase requests (in shares)	—		—		2,688		2,688		39,851		713		23,386		63,950
Repurchase requests (value)	$	—	$	—	$	64,000	$	64,000	$	857,505	$	14,841	$	519,115	$	1,391,461
Repurchases fulfilled (in shares)	20,230		—		11,012		31,242		66,030		713		20,698		87,441
Repurchase requests fulfilled (value)	$	427,529	$	—	$	240,358	$	667,887	$	1,453,327	$	14,841	$	455,115	$	1,923,283



	Three Months Ended September 30, 2018								Nine Months Ended September 30, 2018
	Class A		Class R		Class T		Total		Class A		Class R		Class T		Total
Repurchase requests (in shares)	3,557		—		1,211		4,768		17,152		3,608		2,528		23,288
Repurchase requests (value)	$	75,724	$	—	$	25,734	$	101,458	$	392,278	$	75,097	$	57,003	$	524,378
Repurchases fulfilled (in shares)	2,543		—		420		2,963		17,143		3,608		1,737		22,488
Repurchase requests fulfilled (value)	$	57,971	$	—	$	9,250	$	67,221	$	398,445	$	75,097	$	40,519	$	514,061

In connection with the proposed Merger, on August 5, 2019, the board of directors approved the Amended and Restated Share Repurchase Plan (the “Amended & Restated SRP”), which became effective September 5, 2019, and applied with repurchases made on repurchase dates (as defined in the Amended & Restated SRP) subsequent to the effective date of the Amended & Restated SRP. Under the Amended & Restated SRP, the Company will only repurchase shares of common stock in connection with the death or qualifying disability (as defined in the Amended & Restated SRP) of a stockholder, subject to certain terms and conditions specified in the Amended & Restated SRP.

The Company is not obligated to repurchase shares of its common stock under the share repurchase program. The share repurchase program limits the number of shares to be repurchased in any calendar year to the lesser of (1) 5% of the weighted average number of shares of common stock outstanding during the prior calendar year and (2) those that could be funded from the net proceeds from the sale of shares under the DRP in the prior calendar year, plus such additional funds as may be reserved for that purpose by the Company’s board of directors. Such sources of funds could include cash on hand, cash available from borrowings and cash from liquidations of securities investments as of the end of the applicable month, to the extent that such funds are not otherwise dedicated to a particular use, such as working capital, cash distributions to stockholders or purchases of real estate assets. There is no fee in connection with a repurchase of shares of the Company’s common stock pursuant to the Company’s share repurchase program.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

As of September 30, 2019 and 2018, the Company had outstanding and unfulfilled repurchase requests of 2,688 (pursuant to the Amended & Restated SRP) and 3,857 shares of common stock and recorded $64,000 and $81,708 in accounts payable and accrued liabilities on the accompanying consolidated balance sheets related to these unfulfilled repurchase requests, all of which were repurchased on the October 31, 2019 and 2018 repurchase dates, respectively.

The Company cannot guarantee that the funds set aside for the share repurchase program will be sufficient to accommodate all repurchase requests made in any quarter. In the event that the Company does not have sufficient funds available to repurchase all of the shares of the Company’s common stock for which repurchase requests have been submitted in any quarter, such outstanding repurchase requests will automatically roll over to the subsequent quarter and priority will be given to redemption requests in the case of the death or disability of a stockholder. If the Company repurchases less than all of the shares subject to a repurchase request in any quarter, with respect to any shares which have not been repurchased, a stockholder can withdraw the stockholder’s request for repurchase. Pending requests will be honored among all requests for redemptions in any given repurchase period as follows: first, pro rata as to repurchases sought upon a stockholder’s death or disability; and, next, pro rata as to other repurchase requests. Shares repurchased under the share repurchase program to satisfy the required minimum distribution requirements under the Internal Revenue Code applicable to retirement benefit plans and IRAs will be repurchased on or after the first anniversary of the date of purchase of such shares at 100% of the purchase price or at 100% of the estimated value per share, as applicable.

The Company’s board of directors may, in its sole discretion, amend, suspend or terminate the share repurchase program at any time upon 30 days’ notice to its stockholders if it determines that the funds available to fund the share repurchase program are needed for other business or operational purposes or that amendment, suspension or termination of the share repurchase program is in the best interest of the Company’s stockholders. Therefore, a stockholder may not have the opportunity to make a repurchase request prior to any potential termination of the Company’s share repurchase program. The share repurchase program will terminate in the event that a secondary market develops for the Company’s shares of common stock.

For the three and nine months ended September 30, 2019, the Company reclassified $667,887 and $2,951,937, net of $667,887 and $1,923,283 of fulfilled repurchase requests pursuant to the share repurchase program from temporary equity to permanent equity, which are included as additional paid-in capital in the accompanying consolidated balance sheets. Pursuant to the share repurchase program for the three and nine months ended September 30, 2018, the Company reclassified $1,241,466 and $2,804,736, net of $67,221 and $514,061 of fulfilled repurchase requests, respectively, from permanent equity to temporary equity, which are included as redeemable common stock on the accompanying consolidated balance sheets.

Distributions

The Company’s long-term policy is to pay distributions solely from cash flow from operations. Further, because the Company may receive income from interest or rents at various times during the Company’s fiscal year and because the Company may need cash flow from operations during a particular period to fund capital expenditures and other expenses, the Company’s expectation during its operational stage is that it will continue to declare distributions in anticipation of cash flow that the Company expects to receive during a later period, and the Company expects to pay these distributions in advance of its actual receipt of these funds. In these instances, the Company’s board of directors has the authority under its organizational documents, to the extent permitted by Maryland law, to fund distributions from sources such as borrowings, offering proceeds or advances and the deferral of fees and expense reimbursements by the Advisor, in its sole discretion. If the Company pays distributions from sources other than cash flow from operations, the Company will have fewer funds available for investments and stockholders’ overall return on their investment in the Company may be reduced.

The Company elected to be taxed as, and qualifies as, a REIT for federal income tax purposes commencing with the taxable year ended December 31, 2016. To qualify as a REIT, the Company must make aggregate annual distributions to its stockholders of at least 90% of the Company’s REIT taxable income (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). If the Company meets the REIT qualification requirements, the Company generally will not be subject to federal income tax on the income that the Company distributes to its stockholders each year.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

Distributions Declared and Paid

The following table reflects per share daily distribution rates and annualized distribution rates for the first, second and third fiscal quarters of 2019 and 2018 :



	2019⁽¹⁾									2018⁽¹⁾
	1st Quarter			2nd Quarter			3rd Quarter			1st Quarter			2nd Quarter			3rd Quarter
Daily Distribution per Class A share⁽²⁾	$	0.004110		$	0.004110		$	0.004110		$	0.004110		$	0.004110		$	0.004110
Daily Distribution per Class R share⁽²⁾⁽³⁾	$	0.004110		$	0.004110		$	0.004110		$	0.00394521		$	0.00394521		$	0.00394521
Daily Distribution per Class T share⁽²⁾⁽⁴⁾	$	0.004110		$	0.004110		$	0.004110		$	0.003376		$	0.003376		$	0.003376
Annualized Rate Based on Purchase Price:
Per Class A share	6.00		%	6.00		%	6.00		%	6.00		%	6.00		%	6.00		%
Per Class R share	6.67		%	6.67		%	6.67		%	6.40		%	6.40		%	6.40		%
Per Class T share	6.30		%	6.30		%	6.30		%	5.17		%	5.17		%	5.17		%

_________________

(1)

The Company’s board of directors approved a cash distribution that accrued at the above rates per day for each share of the Company’s Class A common stock, Class R common stock and Class T common stock, which if paid each day over a 365-day period is equivalent to the per share annualized rates reflected above based on a purchase price of $25.00 per share of Class A common stock, $22.50 per share of Class R common stock and $23.81 per share of Class T common stock.


(2)	The distributions declared accrue daily to stockholders of record as of the close of business on each day and are payable in cumulative amounts on or before the third day of each calendar month with respect to the prior month. There is no guarantee that the Company will continue to pay distributions at these rates or at all.

(3)

Distributions during the three and nine months ended September 30, 2018, were based on daily record dates and calculated at a rate of $0.00394521 per share of Class R common stock per day for Class R common stock subject to an annual distribution and shareholder servicing fee of 0.27%. In some instances during the three and nine months ended September 30, 2018, the Company paid distributions at a rate of $0.00369863 per share of Class R common stock per day for Class R common stock subject to an annual distribution and shareholder servicing fee of 0.67%.

(4)

Distributions during the three and nine months ended September 30, 2018, were based on daily record dates and calculated at a rate of $0.003457 per share of Class T common stock per day for Class T common stock subject to an annual distribution and shareholder servicing fee of 1.0%. In some instances during the three and nine months ended September 30, 2018, the Company paid distributions at a rate of $0.003376 per share of Class T common stock per day for Class T common stock subject to an annual distribution and shareholder fee of 1.125%.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

The following tables reflect distributions declared and paid to Class A common stockholders, Class R common stockholders and Class T common stockholders for the three and nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30, 2019								Nine Months Ended September 30, 2019
	Class A		Class R		Class T		Total		Class A		Class R		Class T		Total
DRP distributions declared (in shares)	—		—		—		—		7,715		909		14,754		23,378
DRP distributions declared (value)	$	—	$	—	$	—	$	—	$	173,894	$	20,497	$	332,562	$	526,953
Cash distributions declared	1,313,225		179,679		1,752,258		3,245,162		3,744,962		512,916		4,875,715		9,133,593
Total distributions declared	$	1,313,225	$	179,679	$	1,752,258	$	3,245,162	$	3,918,856	$	533,413	$	5,208,277	$	9,660,546

DRP distributions paid (in shares)	—		—		—		—		15,487		1,845		31,246		48,578
DRP distributions paid (value)	$	—	$	—	$	—	$	—	$	349,083	$	41,587	$	704,286	$	1,094,956
Cash distributions paid	1,315,719		179,679		1,753,616		3,249,014		3,590,399		495,557		4,592,456		8,678,412
Total distributions paid	$	1,315,719	$	179,679	$	1,753,616	$	3,249,014	$	3,939,482	$	537,144	$	5,296,742	$	9,773,368



	Three Months Ended September 30, 2018								Nine Months Ended September 30, 2019
	Class A		Class R		Class T		Total		Class A		Class R		Class T		Total
DRP distributions declared (in shares)	21,257		2,304		35,041		58,602		59,385		6,014		94,730		160,129
DRP distributions declared (value)	$	504,844	$	51,845	$	792,617	$	1,349,306	$	1,410,378	$	135,315	$	2,142,798	$	3,688,491
Cash distributions declared	780,204		107,813		586,129		1,474,146		2,165,573		282,840		1,579,050		4,027,463
Total distributions declared	$	1,285,048	$	159,658	$	1,378,746	$	2,823,452	$	3,575,951	$	418,155	$	3,721,848	$	7,715,954

DRP distributions paid (in shares)	20,611		2,189		34,039		56,839		58,405		5,708		91,734		155,847
DRP distributions paid (value)	$	489,496	$	49,225	$	769,966	$	1,308,687	$	1,387,118	$	128,418	$	2,075,018	$	3,590,554
Cash distributions paid	763,808		102,915		563,745		1,430,468		2,122,328		270,739		1,526,010		3,919,077
Total distributions paid	$	1,253,304	$	152,140	$	1,333,711	$	2,739,155	$	3,509,446	$	399,157	$	3,601,028	$	7,509,631

As of September 30, 2019, $1,056,993 of distributions declared were payable and are included in distributions payable in the accompanying consolidated balance sheets, which included $427,412, $58,591 and $570,990 of Class A common stock, Class R common stock and Class T common stock, respectively, all of which were payable in cash.

As of December 31, 2018, $1,169,815 of distributions declared were payable and included in distributions payable in the accompanying consolidated balance sheets, which included $448,039, $62,322 and $659,454 of Class A common stock, Class R common stock and Class T common stock, respectively, of which $175,189, $21,090 and $371,724, or 7,772, 936 and 16,492 shares of Class A common stock, Class R common stock and Class T common stock, are attributable to the DRP, respectively.

As reflected in the table above, for the three and nine months ended September 30, 2019, the Company paid total distributions of $3,249,014 and $9,773,368, which related to distributions declared for each day in the period from June 1, 2019 through August 31, 2019 and December 1, 2018 through August 31, 2019, respectively.

For the three and nine months ended September 30, 2018, the Company paid total distributions of $2,739,155 and $7,509,631, which related to distributions declared for each day in the period from June 1, 2018 through August 31, 2018 and December 31, 2017 through August 31, 2018, respectively.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

7. Related Party Arrangements

The Company entered into the Advisory Agreement with the Advisor and a Dealer Manager Agreement with the Dealer Manager. Pursuant to the Advisory Agreement and Dealer Manager Agreement, the Company pays the Advisor and the Dealer Manager specified fees upon the provision of certain services related to the Public Offering, the investment of funds in real estate and real estate-related investments and the management of the Company’s investments and for other services (including, but not limited to, the disposition of investments) as well as make certain distributions in connection with the Company’s liquidation or listing on a national stock exchange. Subject to the limitations described below, the Company also reimbursed the Advisor and its affiliates for organization and offering costs incurred by the Advisor and its affiliates on behalf of the Company, as well as acquisition and certain operating expenses incurred on behalf of the Company or incurred in connection with providing services to the Company.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

Amounts attributable to the Advisor and its affiliates incurred (earned) for the three and nine months ended September 30, 2019 and 2018, and amounts outstanding to the Advisor and its affiliates as of September 30, 2019 and December 31, 2018, are as follows:



	Incurred (Earned) For the						Incurred (Earned) For the
	Three Months Ended September 30,						Nine Months Ended September 30,						Payable (Prepaid) as of
	2019			2018			2019			2018			September 30, 2019			December 31, 2018
Consolidated Statements of Operations:
Expensed
Investment management fees⁽¹⁾	$	1,113,302		$	1,078,332		$	3,321,625		$	3,092,157		$	1,010		$	711,025
Loan coordination fees⁽¹⁾	—			—			711,458			—			—			—
Property management:
Fees⁽¹⁾	314,926			312,333			948,497			870,242			168,641			180,208
Reimbursement of onsite personnel⁽²⁾	955,838			940,688			2,818,693			2,537,790			287,998			187,936
Reimbursement of other⁽¹⁾	215,425			138,105			605,232			312,382			11,078			11,173
Reimbursement of property operations⁽²⁾	7,033			8,350			22,325			22,215			—			—
Reimbursement of property G&A⁽³⁾	8,300			3,940			26,289			22,214			—			—
Other operating expenses⁽³⁾	284,313			285,162			917,922			861,533			151,480			105,491
Rental revenue⁽⁴⁾	(5,946		)	(5,013		)	(17,032		)	(5,013		)	—			—
Property insurance⁽⁵⁾	175,905			139,926			442,923			251,232			(108,393		)	(40,276		)
Insurance proceeds⁽⁶⁾	—			—			—			—			—			(75,000		)
Consolidated Balance Sheets:
Assets
Capitalized
Acquisition fees⁽⁷⁾	—			—			—			624,854			—			—
Acquisition expenses⁽⁷⁾	—			—			—			161,423			—			—
Construction management:
Fees⁽⁸⁾	144,433			49,778			266,197			116,489			12,531			5,256
Reimbursements of labor costs⁽⁸⁾	34,553			91,823			113,137			299,152			4,215			16,899
Capital expenditures⁽⁸⁾	—			—			—			21,538			—			—
Additional paid-in capital
Other offering costs reimbursement	—			735,217			—			2,140,104			—			3,680,816
Selling commissions:
Class A	—			332,676			—			926,929			—			—
Class T	—			266,904			—			801,529			—			—
Dealer manager fees:
Class A	—			149,384			—			422,055			—			—
Class T	—			222,420			—			667,939			—			—
Distribution and shareholder servicing fee:
Class R⁽⁹⁾	—			22,667			—			42,572			—			—
Class T⁽⁹⁾	—			279,009			—			812,924			—			—
	$	3,248,082		$	5,051,701		$	10,177,266		$	15,002,260		$	528,560		$	4,783,528

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

_____________________


(1)	Included in fees to affiliates in the accompanying consolidated statements of operations.


(2)	Included in operating, maintenance and management in the accompanying consolidated statements of operations.


(3)	Included in general and administrative expenses in the accompanying consolidated statements of operations.


(4)	Included in rental income in the accompanying consolidated statements of operations.

(5)

Property related insurance expense and the amortization of the prepaid insurance deductible account are included in general and administrative expenses in the accompanying consolidated statements of operations. The amortization of the prepaid property insurance is included in operating, maintenance and management expenses in the accompanying consolidated statements of operations. The prepaid insurance is included in other assets in the accompanying consolidated balance sheets upon payment.


(6)	Included in other income in the accompanying consolidated statements of operations.


(7)	Included in total real estate, cost in the accompanying consolidated balance sheets following the adoption of ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of Business (“ASU 2017-01”), as of January 1, 2017. ASU 2017-01 now forms part of ASC 805 Business Combinations (“ASC 805”).


(8)	Included in building and improvements in the accompanying consolidated balance sheets.


(9)	Included in additional paid-in capital as commissions on sales of common stock and related dealer manager fees to affiliates in the accompanying consolidated statements of stockholders’ equity.

Organization and Offering Costs

Organization and offering expenses include all expenses (other than sales commissions, the dealer manager fee and the distribution and shareholder servicing fee) paid by the Company in connection with the Public Offering, including legal, accounting, tax, printing, mailing and filing fees, charges of the Company’s escrow holder and transfer agent, expenses of organizing the Company, data processing fees, advertising and sales literature costs, transfer agent costs, information technology costs, bona fide out-of-pocket due diligence costs and amounts to reimburse the Advisor or its affiliates for the salaries of its employees and other costs in connection with preparing sales materials and providing other administrative services in connection with the Public Offering. Any such reimbursement will not exceed actual expenses incurred by the Advisor. After the termination of the Public Offering, the Advisor had an obligation to reimburse the Company to the extent total organization and offering expenses (including sales commissions, dealer manager fees and the distribution and shareholder servicing fees) incurred by the Company exceed 15% of the gross proceeds raised in the Primary Offering. Total organization and offering expenses incurred by the Company did not exceed 15% of the gross offering proceeds raised in the Primary Offering.

The Company also reimbursed costs of bona fide training and education meetings held by the Company (primarily the travel, meal and lodging costs of registered representatives of broker-dealers), attendance and sponsorship fees and cost reimbursement of employees of the Company’s affiliates to attend seminars conducted by broker-dealers and, in certain cases, reimbursement to participating broker-dealers for technology costs associated with the offering, costs and expenses related to such technology costs, and costs and expenses associated with the facilitation of the marketing of the Company’s shares and the ownership of the Company’s shares by such broker-dealers’ customers; provided, however, that the Company did not pay any of the foregoing costs to the extent that such payment would cause total underwriting compensation to exceed 10% of the gross offering proceeds of the Primary Offering, as required by the rules of the Financial Industry Regulatory Authority, Inc. (“FINRA”).

Organization and offering costs include payments made to Crossroads Capital Advisors, whose parent company indirectly owns 25% of the Steadfast REIT Investments, LLC (the “Sponsor”) for certain specified services provided to the Company on behalf of the Advisor, including, without limitation, establishing operational and administrative processes; engaging and

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

negotiating with vendors; providing recommendations and advice for the development of marketing materials and ongoing communications with investors; and assisting in public relations activities and the administration of the DRP and share repurchase program. From the commencement of the Public Offering through September 30, 2019 and December 31, 2018, the Advisor had incurred on the Company’s behalf $1,127,576 and $1,127,576, respectively, of costs attributable to Crossroads Capital Advisors for the services described above, all of which was recorded by the Company as offering costs during the applicable periods.

The amount of reimbursable organization and offering (“O&O”) costs that have been paid or recognized from inception through September 30, 2019, is as follows:



	Amount			Percentage of Gross Offering Proceeds
Gross offering proceeds:	$	199,033,109		100.00	%
O&O limitation	15.00		%
Total O&O costs available to be paid/reimbursed	$	29,854,966		15.00	%

O&O expenses recorded:
Sales commissions	$	7,980,090		4.01	%
Broker Dealer fees⁽¹⁾	5,061,337			2.54	%
Distribution and shareholder servicing fees⁽²⁾	1,334,800			0.67	%
Offering cost reimbursements	14,582,846			7.33	%
Organizational costs reimbursements	26,980			0.01	%
Total O&O cost reimbursements recorded by the Company	$	28,986,053		14.56	%

_____________________


(1)	Includes $1,903,127 of marketing reallowance paid to participating broker dealers.


(2)	Includes the distribution and shareholder servicing fees paid from inception through September 30, 2019, for Class R shares of 0.27% and 0.67% and Class T shares up to 1.125% of the purchase price per share sold in the Public Offering. The distribution and shareholder servicing fees were paid from sources other than Public Offering proceeds.

When recognized, organization costs are expensed as incurred. From inception through September 30, 2019, the Advisor incurred $26,980 of organizational costs on the Company’s behalf, all of which was reimbursed to the Advisor.

Offering costs, including selling commissions and dealer manager fees and the distribution and shareholder servicing fees, were deferred and charged to stockholders’ equity. All such amounts were reimbursed to the Advisor, the Dealer Manager or their affiliates from gross offering proceeds except for the distribution and shareholder servicing fees, which were paid from sources other than Public Offering proceeds. For the three and nine months ended September 30, 2019, the Advisor did not incur offering costs related to the Public Offering. For the three and nine months ended September 30, 2018, the Advisor incurred $395,373 and $4,420,040, respectively, of offering costs related to the Public Offering. The Advisor incurred total offering costs related to the Public Offering of $25,485,548 from inception through September 30, 2019, of which $17,875,513 was paid. The Company accrued $0 and $3,680,816 for the reimbursement of offering costs in the accompanying consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

Investment Management Fee

The Company pays the Advisor a monthly investment management fee equal to one-twelfth of 1.0% of the value of the Company’s investments in properties and real estate-related assets. For the purposes of the investment management fee, the value of the Company’s investments in properties equaled their costs, until the investments were valued by an independent third-party appraiser or qualified independent valuation expert. “Costs” are calculated by including acquisition fees, acquisition expenses, renovations and upgrades, and any debt attributable to such investments, or the Company’s proportionate share thereof in the case of investments made through joint ventures.

Acquisition Fees and Expenses

The Company pays the Advisor an acquisition fee equal to 2.0% of the cost of the investment which includes the amount actually paid or budgeted to fund the acquisition, origination, development, construction or improvement of any real property or real estate-related asset acquired. In addition to acquisition fees, the Company reimburses the Advisor for amounts directly incurred by the Advisor and amounts the Advisor pays to third parties in connection with the selection, evaluation, acquisition and development of a property or acquisition of real estate-related assets, whether or not the Company ultimately acquires the property or the real estate-related assets.

The Charter limits the Company’s ability to pay acquisition fees if the total of all acquisition fees and expenses relating to the purchase would exceed 6.0% of the contract purchase price. Under the Charter, a majority of the Company’s board of directors, including a majority of the independent directors, is required to approve any acquisition fees (or portion thereof) that would cause the total of all acquisition fees and expenses relating to an acquisition to exceed 6.0% of the contract purchase price. In connection with the purchase of securities, the acquisition fee may be paid to an affiliate of the Advisor that is registered as a FINRA member broker-dealer if applicable FINRA rules would prohibit the payment of the acquisition fee to a firm that is not a registered broker-dealer.

Loan Coordination Fee

Subject to the determination by a majority of the independent directors that the Advisor provides a substantial amount of services in connection with the origination or refinancing of any debt financing obtained by the Company that is used to refinance properties or other permitted investments or financing in connection with a recapitalization of the Company, the Company pays the Advisor a loan coordination fee equal to 0.75% of the amount available under such financing.

Property Management Fees and Expenses

The Company entered into Property Management Agreements (each, as amended from time to time, a “Property Management Agreement”) with Steadfast Management Company, Inc., an affiliate of the Sponsor (the “Property Manager”), in connection with the management of each of the Company’s properties. The property management fee payable with respect to each property under the Property Management Agreements at September 30, 2019, ranged from 2.75% to 3.0% of the gross revenue of the property (as defined in the Property Management Agreement). In addition, the Property Manager may also earn an incentive management fee equal to 1.0% of total collections based on performance metrics of the property. The Property Manager may subcontract with third-party property managers and will be responsible for supervising and compensating those third-party property managers and will be paid an oversight fee equal to 1.0% of the gross revenues of the property managed for providing such supervisory services. In no event will the Company pay its Property Manager or any affiliate both a property management fee and an oversight fee with respect to any particular property. Each Property Management Agreement has an initial one-year term and will continue thereafter on a month-to-month basis unless either party gives 60-day prior notice of its desire to terminate the Property Management Agreement, provided that the Company may terminate the Property Management Agreement at any time upon a determination of gross negligence, willful misconduct or bad acts of the Property Manager or its employees or upon an uncured breach of the Property Management Agreement upon 30 days’ prior written notice to the Property Manager. In the event of a termination of the Property Management Agreement by the Company without cause, the Company will pay a termination fee to the Property Manager equal to three months of the monthly management fee based on the average gross collections for the three months preceding the date of termination.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

In addition to the property management fee, the Property Management Agreements also specify certain other reimbursements payable to the Property Manager or its affiliates, including reimbursements for benefit administration, information technology infrastructure, licenses, support and training services and capital expenditures. The Company also reimburses the Property Manager for the salaries and related benefits of on-site property management employees.

Construction Management Fees

The Company entered into Construction Management Agreements (each, a “Construction Management Agreement”) with Pacific Coast Land & Construction, Inc., an affiliate of the Sponsor (the “Construction Manager”), in connection with capital improvements and renovation or value-enhancement projects for certain properties the Company acquires. The construction management fee payable with respect to each property under the Construction Management Agreements is equal to 6.0% of the costs of the improvements for which the Construction Manager has planning and oversight authority. Generally, each Construction Management Agreement can be terminated by either party with 30 days’ prior written notice to the other party. Construction management fees are capitalized to the respective real estate properties in the period in which they are incurred, as such costs relate to capital improvements and renovations for apartment homes taken out of service while they undergo the planned renovation.

The Company may also reimburse the Construction Manager for the salaries and related benefits of certain of its employees for time spent working on capital improvements and renovations.

Property Insurance

The Company deposits amounts with an affiliate of the Sponsor to fund a prepaid insurance deductible account to cover the cost of required insurance deductibles across all properties of the Company and other affiliated entities. Upon filing a major claim, proceeds from the insurance deductible account may be used by the Company or another affiliate of the Sponsor. In

addition, the Company deposits amounts with an affiliate of the Sponsor to cover the cost of property and property related insurance across certain properties of the Company.

Other Operating Expense Reimbursement

In addition to the various fees paid to the Advisor, the Company is obligated to pay directly or reimburse all expenses incurred by the Advisor in providing services to the Company, including the Company’s allocable share of the Advisor’s overhead, such as rent, employee costs, benefit administration costs, utilities and information technology costs. The Company will not reimburse the Advisor for employee costs in connection with services for which the Advisor or its affiliates receive acquisition fees, investment management fees, loan coordination fees and disposition fees or for the employee costs the Advisor pays to the Company’s executive officers.

The Charter limits the Company’s total operating expenses during any four fiscal quarters to the greater of 2% of the Company’s average invested assets or 25% of the Company’s net income for the same period (the “2%/25% Limitation”). The Company may reimburse the Advisor, at the end of each fiscal quarter, for operating expenses incurred by the Advisor; provided, however, that the Company shall not reimburse the Advisor at the end of any fiscal quarter for operating expenses that exceed the 2%/25% Limitation unless the independent directors have determined that such excess expenses were justified based on unusual and non-recurring factors. The Advisor must reimburse the Company for the amount by which the Company’s operating expenses for the preceding four fiscal quarters then ended exceed the 2%/25% Limitation, unless approved by the independent directors. For purposes of determining the 2%/25% Limitation, “average invested assets” means the average monthly book value of the Company’s assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, reserves for bad debts or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by the Company, as determined by GAAP, that are in any way related to the Company’s operation, including advisor fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, listing and registration of shares of the Company’s common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain in the sale of the Company’s assets; (f) acquisition fees and acquisition

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

expenses (including expenses relating to potential acquisitions that the Company does not close); (g) real estate commissions on the resale of investments; and (h) other expenses connected with the acquisition, disposition, management and ownership of investments (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of real property).

As of September 30, 2019, the Company’s total operating expenses, as defined above, did not exceed the 2%/25% Limitation.

Disposition Fee

If the Advisor or its affiliates provide a substantial amount of services in connection with the sale of a property or real estate-related asset, including pursuant to a sale of the entire Company, as determined by a majority of the Company’s independent directors, the Advisor or its affiliates will earn a disposition fee equal to (1) 1.5% of the sales price of each property or real estate-related asset sold or (2) 1.0%, which may be increased to 1.5% in the sole discretion of the Company’s independent directors, of the total consideration paid in connection with the sale of the Company. In the event of a final liquidity event, this fee will be reduced by the amount of any previous disposition fee paid on properties previously exchanged under Section 1031 of the Internal Revenue Code.

To the extent the disposition fee is paid upon the sale of any assets other than real property, it will be included as an operating expense for purposes of the 2%/25% Limitation. In connection with the sale of securities, the disposition fee may be paid to an affiliate of the Advisor that is registered as a FINRA member broker-dealer if applicable FINRA rules would prohibit the payment of the disposition fee to a firm that is not a registered broker-dealer. As of September 30, 2019, the Company had not sold or otherwise disposed of property or any real estate-related assets. Accordingly, the Company had not incurred any disposition fees as of September 30, 2019.

Sales Commissions

The Company paid the Dealer Manager up to 7.0% of gross offering proceeds from the sale of Class A shares in the Primary Offering and up to 3.0% of gross offering proceeds from the sale of Class T shares in the Primary Offering (all of which was reallowed to participating broker-dealers), subject to reductions based on volume and for certain categories of purchasers. No sales commissions were paid for sales of Class R shares or for sales pursuant to the DRP. The total amount of all items of compensation from any source payable to the Dealer Manager and the participating broker-dealers may not exceed 10.0% of the gross proceeds from the Primary Offering on a per class basis.

Dealer Manager Fees

The Company paid the Dealer Manager up to 3.0% of gross offering proceeds from the sale of Class A shares and up to 2.5% of gross offering proceeds from the sale of Class T shares (a portion of which was reallowed to participating broker-dealers). No dealer manager fee was paid for sales of Class R shares or for sales pursuant to the Company’s DRP.

Distribution and Shareholder Servicing Fees

The Company paid the Dealer Manager either (1) 0.27%, annualized, of the purchase price per Class R share (or, once reported, the amount of the Company’s estimated value per share) for each Class R share purchased in the Primary Offering from a registered investment advisor that does not participate on an alternative investment platform; (2) 0.67%, annualized, of the purchase price per Class R share (or, once reported, the amount of the Company’s estimated value per share) for each Class R share purchased in the Primary Offering from a registered investment advisor that participates on an alternative investment platform; and (3) 1.125%, annualized, of the purchase price per Class T share (or, once reported, the amount of the Company’s estimated value per share) for each Class T share purchased in the Primary Offering. The distribution and shareholder servicing fee accrued daily and paid monthly in arrears.

Effective October 1, 2018, the Company ceased paying the distribution and shareholder servicing fee because total underwriting compensation had reached 10% of the total gross investment amount in the Primary Offering.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

Subordinated Participation in Net Sale Proceeds (payable only if the Company’s shares are not listed on an exchange)

The Advisor (in its capacity as special limited partner of the Operating Partnership) would receive 15.0% of the remaining net sale proceeds after return of the total investment amount, which is the amount equal to the original issue price paid by the stockholders in the Public Offering multiplied by the number of shares issued in the Public Offering, reduced by the weighted average original issue price of the shares sold in the Primary Offering multiplied by the total number of shares repurchased by the Company, plus payment to investors of an amount equal to a 6.0% annual cumulative, non-compounded return of the total investment amount, less amounts previously distributed to stockholders, including distributions that may constitute a return of capital for federal income tax purposes.

“Net sale proceeds” means the net cash proceeds realized from the sale of the Company or all of the Company’s assets after deduction of all expenses incurred in connection with a sale or disposition of the Company or of the Company’s assets, including disposition fees paid to the Advisor, or from the prepayment, maturity, workout or other settlement of any loan or other investment. For purposes of calculating the 6.0% annual cumulative, non-compounded return of the total investment amount, the aggregate of all investors’ capital shall be deemed to have been invested collectively on one date—the aggregate average investment date, being a day of a month determined by the average weighted month of all shares sold on a monthly basis. In addition, the Advisor (in its capacity as special limited partner of the Operating Partnership) will receive a distribution similar to the subordinated participation in net sale proceeds in the event the Company undertakes an issuer tender offer that results in the tendering stockholders receiving a return of the total investment amount of the tendering stockholders plus payment to those investors of an amount equal to a 6.0% annual cumulative, non-compounded return of the total investment amount of the tendering stockholders, less amounts previously distributed to stockholders, including distributions that may constitute a return of capital for federal income tax purposes.

Subordinated Incentive Listing Distribution (payable only if the Company’s shares are listed on an exchange)

Upon the listing of the Company’s shares on a national securities exchange, the Advisor (in its capacity as special limited partner of the Operating Partnership) will receive 15.0% of the amount by which the sum of the Company’s adjusted market value plus distributions paid by the Company to stockholders from inception until the date the adjusted market value is determined, including distributions that may constitute a return of capital for federal income tax purposes, exceeds the sum of the total investment amount plus an amount equal to a 6.0% annual cumulative, non-compounded return to investors of the total investment amount, less amounts previously distributed to stockholders, including distributions that may constitute a return of capital for federal income tax purposes. For purposes of calculating the 6.0% annual cumulative, non-compounded return of the total investment amount, the aggregate of all investors’ capital shall be deemed to have been invested collectively on one date, the aggregate average investment date, being a day of a month determined by the average weighted month of all shares sold on a monthly basis.

The adjusted market value of the Company’s common stock will be calculated based on the average market value of the shares of common stock issued and outstanding at listing over the 30 trading days beginning 180 days after the shares are first listed or included for quotation. The Company has the option to pay the subordinated incentive listing distribution in the form of stock, cash, a promissory note or any combination thereof. Any previous payments of the subordinated participation in net sales proceeds will offset the amounts due pursuant to the subordinated listing distribution.

Subordinated Distribution Upon Termination of the Advisory Agreement

Upon termination or non-renewal of the Advisory Agreement with or without cause, the Advisor (in its capacity as special limited partner of the Operating Partnership), would be entitled to receive distributions from the Operating Partnership equal to 15.0% of the amount by which the sum of the Company’s appraised market value plus distributions exceeds the sum of the total investment amount plus an amount equal to a 6.0% annual cumulative, non-compounded return of the total investment amount to investors, less amounts previously distributed to stockholders, including distributions that may constitute a return of capital for federal income tax purposes. For purposes of calculating the 6.0% annual cumulative, non-compounded return of the total investment amount, the aggregate of all investors’ capital shall be deemed to have been invested collectively on one date, the aggregate average investment date, being a day of a month determined by the average weighted month of all shares sold on a

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PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

monthly basis. If the Company does not provide this return, the Advisor will not receive this distribution. In addition, the Advisor may elect to defer its right to receive a subordinated distribution upon termination until either shares of the Company’s common stock are listed and traded on a national securities exchange or another liquidity event occurs.

Pending Merger with STAR

Amendment to Operating Partnership Agreement

Concurrently with the entry into the STAR III Merger Agreement, the Company entered into an amendment (the “First Amendment”) to the Partnership Agreement with the Operating Partnership. The First Amendment will become effective at the earlier of (i) the date that the Company merges with and into STAR III Merger Sub and (ii) upon payment of certain consideration owed to the Advisor in connection with consummation of a Superior Proposal (as defined in the STAR III Merger Agreement). The purpose of the First Amendment is to revise the economic interests of the Advisor by providing that the Advisor will not receive any special allocations with respect to a “Special Limited Partner Interest” (as defined in the Partnership Agreement) pursuant to the Partnership Agreement.

Termination Agreement

Concurrently with the entry into the STAR III Merger Agreement, the Company and the Advisor entered into the Termination Agreement, effective as of August 5, 2019. Pursuant to the Termination Agreement, the current Advisory Agreement will be terminated at the effective time of the Merger. Also pursuant to the Termination Agreement, the Advisor waived any disposition fee it otherwise would be entitled to pursuant to the Advisory Agreement related to the Merger and agreed to reimburse STAR III for its costs if the STAR III stockholders reject the Merger at a meeting of stockholders.

8. Long-Term Incentive Award Plan and Independent Director Compensation

The Company adopted a long-term incentive plan (the “Incentive Award Plan”) which the Company uses to attract and retain qualified directors, officers, employees and consultants. The Incentive Award Plan authorizes the granting of restricted stock, stock options, restricted or deferred stock units, performance awards and other stock-based awards to the Company’s directors, officers, employees and consultants selected by its board of directors for participation in the Incentive Award Plan. Stock options granted under the Incentive Award Plan will not exceed an amount equal to 10% of the outstanding shares of the Company’s common stock allocated to the Incentive Award Plan on the date of grant of any such stock options. Any stock options granted under the Incentive Award Plan will have an exercise price or base price that is not less than fair market value of the Company’s common stock on the date of grant.

Under the Company’s independent directors’ compensation plan, which is a sub-plan of the Incentive Award Plan, each of the Company’s independent directors received 2,000 shares of restricted Class A common stock once the Company raised $2,000,000 in gross offering proceeds in the Public Offering. Each subsequent independent director that joins the Company’s board of directors receives 2,000 shares of restricted Class A common stock upon election to the Company’s board of directors. In addition, on the date following an independent director’s re-election to the Company’s board of directors, he or she would receive 1,000 shares of restricted Class A common stock. The shares of restricted Class A common stock generally vest in four equal annual installments beginning on the date of grant and ending on the third anniversary of the date of grant; provided, however, that the restricted common stock will become fully vested and become non-forfeitable on the earlier to occur of (1) the termination of the independent director’s service as a director due to his or her death or disability or (2) a change in control of the Company. These awards entitle the holders to participate in distributions beginning on the date of grant.

The Company recorded stock-based compensation expense of $9,379 and $42,249 for the three and nine months ended September 30, 2019 and $35,613 and $63,539 for the three and nine months ended September 30, 2018, related to the independent directors’ restricted common stock, respectively.

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

In addition to the stock awards, the Company pays each of its independent directors annual compensation of $55,000, prorated for any partial term (the audit committee chairperson receives an additional $10,000 annually, prorated for any partial term). In addition, the independent directors are paid for attending meetings as follows: (1) $2,500 for each board meeting attended in person, (2) $1,500 for each committee meeting attended in person in such director’s capacity as a committee member and (3) $1,000 for each board meeting attended via teleconference (not to exceed $4,000 for any one set of meetings attended within a 48-hour period). The Company’s independent directors may elect to receive the meeting fees and annual compensation to which they are entitled in shares of the Company’s common stock with an equivalent value. Such election shall be made by delivering a valid election form as prescribed in the independent directors’ compensation plan. Such election shall be irrevocable for the plan year. All directors also receive reimbursement of reasonable out of pocket expenses incurred in connection with attendance at meetings of the board of directors. Director compensation is an operating expense of the Company that is subject to the operating expense reimbursement obligation of the Advisor discussed in Note 7 (Related Party Arrangements). The Company recorded an operating expense of $81,250 and $222,750 for the three and nine months ended September 30, 2019, respectively, and $285,363 and $432,289 for the three and nine months ended September 30, 2018, respectively, related to the independent directors’ annual compensation and attending board committee meetings, which is included in general and administrative expenses in the accompanying consolidated statements of operations. As of September 30, 2019 and December 31, 2018, $81,250 and $251,750 is included in accounts payable and accrued liabilities on the consolidated balance sheets, respectively.

9. Commitments and Contingencies

Economic Dependency

The Company is dependent on the Advisor and its affiliates for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase, and disposition of real estate and real estate-related investments; management of the daily operations of the Company’s real estate and real estate-related investment portfolio; and other general and administrative responsibilities. In the event that these companies are unable to provide the respective services, the Company will be required to obtain such services from other sources.

Concentration of Credit Risk

The geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the Atlanta, Georgia, Austin, Texas, Dallas, Texas, Denver, Colorado and Indianapolis, Indiana apartment markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, relocations of businesses, increased competition from other apartment communities, decrease in demand for apartments or any other changes, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.

Environmental

As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.

Legal Matters

From time to time, the Company is subject, or party, to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on the Company’s results of operations or financial condition nor is the Company aware of any such legal proceedings contemplated by government agencies.

10. Derivative Financial Instruments

Table of Contents

PART I — FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT III, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(unaudited)

The Company uses interest rate derivatives with the objective of managing exposure to interest rate movements thereby minimizing the effect of interest rate changes and the effect they could have on future cash flows. Interest rate cap agreements are used to accomplish this objective. The following tables provide the terms of the Company’s interest rate derivative instruments that were in effect at September 30, 2019 and December 31, 2018:

September 30, 2019

Type

Maturity Date Range

Based on

Number of Instruments

Notional Amount

Variable Rate

Weighted Average Rate Cap

Fair Value

Steadfast Apartment REIT III, Inc. 10-Q