Nexpoint Residential Trust, Inc. quarterly report, Q1 FY2020

NexPoint Residential Trust, Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. The company is an externally managed REIT focused on value-add multifamily properties, primarily in the Southeastern and Southwestern United States.

Business context and operating performance

At quarter-end, the portfolio comprised 37 properties and 14,104 apartment units, approximately 94.2% occupied, with weighted-average effective monthly rent of $1,110 per occupied unit. Three properties were sold during the quarter. Cutter’s Point remained closed for tornado reconstruction and was excluded from the unit count and same-store pool.

Metric	Q1 2020	Q1 2019
Total revenue	$52.6 million	$41.5 million
Operating income before property-sale gains	$1.6 million	$3.7 million
Gain on real estate sales	$39.0 million	—
Net income (loss)	$28.0 million	$(4.4) million
Net income (loss) attributable to common stockholders	$28.0 million	$(4.4) million
Basic / diluted EPS	$1.10 / $1.08	$(0.19) / $(0.19)
Net cash provided by operating activities	$11.4 million	$3.7 million
FFO / Core FFO / AFFO per diluted share	$0.48 / $0.53 / $0.59	$0.46 / $0.46 / $0.53

Reported earnings benefited principally from the $39.0 million gain on sales of three properties. Excluding that gain, operating income fell year over year as expenses and interest costs increased. Revenue rose 26.7%; management attributed rental-income growth to portfolio changes and higher rents, including a 10.2% increase in portfolio effective rent per occupied unit versus March 2019.

Same-store NOI increased 5.6% to $17.8 million, on 5.3% higher same-store revenue. Same-store occupancy was 94.5%, compared with 93.6% a year earlier, and effective monthly rent was $1,035 versus $1,006. Total NOI, a non-GAAP measure, increased 27.1% to $30.0 million. Management reported Core FFO up 23.3% and AFFO up 20.4%; these measures are supplemental and are not substitutes for GAAP earnings or cash flow.

Cash flow, debt, and liquidity

• Operating cash flow was $11.4 million. Investing activities provided $72.3 million, primarily reflecting $85.4 million of net property-sale proceeds, partly offset by $13.6 million of real estate additions. Financing activities used $49.3 million, including $31.0 million of share repurchases, $41.8 million of mortgage repayments, and $8.5 million of dividends; ATM share issuance provided $27.2 million net.
• Cash and cash equivalents were $69.5 million and restricted cash was $36.0 million at March 31, 2020. Total assets were $1.84 billion and stockholders’ equity was $392.2 million.
• Mortgage principal outstanding was $1.152 billion and the corporate credit facility had $225 million outstanding, or approximately $1.377 billion of gross debt principal. The facility is floating-rate, interest-only, and due January 2021, with a one-year extension option subject to conditions. Scheduled principal maturities include $225.0 million in 2021 and $424.7 million of mortgages in 2024.
• Mortgage debt’s weighted-average stated rate was 2.61%; the company reported an adjusted rate of 3.00% after including swap costs. Swaps with $1.168 billion notional effectively fixed a portion of floating-rate exposure; the filing also reports swaps covering 100% of floating-rate mortgages and 38.4% of the credit facility. The company recorded a $50.5 million unrealized derivative loss in other comprehensive loss, and reported $47.1 million of derivative liabilities at quarter-end.
• Management believed available cash, expected operating cash flow, and potential debt or equity financing would meet operating, scheduled debt-service, and dividend needs for the 12 months following March 31, 2020. The credit facility was fully drawn at quarter-end; access to additional financing remains subject to market, covenant, and other conditions.

Material changes, outlook, and risks

• The company sold Southpoint Reserve at Stoney Creek, Willow Grove, and Woodbridge for an aggregate $86.5 million, generating $85.4 million net cash proceeds and a $39.0 million gain. It repaid $41.6 million of related mortgage principal. No properties were acquired in Q1 2020, versus three acquisitions in Q1 2019.
• Q1 2020 included $0.9 million of debt-extinguishment and modification costs, including prepayment penalties and write-offs of financing costs. Interest expense rose to $11.7 million from $8.1 million, reflecting higher debt associated with portfolio activity and reduced swap benefits.
• The company issued 560,000 shares through its 2019 ATM program for $28.0 million gross proceeds; that program reached its $100 million limit and expired. A new $225 million ATM program was established in March; no shares were sold under it in Q1. The board increased the share-repurchase authorization to $100 million. Q1 repurchases totaled 1,090,480 shares for $31.0 million. Subsequent to quarter-end through May 8, another 553,417 shares were repurchased at an average $24.41 per share for $13.5 million.
• The quarterly dividend was $0.3125 per share, declared in February and paid March 31. On May 4, the board declared the same quarterly amount for payment June 30, 2020.
• COVID-19 created material uncertainty around rent collection, property valuations, cash flow, financing, and covenant compliance. As of March 31, 15 residents had payment plans totaling about $6,000; no rent concessions had been granted. By April 28, 992 residents had April payment plans totaling about $1.2 million. As of May 6, 87 residents had May plans totaling about $0.1 million. The company reported collecting 51.7% of expected rent under April in-month plans and had granted no concessions through April 30.
• Other notable items: Cutter’s Point reconstruction was estimated to finish in 2021; $0.3 million of related costs had been capitalized by quarter-end. No real-estate impairment was recorded in Q1. Management reported compliance with debt provisions, effective disclosure controls, and no material litigation known to it. LIBOR transition after 2021 is a risk for debt and derivative contracts indexed to LIBOR.

Important facts for investors to verify

• How rent collections, payment-plan balances, occupancy, concessions, and bad debt evolved after the filing’s April and May disclosures.
• Whether cash generation and available financing can cover the January 2021 credit-facility maturity, given the facility was fully drawn at quarter-end and extension is conditional.
• The impact of property-sale gains on reported earnings versus recurring operating results, including trends in same-store NOI and FFO/AFFO.
• Derivative valuation and hedge effectiveness, the substantial Q1 mark-to-market loss, and exposure to LIBOR replacement and interest-rate changes.
• The pace and price of subsequent share repurchases, use of the new ATM program, and the sustainability of dividends relative to recurring cash generation.
• Potential COVID-related impairment, covenant, refinancing, and property-operating risks, as well as progress and costs for Cutter’s Point reconstruction.