Nexpoint Residential Trust, Inc. quarterly report, Q2 FY2020

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NexPoint Residential Trust, Inc. — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results. NexPoint 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; reported occupancy was 95.3%, and weighted average monthly effective rent per occupied unit was $1,109. Cutter’s Point was temporarily out of operation during reconstruction and excluded from operating pools.

  • Q2 revenue was $50.7 million, up 17.7% from $43.1 million. Rental income increased to $49.3 million, with management attributing growth partly to a 9.2% rise in portfolio effective rent versus June 2019.
  • Q2 GAAP net loss attributable to common stockholders was $9.3 million, or $0.38 per diluted share, versus a $2.0 million loss, or $0.08 per share, a year earlier. Operating income before property-sale gains fell to $1.7 million from $6.6 million; higher expenses and interest were principal factors.
  • For the first half, revenue was $103.3 million, up 22.1%. Net income attributable to common stockholders was $18.7 million, or $0.75 per diluted share, versus a $6.3 million loss, or $0.27 per share, in 2019. The 2020 result included $39.0 million of gains from property sales; it should not be read as recurring operating earnings.
  • Q2 NOI, a company-defined non-GAAP measure, was $29.2 million, up 18.9%; same-store NOI rose 5.8% to $20.2 million. First-half NOI increased 22.9% to $59.2 million, while same-store NOI rose 5.3% to $36.0 million. NOI excludes various corporate, financing, casualty and other items and is not a substitute for GAAP earnings or cash flow.
  • Q2 FFO was $0.50 per diluted share, Core FFO $0.59 and AFFO $0.66. Reported diluted dividend coverage was 1.59x for FFO and 2.13x for AFFO. These are non-GAAP measures.

Cash flow, balance sheet and capital

  • First-half operating cash flow was $25.9 million, versus $23.6 million in 2019. Investing activities provided $58.6 million, mainly reflecting $85.4 million of net property-sale proceeds, partly offset by $23.2 million of real estate additions. Financing activities used $70.7 million.
  • Cash and cash equivalents were $53.2 million and restricted cash $31.8 million at June 30, for $85.0 million combined. Total assets were $1.817 billion; stockholders’ equity was $354.4 million.
  • Mortgage principal was $1.152 billion and the corporate credit facility had $225 million outstanding, for $1.377 billion of principal debt. The facility was scheduled to mature January 28, 2021, with a one-year extension option subject to covenant compliance; management stated it believed the extension conditions were met.
  • Mortgage debt’s reported weighted average interest rate was 1.83%; the filing also reports an adjusted mortgage rate of 3.06% after including swap costs. Interest-rate swaps had $1.168 billion notional and $55.1 million of fair-value liabilities at quarter-end. First-half unrealized derivative losses were $58.6 million in other comprehensive income.
  • The company repurchased 1.645 million shares for $44.5 million in the first half. It issued 560,000 shares under the prior ATM program for $28.0 million gross proceeds; that program then expired. A new ATM program authorizes up to $225 million, with no shares issued under it by June 30.
  • Cash dividends declared were $0.3125 per share for Q2. On July 27, the board declared another $0.3125 quarterly dividend, payable September 30, 2020.

Material changes and unusual items

  • Three properties were sold in March for $86.5 million in aggregate sales prices, generating $85.4 million net cash proceeds and $39.0 million of recorded gains; related mortgage principal of approximately $41.6 million was repaid. No properties were acquired in the first half of 2020.
  • Q2 interest expense increased to $11.0 million from $8.6 million. Management attributed the increase mainly to a $4.5 million adverse year-over-year change in swap expense, partly offset by lower interest on debt.
  • A June fire at Venue 8651 caused an approximately $0.6 million property write-down. The company reported $1.1 million of casualty loss and $1.1 million of insurance business-interruption income in Q2. Its allocated $1.5 million self-insurance amount for 2020 had been used by June 30.
  • Cutter’s Point remained under reconstruction following 2019 tornado damage; completion was estimated for 2021. A newly identified asbestos issue there was expected to cost approximately $0.5 million to address, with work expected to begin in Q3.
  • COVID-19 payment plans covered 1,541 residents and approximately $1.7 million of rent at June 30. The company reported no rent concessions, but eviction and late-fee moratoria and ongoing economic uncertainty could affect collections. Q2 pandemic-related property costs were $0.3 million.
  • After quarter-end, the company entered into an agreement to sell Eagle Crest for $55.5 million, subject to due diligence and customary closing conditions, with closing expected on or before September 30, 2020. The filing does not report a completed sale.

Outlook, risks and contingencies

Management gave no numerical earnings or operating guidance. It said available cash, expected operating cash flows and potential debt or equity financing should fund operations, scheduled debt service and dividends for the 12 months after June 30, 2020. It also cautioned that COVID-19 could affect rent collections, property valuations, cash flow, capital access and debt refinancing. Other significant risks include the 2021 credit-facility maturity, floating-rate debt and swap exposure, geographic concentration, REIT qualification and dependence on access to capital. Management reported no material litigation and believed it was in compliance with debt covenants and REIT requirements.

Important facts for investors to verify

  • Subsequent rent collections, payment-plan balances and any changes to eviction restrictions or tenant assistance.
  • Credit-facility extension or refinancing progress, covenant headroom and repayment sources for the $225 million maturity.
  • Derivative fair-value movements, actual swap cash settlements and the company’s transition arrangements for LIBOR-linked contracts.
  • Insurance recoveries, remaining self-insurance exposure, Venue 8651 repairs and the Cutter’s Point asbestos remediation cost.
  • Whether the Eagle Crest sale closes on expected terms, and the resulting debt repayment, liquidity and gain or loss.
  • Dividend sustainability against recurring cash generation, taking account of capital spending, debt service and share repurchases.