NexPoint Residential Trust, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context
NexPoint is an externally managed REIT focused on value-add multifamily properties, primarily in the Southeastern and Southwestern United States. At quarter-end, it owned 32 properties with 11,395 units; portfolio occupancy was 94.0%, and weighted average effective monthly rent per occupied unit was $932. The company reported 26 same-store properties comprising 8,871 units.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $37.1 | $33.1 | $109.3 | $100.2 |
| Operating income | $4.8 | $4.9 | $10.5 | $17.2 |
| Net income | $54.1 | $8.8 | $60.7 | $25.7 |
| Net income attributable to common stockholders | $53.9 | $7.1 | $57.7 | $21.7 |
| Diluted EPS | $2.51 | $0.33 | $2.70 | $1.02 |
| Operating cash flow | Not reported separately | Not reported separately | $27.5 | $26.3 |
| Same-store NOI | $13.8 | $12.6 | $40.5 | $37.5 |
| FFO per diluted share | $0.32 | $0.32 | $0.77 | $1.07 |
| AFFO per diluted share | $0.42 | $0.38 | $1.20 | $1.19 |
Q3 operating margin was approximately 12.8%, versus 14.9% a year earlier; nine-month operating margin was approximately 9.6%, versus 17.1%. These are calculated as operating income divided by revenue. Q3 net income included a $58.5 million gain on real estate sales; the nine-month gain was $78.4 million. Thus GAAP earnings substantially reflect dispositions rather than recurring property operations.
Q3 revenue rose 12.1%; management cited a 9.9% increase in portfolio effective rent per occupied unit to $932 and occupancy improvement to 94.0% from 93.6% in Q3 2016. Same-store NOI increased 9.3% in Q3 and 7.9% year to date. For the nine months, however, FFO per diluted share declined to $0.77 from $1.07; AFFO per diluted share was nearly flat at $1.20 versus $1.19.
Balance sheet, cash flow and capital
- Total assets were $1,077.4 at September 30, 2017, compared with $1,035.4 at December 31, 2016. Total equity was $244.1, including $2.1 of redeemable noncontrolling interests presented outside permanent equity.
- Cash and cash equivalents were $92.7; restricted cash was $29.4, for total cash and restricted cash of $122.1. Nine-month operating cash flow was $27.5, investing cash flow was positive $67.6, and financing cash flow was negative $28.3.
- Reported total indebtedness was approximately $817.9 gross, including $702.5 of operating-property mortgages, $30.8 of mortgages on properties held for sale, and $84.6 under credit and bridge facilities. The balance sheet reports debt net of financing costs and other adjustments.
- The weighted average interest rate on mortgage debt was 3.04%; management reported a 3.34% adjusted weighted average rate for total indebtedness. Swaps with $650.0 notional effectively fixed rates on 96% of floating-rate mortgage debt; caps covered $293.2 of floating-rate mortgages.
- Quarterly dividends declared were $0.22 per share in Q3, versus $0.206 in Q3 2016. On October 30, the board declared a quarterly dividend of $0.25 per share, payable December 29, 2017.
Material changes, outlook and risks
- Portfolio turnover: The company acquired Hollister Place and Rockledge Apartments for a combined $138.0 during the first nine months and sold nine properties for $228.1 gross proceeds, generating $78.4 in gains. At quarter-end, Timberglen and Southpoint Reserve were classified as held for sale.
- Buyout and refinancing: The June buyout of joint venture interests representing approximately 8.4% of the portfolio cost $51.7, funded with cash, borrowings and 73,233 OP units. A June Freddie Mac refinancing replaced prior mortgages and a $300 million credit facility with 22 mortgages totaling $502.1; management said the refinancing reduced the borrowing spread on $468.4 of floating-rate debt by about 57 basis points. Nine-month extinguishment and modification costs were $5.7, including $2.7 of prepayment penalties.
- Bridge debt: At September 30, the $54.6 million 2017 Bridge Facility was due October 31, 2017. Subsequent to quarter-end, sale proceeds reduced it by about $46.0 million, and its remaining approximately $8.6 million was extended to March 31, 2018. Management intended to repay the balance with property-sale proceeds or cash on hand.
- Liquidity outlook: Management stated that available cash, expected operating cash flows and potential financings should cover operations, scheduled debt service and dividends for the 12 months following September 30. Longer-term funding needs may rely on debt or equity financing and asset sales; access to capital is not assured. The filing provides no earnings or FFO guidance.
- Property and operating risks: Hurricanes Harvey and Irma caused estimated damage of approximately $40,000 to properties, described as minimal. The company cited exposure to interest rates, real estate markets, property costs, leverage, capital access, REIT qualification and concentrated geographic markets. It reported compliance with debt covenants, no material litigation, and no material changes to previously disclosed risk factors.
- Other items: The company reported no material impairment charges and no material off-balance-sheet arrangements. It estimated $6.3 million of renovation reserves at quarter-end and had escrowed approximately $4.2 million for energy and water-efficiency improvements. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- Separate recurring operating performance from the $78.4 million year-to-date property-sale gains; review FFO and AFFO alongside GAAP EPS.
- Confirm the post-quarter bridge-facility balance, March 2018 maturity and repayment plan, as well as the closing and funding of the Atera acquisition and related 1031 exchanges.
- Review floating-rate exposure, swap and cap terms, debt maturities, refinancing costs and the potential effect of higher rates.
- Assess whether rent growth and same-store NOI gains can continue amid higher property taxes, insurance and operating costs.
- Evaluate the sustainability of the increased $0.25 dividend against recurring cash generation, capital spending and REIT distribution requirements.