NexPoint Residential Trust, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context
The company is an externally managed REIT focused on value-add multifamily properties, primarily in the Southeastern and Southwestern United States. At quarter-end, its portfolio comprised 32 properties and 11,471 apartment units; occupancy was 94.0% and average effective monthly rent per occupied unit was $958. The Adviser’s agreement was renewed through March 16, 2019.
Financial performance and liquidity
- Revenue: $35.1 million, down 5.2% from $37.0 million. Rental income was $30.6 million versus $31.9 million; other income was $4.5 million versus $5.1 million.
- Profit: Operating income was $3.7 million versus $3.9 million. Net income attributable to common stockholders was $10.1 million, or $0.48 basic and $0.47 diluted per share, compared with a $3.6 million loss, or $0.17 loss per share, in Q1 2017. The 2018 result included a $13.7 million gain on the sale of Timberglen.
- Operating measures: Same-store NOI increased 5.9% to $16.5 million, while total NOI declined 2.9% to $19.1 million. The filing reports non-GAAP FFO of $7.7 million ($0.36 diluted per share), Core FFO of $8.3 million ($0.39), and AFFO of $9.5 million ($0.45), versus $8.0 million, $8.1 million, and $9.1 million, respectively, in Q1 2017.
- Cash flow: Operating activities provided $3.1 million, down from $7.6 million. Investing activities provided $22.7 million, including $29.6 million of net proceeds from the Timberglen sale. Financing activities used $36.9 million, including debt payments, $5.1 million of share repurchases, and $5.3 million of dividends. Cash and restricted cash ended at $32.2 million ($13.9 million unrestricted cash).
- Debt: Total debt principal was approximately $774.5 million, including $730.9 million of operating-property mortgages, $13.6 million associated with a property held for sale, and a $30.0 million credit facility. The credit facility bore 5.88% and matured December 29, 2018, with one 12-month extension option. Reported total liabilities were $781.8 million and stockholders’ equity was $247.7 million.
- Interest-rate exposure: The company reported a 3.71% weighted-average rate on total indebtedness and a 3.22% adjusted rate after swaps. Swaps with $650 million notional effectively fixed rates on 95% of floating-rate mortgage debt; caps covered $177.3 million. A 1% LIBOR increase was estimated to add about $0.64 million in annual interest expense, after swaps and before cap effects.
- Dividends: The company declared $0.25 per common share for Q1, versus $0.22 in Q1 2017. A further $0.25 dividend was declared April 30, payable June 29, 2018.
Material changes versus Q1 2017
- Revenue fell 5.2%, chiefly reflecting property acquisition and disposition timing; portfolio occupancy was 94.0% versus 94.6% a year earlier. The company reported an 8.5% increase in portfolio effective rent per occupied unit to $958.
- Same-store revenue rose 3.6% and same-store NOI rose 5.9%; same-store occupancy was 94.1% versus 94.6%, while same-store effective monthly rent per occupied unit increased to $933 from $899.
- Net income improved substantially from a loss to a profit, primarily because of the Timberglen sale gain. Excluding real-estate disposition gains, FFO declined about 4%; Core FFO and AFFO increased modestly.
- The company sold Timberglen for $30.0 million on January 31 and repaid its associated mortgage. It also repaid the remaining $8.6 million balance on its 2017 bridge facility, which was retired.
- Interest expense declined to $6.8 million from $7.2 million, despite higher interest on debt, partly because of changes in swap-related amounts and lower deferred-financing-cost amortization. A $0.6 million loss on debt extinguishment and modification costs was recorded in 2018.
Outlook, risks and unusual items
- No specific earnings or operating guidance was provided. Management stated that 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 March 31, 2018.
- Management intended to repay the $30 million credit facility with proceeds from the sale of the property held for sale or cash on hand. A separate operating-property mortgage of approximately $10.9 million was scheduled to mature September 1, 2018; the company said it was discussing refinancing and maturity extension with the lender.
- Management identified access to debt and equity capital, substantial indebtedness, rising interest rates, geographic concentration, real-estate illiquidity, execution of the value-add strategy, and maintaining REIT qualification as material risks. It cautioned that short-term leases can expose rents to market declines.
- At quarter-end, approximately $4.7 million was available in renovation value-add reserves. The company spent $4.0 million on rehab expenditures in the quarter and expected green improvements at 18 properties to be completed by year-end 2018.
- Management reported no material litigation, no known material environmental liability, and no material change in risk factors from its 2017 Form 10-K. It said it was in compliance with debt covenants. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
- After quarter-end, the company repurchased 167,267 additional shares through April 30. The board increased the repurchase authorization to $40 million and extended it through June 15, 2020.
Important facts for investors to verify
- Whether the planned sale of the held-for-sale property and/or refinancing will cover the $30 million credit facility maturity, and the status of the September 2018 mortgage refinancing.
- How much of reported net income depends on property-sale gains, and whether same-store rent and NOI growth can continue alongside occupancy trends.
- The sustainability of cash available for dividends, given Q1 operating cash flow of $3.1 million, capital spending, debt service, and the REIT distribution requirement.
- Current floating-rate exposure, hedge terms and counterparties, and sensitivity to further LIBOR increases.
- The pace and returns of value-add renovations, including the expected cost savings from the green-improvement program.