NexPoint Residential Trust, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Although the request identifies 2017 Q4, this filing reports full-year and year-end results; unaudited quarterly results are also included. The company is an externally managed multifamily REIT focused on value-add properties, primarily in the Southeastern and Southwestern United States.
Business context and portfolio
- At year-end, the company owned 33 properties with 11,775 apartment units in seven states; occupancy was 93.8% and weighted average effective monthly rent per occupied unit was $948.
- Strategy centers on acquiring and renovating Class B properties, increasing rents and net operating income (NOI), and distributing cash to stockholders. The company is externally managed by NexPoint Real Estate Advisors; BH Management operates and leases the properties.
- During 2017, it acquired three properties for $197.2 million and sold nine properties for $228.1 million. It also bought out approximately 8.4% of portfolio interests held by BH Equity for approximately $51.7 million.
Key financial results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $144.2 million | $132.8 million | +8.6% |
| Net income | $56.4 million | $25.9 million | +$30.5 million |
| Net income attributable to common stockholders | $53.4 million | $21.9 million | +$31.5 million |
| Diluted earnings per share | $2.49 | $1.03 | +$1.46 |
| NOI | $76.6 million | $69.7 million | +9.8% |
| Funds from operations (FFO), attributable to common stockholders | $25.1 million; $1.19/share diluted | $31.0 million; $1.46/share diluted | -19.2% |
| Core FFO, attributable to common stockholders | $30.4 million; $1.42/share diluted | $31.3 million; $1.47/share diluted | -2.9% |
| Adjusted FFO (AFFO), attributable to common stockholders | $35.1 million; $1.64/share diluted | $33.5 million; $1.57/share diluted | +4.8% |
Revenue growth included higher rents and occupancy. In the 26-property same-store pool, revenue increased 7.0% and NOI rose 8.6%; occupancy improved to 94.0% from 93.6%, and effective monthly rent per unit increased 4.4% to $901. Total NOI was approximately 53.1% of revenue (calculated from reported figures); this is a non-GAAP operating measure, not a GAAP profit margin.
GAAP net income growth was substantially driven by property-sale gains: $78.4 million in 2017 versus $25.9 million in 2016. Excluding those gains, the operating picture was weaker: FFO declined, while higher depreciation, interest expense, and debt-related costs weighed on results. Interest expense rose to $29.6 million from $20.2 million; loss on extinguishment of debt and modification costs increased to $5.7 million from $1.7 million.
Cash flow, debt, and liquidity
- Operating cash flow was $37.5 million, versus $33.8 million in 2016. Investing activities provided $2.3 million, reflecting $224.4 million of net property-sale proceeds offset by acquisitions and capital additions. Financing activities used $51.8 million, including the BH Equity buyout and net debt repayments.
- Year-end cash and restricted cash totaled $43.2 million: $16.0 million cash and cash equivalents and $27.2 million restricted cash. Management identified $5.2 million for renovations and approximately $22.0 million for lender escrows and security deposits.
- Year-end debt principal was approximately $801.0 million, comprising $762.4 million of mortgage debt and $38.6 million under credit and bridge facilities; reported debt, net of financing costs, was $792.8 million. Total assets were $1.055 billion and stockholders’ equity was $239.4 million.
- The reported adjusted weighted average interest rate was 3.24% on total indebtedness. Swaps totaling $650.0 million effectively fixed rates on about 92% of $703.1 million in floating-rate mortgage debt; rate caps covered another $273.5 million of floating-rate mortgage debt. The filing estimates a 0.25-percentage-point LIBOR increase would add about $230,000 to annual interest expense, after swap settlements, before cap effects.
- The $30 million credit facility was due December 29, 2018. The $8.6 million 2017 bridge facility outstanding at year-end was repaid in February 2018 with Timberglen sale proceeds. Management said available cash and expected operating cash flows would cover operations, scheduled debt service, and dividend requirements for the 12 months after year-end.
Material changes, outlook, and risks
- The June 2017 Freddie Mac refinancing replaced $168.4 million of existing mortgages and the $300 million credit facility with 22 mortgages totaling $502.1 million. It reduced the borrowing spread on $468.4 million of floating-rate debt by approximately 57 basis points, while incurring refinancing and other debt costs.
- Interior renovations had been completed on 4,374 units at an average cost of $4,962 per unit; reported average rent growth on renovated and leased units was 10.8%, or $90 monthly per unit. The company reported a 21.0% return on capital spent on interior renovations. It had $5.2 million reserved for approximately 800 planned rehabs.
- Dividends declared totaled $0.91 per share in 2017, up from $0.838 in 2016. The fourth-quarter dividend increased to $0.25 per share; the Board declared another $0.25 per share for the first quarter of 2018. Management said it expects to continue quarterly cash dividends and target a payout below Core FFO, subject to Board discretion and cash, debt, tax, and capital needs.
- Management’s stated leverage objective is to reduce loan-to-value to 40–45% over time; typical acquisition leverage targets were 50–60%. The filing provides no formal earnings or revenue guidance.
- Key risks include substantial leverage and refinancing needs, floating-rate exposure, property and rental-market competition, geographic concentration, execution and cost risks in the value-add program, real estate illiquidity, and possible adverse effects from changes to Freddie Mac or Fannie Mae. Short-term leases can transmit rent declines quickly. REIT qualification and distributions also depend on complex tax requirements.
- The company reported minimal direct damage from Hurricanes Harvey and Irma, approximately $85,000. Management reported no material litigation or known environmental liability, while cautioning that assessments may not identify all environmental conditions. The company reported effective disclosure controls and internal control over financial reporting; it was an emerging growth company and did not obtain an auditor attestation on internal control effectiveness.
- Related-party and governance considerations include external management, advisory and administrative fees, and BH’s property-management relationship and former ownership interests. The Advisory Agreement was renewed in February 2018 through March 16, 2019.
Important facts for investors to verify
- How much of 2017 net income and EPS reflected nonrecurring property-sale gains, and how the portfolio’s recurring cash earnings compare with GAAP income.
- Debt maturities, covenants, refinancing capacity, and actual leverage relative to the stated 40–45% target; distinguish gross principal from debt net of financing costs.
- Whether same-store rent and NOI growth, renovation returns, and occupancy can be sustained as operating costs—especially property taxes and repairs—rise.
- Cash available for dividends after recurring capital expenditures and debt service; compare the $0.91 annual dividend with FFO, Core FFO, AFFO, and operating cash flow.
- Post-year-end developments disclosed in the filing: Timberglen sold for $30.0 million in January 2018, the bridge facility was repaid, and subsequent repurchases brought cumulative buybacks to 473,444 shares through February 13, 2018.
- Potential conflicts, fee terms, and fee waivers involving the external Adviser and property manager, along with the status of the 1031 exchange and the remaining credit facility due in 2018.