NexPoint Residential Trust, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. The company began operating as a public company on March 31, 2015 following a spin-off; earlier periods include predecessor operations. Comparisons are therefore affected by portfolio growth and are not fully like-for-like.
Business context
NexPoint owns and operates value-add multifamily properties, primarily in the Southeastern and Southwestern United States, and is externally managed. At quarter-end it held interests in 41 properties with 12,822 apartment units, approximately 93% occupied, and average effective monthly rent of $796 per occupied unit. A 333-unit Fort Worth property was acquired October 30, 2015, after quarter-end.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $30.8 million | $11.9 million | $85.1 million | $22.7 million |
| Operating income (loss) | $3.7 million | $(4.4) million | $3.8 million | $(7.3) million |
| Net loss attributable to common shareholders | $(1.1) million | $(5.7) million | $(8.7) million | $(10.0) million |
| Basic and diluted loss per share | $(0.04) | $(0.30) | $(0.42) | $(0.54) |
| FFO per share | $0.33 | $(0.08) | $0.88 | $(0.05) |
| AFFO per share | $0.37 | $0.07 | $1.04 | $0.22 |
Q3 operating margin was approximately 12.1% of revenue; nine-month operating margin was approximately 4.5%. Management reported Q3 same-store rental income growth of 6.4%, including a 3.9% increase in monthly rent per unit and a 1.8% increase in occupancy. Same-store operating expenses rose 6.9%. FFO and AFFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Cash flow: Nine-month operating cash flow was $15.8 million, versus cash used of $3.1 million in 2014. Investing used $267.7 million; financing provided $258.2 million. Cash and cash equivalents ended at $19.0 million.
- Assets and liquidity: Total assets were $970.2 million; total equity was $256.4 million. Restricted cash was $54.9 million, including $38.9 million designated for value-add renovations, and should not be treated as unrestricted cash.
- Debt: Mortgages payable were $667.8 million and the company had a $29.0 million bridge facility, for approximately $696.8 million of balance-sheet debt. Mortgage debt was primarily non-recourse and floating-rate; weighted-average mortgage interest rate was 2.50%. The bridge facility is recourse, bears interest at 4.00% plus one-month LIBOR, and matures August 4, 2016.
- Interest-rate exposure: The filing reports approximately $638 million of floating-rate debt and rate caps covering $564 million of total debt, with a weighted-average cap rate of 6.00% and generally three-to-four-year terms.
- Margins and costs: Interest expense was $4.6 million in Q3 and $12.9 million for nine months. Depreciation and amortization was $9.1 million and $30.8 million, respectively. Q3 NOI was $15.7 million; nine-month NOI was $43.7 million.
Material changes and unusual items
- Revenue growth and the improvement in reported operating results largely reflect a larger portfolio: 41 properties at September 30, 2015 versus 25 at September 30, 2014. The company acquired nine properties during the first nine months of 2015.
- Despite higher revenue, the company recorded a GAAP net loss. Depreciation, interest, and acquisition costs are among the expenses affecting the comparison; FFO and AFFO were positive in 2015.
- In August, Georgia’s Department of Transportation acquired land and access rights at The Crossings for $326,111; the company recognized a $157,882 gain.
- On October 21, 2015, the company refinanced the Regatta Bay loan, paying a $652,426 prepayment penalty and receiving $277,841 in net proceeds. It acquired The Place at Vanderbilt on October 30 for $19.25 million, with $13.875 million of assumed debt.
- The board declared a $0.206-per-share dividend paid September 30 and approved another $0.206-per-share dividend for payment December 31, 2015.
Outlook, risks and contingencies
Management expected available cash, operating cash flow, and potential debt or equity financing to meet operating, scheduled debt-service, and dividend needs for the 12 months after September 30, 2015. It was negotiating to convert or extend the bridge facility; if unsuccessful, repayment could require cash, new financing, or refinancing proceeds. Management also described an intention to reduce leverage over the next 36 months. No quantified earnings or revenue guidance was provided.
The investment plan includes value-add spending generally estimated at $4,000–$10,000 per unit over the first 24–36 months of ownership; approximately $38.9 million was reserved for planned capital expenditures at quarter-end. Key risks include refinancing and capital-market access, rising rates on floating-rate debt, property-market and operating risks, geographic concentration, execution of acquisitions and renovations, related-party fees and conflicts, and maintaining REIT qualification. The company intended to elect REIT tax treatment for 2015. Management reported no material litigation and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material change in internal control reported.
Most important facts for investors to verify
- Progress and final terms of the bridge-facility extension or refinancing before its August 2016 maturity.
- Floating-rate debt exposure, cap coverage and expiration dates, and sensitivity of interest expense to rate increases.
- Whether same-store rent and occupancy gains continue, and how operating-cost growth affects property-level margins.
- Value-add renovation spending, returns, and availability of the restricted renovation reserves.
- Dividend coverage by recurring cash flow, while distinguishing GAAP earnings, FFO/AFFO, and cash available for distribution.
- REIT qualification and the potential impact of related-party management arrangements and fees.