NexPoint Residential Trust, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. The company began operations as a separate public company in March 2015; 2015 and earlier comparisons include predecessor operations and are not fully like-for-like.
Business context
NexPoint is an externally managed REIT focused on value-add multifamily properties, primarily in the Southeastern and Southwestern United States. At year-end it owned 39 properties with 12,965 units in eight states, including two properties held by an exchange accommodation titleholder pending reverse 1031 exchanges. Portfolio occupancy was 93.4%, and average effective monthly rent per occupied unit was $880. BH Management operated the properties; most were held through joint ventures with BH affiliates.
Financial and operating metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $132.8 million | $117.7 million |
| Operating income | $21.8 million | $7.5 million |
| Net income (loss) | $25.9 million | $(11.0) million |
| Net income (loss) attributable to common stockholders | $21.9 million; $1.03 per share | $(10.8) million; $(0.51) per share |
| NOI | $69.6 million | $60.4 million |
| FFO / Core FFO / AFFO attributable to common stockholders | $31.0 / $30.6 / $33.3 million | $25.6 / $28.9 / $29.9 million |
| Cash from operating activities | $33.8 million | $34.5 million |
| Cash used in investing activities | $51.9 million | $283.0 million |
| Cash from financing activities | $10.3 million | $251.1 million |
The $25.9 million of 2016 property-sale gains materially contributed to the return to GAAP profitability. NOI was about 52% of revenue. FFO, Core FFO, AFFO and NOI are non-GAAP measures; the filing cautions they are not substitutes for GAAP results or cash flow.
For the fourth quarter, revenue was $32.6 million, net income was $0.2 million, and NOI was $17.4 million, up 5.8% year over year. Q4 same-store NOI rose 15.4%; same-store rent revenue increased 6.4%, while occupancy declined 0.4 percentage points to 93.7%.
For the full year, same-store NOI increased 12.1% to $44.1 million. Same-store effective monthly rent rose 6.7% to $873, but occupancy eased from 94.6% to 94.0%. Renovations completed during 2016 covered 1,725 units at an average cost of $5,031 per unit; across completed and leased renovations since inception, reported rent growth averaged 10.9% and return on renovation capital was 21.1%.
Material changes and capital position
- Completed four acquisitions totaling 1,556 units for approximately $175.1 million and sold seven properties for $134.0 million, recognizing $25.9 million in gains. Acquisitions included two Houston properties held as Parked Assets pending reverse 1031 exchanges.
- Gross indebtedness was approximately $770.4 million at year-end; debt carrying value net of deferred financing costs was $763.5 million. Total assets were $1.04 billion and stockholders’ equity was $231.5 million.
- Debt had a weighted-average interest rate of 3.14%; approximately $710.2 million was floating-rate debt. Swaps covered $400 million, and caps covered approximately $306.3 million. The filing estimates a 1 percentage-point rate increase would raise annual interest expense by about $3.1 million, subject to hedging and other factors.
- Cash and restricted cash totaled $55.3 million, comprising $22.7 million of cash and cash equivalents and $32.6 million of restricted cash. The latter included lender escrows, security deposits, and renovation reserves; approximately $13.4 million was reserved for planned renovations.
- The company expanded a Freddie Mac credit facility to $300 million and drew it fully. It also had a $30 million credit facility, of which $15 million was drawn at year-end, and a $30 million bridge facility maturing in April 2017, with an extension option. The company planned to repay the bridge facility using proceeds from property sales or cash on hand.
- Operating cash flow was slightly lower year over year. The year-end cash balance was down $7.8 million from the prior year, after investing and financing activity.
Outlook, risks and unusual items
Management said available cash, expected operating cash flows, and potential financing were expected to cover operations, scheduled debt service and dividends for the 12 months after year-end. It targeted reducing leverage over time to 40%–45% loan-to-value, from a stated typical acquisition target of 50%–60%; no year-end loan-to-value figure is provided. The company intended to continue quarterly dividends and target a payout below Core FFO, but distributions remain subject to Board discretion, cash availability and debt restrictions.
The Board raised the quarterly dividend to $0.22 per share in Q4 2016; total 2016 dividends were $0.838 per share. A $0.22 first-quarter 2017 dividend was declared after year-end. The company was under contract to sell four properties classified as held for sale, with a combined carrying value of approximately $62.4 million, and expected these sales to support the planned bridge repayment and 1031 exchanges.
- Key risks: substantial indebtedness and refinancing needs; floating-rate exposure; debt covenants and cross-collateralization; reliance on property sales to repay short-term borrowing; and exposure to multifamily market, rent, occupancy and operating-cost changes.
- Other material risks include geographic concentration, property illiquidity, execution and cost risks in the value-add program, environmental and insurance exposures, joint-venture and related-party conflicts, and the need to maintain REIT qualification.
- The adviser agreement was renewed for one year through March 16, 2018. The company remains externally managed and pays advisory and administrative fees based on assets; BH and affiliates also receive property, construction and other fees and hold interests in most property ventures.
- Seven property sales generated gains; 1031 exchanges were used or planned for certain proceeds. The filing notes possible additional BH-affiliate profit interests of up to $2.5 million in aggregate, but says the amount was reasonably possible and not reasonably estimable; no liability was accrued.
- No material litigation was reported. Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The company remained an emerging growth company and did not provide an auditor attestation on internal controls.
Most important facts for investors to verify
- Whether the held-for-sale properties closed on expected terms and generated enough proceeds to repay the $30 million bridge facility and other planned borrowing, including the subsequent Hollister Place financing.
- Debt maturities, covenant headroom, collateral and cross-default terms, and sensitivity to interest rates—especially the 2021 credit-facility maturity and remaining unhedged floating-rate exposure.
- Whether same-store rent growth and renovation returns persist while occupancy is softening, and how property expenses and taxes affect NOI.
- How much reported GAAP profit depended on asset-sale gains, and how recurring FFO, Core FFO, AFFO and operating cash flow support the dividend and future capital spending.
- The status and tax consequences of the reverse 1031 exchanges, the four contracted property sales, and potential joint-venture profit interests.
- Related-party fees, adviser incentives and joint-venture economics, including the effect of externally managed structure on stockholders’ returns.