NexPoint Residential Trust, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. 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 40 properties with 15,127 units; the portfolio was 93.9% leased, with average monthly effective rent of $1,497 per occupied unit.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $69.6 million | $65.8 million | $138.8 million | $126.6 million |
| Operating income | $10.0 million | $4.2 million | $23.2 million | $9.9 million |
| Net loss | $4.0 million | $7.8 million | $7.9 million | $12.5 million |
| Net loss per share | $0.15 | $0.30 | $0.31 | $0.49 |
| Same-store NOI (non-GAAP) | $39.7 million | $36.9 million | $75.5 million | $69.5 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $53.9 million | $38.7 million |
Q2 operating margin was approximately 14.4%, compared with 6.4% a year earlier; first-half operating margin was approximately 16.7%, compared with 7.8%. These are calculated from reported operating income and revenue. First-half cash used in investing was $36.4 million and cash used in financing was $26.4 million. Cash, cash equivalents and restricted cash totaled $43.0 million at June 30; unrestricted cash was $10.1 million.
Rental income grew 5.7% in Q2 and 9.6% for the first half year over year. Same-store NOI increased 7.6% in Q2 and 8.5% for the first half. Portfolio rent growth was partly offset by lower same-store occupancy: 93.8% versus 94.4% in the Q2 comparison, and 93.7% versus 94.4% in the first-half comparison.
Debt, liquidity and distributions
Debt principal totaled approximately $1.68 billion: $1.55 billion of operating-property mortgages, $68.2 million of mortgages on properties held for sale, and $57.0 million drawn on the credit facility. The mortgage weighted-average interest rate was 6.64%; management reported an adjusted rate of 3.65% after swaps. Interest expense rose to $14.5 million in Q2 from $12.4 million, and to $31.3 million for the first half from $23.0 million, primarily reflecting higher borrowing rates.
Approximately 74% of floating-rate debt was covered by $1.2 billion of interest-rate swaps; caps covered approximately $1.4 billion, at a weighted-average cap rate of 5.82%. The revolving credit facility had $293 million available and matures June 30, 2025. Debt principal maturities include $68.5 million in 2024, $234.5 million in 2025 and $290.3 million in 2026, including facility debt where applicable.
Management stated available cash, expected operating cash flows and potential financing should be sufficient for operations, scheduled debt service and dividends for the 12 months following June 30, 2023. The company paid $22.1 million in common dividends during the first half and declared a $0.42-per-share quarterly dividend in July, payable September 29, 2023.
Changes, outlook and notable items
- Revenue growth and lower expenses supported higher operating income and reduced GAAP net losses. However, higher interest costs weighed on results. First-half Core FFO declined to $39.0 million from $40.4 million; AFFO declined to $44.2 million from $45.1 million. These are company-defined non-GAAP measures.
- Management attributed rent growth to its value-add program and market rent increases. Same-store operating expenses rose 11.2% in the first half, including increases in property operating costs and real estate taxes.
- Two Houston properties, Old Farm and Stone Creek at Old Farm, remained classified as held for sale after the buyer terminated its purchase agreement and forfeited its deposit. The company recorded a $0.25 million gain and said it was marketing the properties, with a sale expected by December 31, 2023. Timber Creek and Radbourne Lake were subsequently marketed for sale in July.
- Casualty damage at eight properties had left 91 units out of service at June 30. First-half casualty loss was $0.9 million; insurance-related business-interruption income was also recorded. First-half value-add rehabilitation expenditures were $23.2 million.
- LIBOR ceased publication on June 30, 2023; the company said affected debt and derivatives would transition to SOFR with spread adjustments and that it did not anticipate a material change in all-in rates. Interest-rate exposure remains significant.
- The Adviser waived $10.7 million of advisory and administrative fees in the first half; the waivers are permanent for those periods, but future waivers on certain assets are discretionary. The Advisory Agreement was renewed for a one-year term in February 2023.
- The company reported no material litigation involving it. An independent special committee reported no evidence the company engaged in conduct exposing it to liability in lawsuits involving its Sponsor and others; management does not expect those cases to materially affect the company.
No specific earnings or operating guidance was provided. The filing identifies risks including higher interest rates, substantial floating-rate indebtedness, refinancing and capital-market access, property damage and insurance costs, geographic concentration, and maintaining REIT qualification. Management reported compliance with debt covenants and effective disclosure controls.
Important facts for investors to verify
- Whether rent growth can continue to outpace rising property operating costs, taxes and insurance, and whether occupancy stabilizes.
- Debt refinancing needs, floating-rate exposure and the actual effect of the LIBOR-to-SOFR transition, including upcoming cap expirations.
- Timing and proceeds from the planned sales of Old Farm and Stone Creek, and the status of the additional properties marketed after quarter-end.
- Restoration schedules, insurance recoveries and the number of units still unavailable following casualty events.
- Cash generation and dividend coverage, including the distinction between GAAP earnings, operating cash flow and company-defined FFO, Core FFO and AFFO.
- The sustainability of adviser fee waivers and the potential impact of related-party arrangements and commitments.