Nexpoint Residential Trust, Inc. annual report, FY2022

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NexPoint Residential Trust, Inc. — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. NexPoint Residential Trust (NYSE: NXRT) is an externally managed REIT focused on value-add multifamily properties, primarily in the Southeastern and Southwestern United States. At year-end it owned 40 communities with 15,127 units across seven states.

Financial performance and liquidity

  • Revenue: $264.0 million, up 20.4% from $219.2 million in 2021. Rental income was $257.9 million, up $44.4 million; management attributed rent growth to renovations and organic increases.
  • Property operations: NOI was $157.4 million, up 22.3%. Same-store NOI rose 16.2% to $129.3 million; same-store effective monthly rent increased 17.8% to $1,493, while year-end occupancy edged down to 94.1% from 94.3%.
  • Profit: GAAP net loss was $9.3 million, versus net income of $23.1 million in 2021; diluted loss per share was $0.36. The result included $8.7 million of debt extinguishment and modification costs and a $14.7 million property-sale gain, compared with $46.2 million of gains in 2021.
  • REIT operating measures: FFO attributable to common stockholders was $73.4 million ($2.81 diluted per share), Core FFO $81.8 million ($3.13), and AFFO $91.4 million ($3.49). These are non-GAAP measures and are not cash flow measures.
  • Cash flow: Operating cash flow was $79.1 million, versus $73.3 million in 2021. Investing used $162.3 million and financing provided $46.3 million. Year-end cash and cash equivalents were $16.8 million, with $35.0 million of restricted cash; together these totaled $51.8 million.
  • Debt: Total debt principal was approximately $1.68 billion, including $1.54 billion of operating-property mortgages, $68.2 million of debt on properties held for sale, and $74.5 million drawn on the credit facility. Mortgage debt’s weighted-average rate was 5.71% unadjusted and 3.29% after swaps; total debt’s adjusted rate was 3.38%. About $1.17 billion of floating-rate mortgage exposure was swapped, and caps covered about $1.3 billion.
  • Liquidity and distributions: The $250 million credit facility had $275.5 million available under its expanded commitments at year-end and matures in 2025. The company declared $1.56 per share in 2022, including a fourth-quarter dividend of $0.42; diluted AFFO covered declared dividends 2.24 times. Management said available cash, expected operating cash flow and potential financing were expected to cover operations, scheduled debt service and dividend requirements for the 12 months after year-end.

Material changes and significant transactions

  • Acquired two communities for a combined $143.4 million (562 units) in April 2022; these were acquired from Adviser-affiliated Delaware statutory trusts. Sold Hollister Place for $36.75 million, recognizing a $14.7 million gain.
  • Completed a cash-out refinancing of 19 properties in the fourth quarter. Mortgage principal on the refinanced debt increased from approximately $544 million to $808 million; maturities were extended to December 2032, with floating-rate pricing based on SOFR plus 1.55% for 18 properties and 2.09% for one.
  • Revenue growth was partly offset by rising costs: total expenses increased 15.6% to $232.4 million, including higher property operating costs, taxes and insurance, and depreciation. Interest expense rose to $50.6 million from $44.6 million.
  • Completed interior renovations on 2,409 units in 2022 at an average cost of $10,888 per unit. Across renovated units leased through year-end, the company reported average rent growth of 13.8% and a 22.0% return on interior-renovation capital.

Outlook, risks and unusual items

  • No specific numerical earnings or operating guidance is provided. Management’s strategy is to continue value-add renovations and disciplined acquisitions, while targeting a gradual reduction in leverage to 40%–45% loan-to-value over time.
  • Management identifies inflation, higher interest rates, recession risk, property operating-cost increases, regional concentration, competition, refinancing access and the execution and cost risks of renovations as key uncertainties. Most apartment leases are for one year or less, exposing rents to changes in market conditions.
  • Despite hedges and caps, substantial debt remains floating-rate; the filing reports approximately $1.6 billion of floating-rate debt. LIBOR transition and refinancing conditions also remain relevant risks.
  • Casualty events affected ten properties; 113 units were excluded from the portfolio’s unit count at year-end. The company recognized $2.5 million in casualty gains and $1.3 million in business-interruption proceeds in 2022.
  • After year-end, NXRT signed an agreement to sell Old Farm and Stone Creek for a combined $135 million, refinanced Venue on Camelback, and paid down $17.5 million on its credit facility. A $0.42-per-share dividend was declared in February 2023.
  • Two lawsuits involving the Sponsor and Jim Dondero—the Highland bankruptcy-related case and a UBS case—do not assert claims related to NXRT’s business or assets. The company said it did not expect a material effect. The company reported no material litigation against it and no material environmental liabilities known at year-end.
  • KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.

Important facts for investors to verify

  • Reconcile debt balances, rates, hedge and cap coverage, and near-term maturities—particularly the distinction between reported and hedge-adjusted borrowing costs.
  • Review the $135 million post-year-end sale agreement, expected closing proceeds, debt repayment and any tax or operating effects.
  • Assess whether rent growth and renovation returns persist as operating expenses rise and occupancy softens; note the same-store pool differs from the full portfolio.
  • Evaluate dividend sustainability against cash available for distribution, debt covenants, REIT distribution requirements and the company’s reliance on external financing.
  • Review related-party acquisitions, Adviser and property-manager fees, fee waivers, and the company’s dependence on external management.