NexPoint Residential Trust, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Dollar amounts are in millions unless stated otherwise. The company is an externally managed REIT focused on value-add multifamily properties, primarily in the Southeastern and Southwestern United States.
Business context
At quarter-end, the portfolio comprised 39 properties and 13,407 units, approximately 94.4% leased, with average effective monthly rent of $1,016 per occupied unit. The company acquired four properties during the first half for a combined purchase price of approximately $151.5 million, adding 852 units.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $43.1 | $35.7 | $84.6 | $70.7 |
| Operating income before property-sale gains | $6.6 | $5.2 | $10.3 | $8.9 |
| Net income (loss) | $(2.0) | $(1.7) | $(6.4) | $8.4 |
| Net income (loss) attributable to common stockholders | $(2.0) | $(1.7) | $(6.3) | $8.4 |
| Basic EPS | $(0.08) | $(0.08) | $(0.27) | $0.40 |
| Net cash from operating activities | — | $23.6 | $17.3 |
Revenue increased 20.8% in Q2 and 19.6% in the first half year over year, reflecting acquisitions and higher same-store rents. Same-store NOI rose 5.4% in Q2 and 6.2% for the first half. Same-store revenue increased 4.0% and 4.3%, respectively; higher property taxes partly offset lower or flat operating costs. Company-wide NOI, a non-GAAP measure, increased 23.9% in Q2 to $24.6 million and 23.6% in the first half to $48.2 million, with material contributions from recently acquired properties.
First-half 2018 earnings included a $13.7 million gain on a property sale; there was no such gain in 2019. Depreciation and amortization and interest expense also rose in 2019, in part due to portfolio growth. The company reported first-half diluted FFO of $0.91 per share and AFFO of $1.06 per share, versus $0.80 and $0.92, respectively, in 2018. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Unrealized derivative losses drove other comprehensive loss of $12.9 million in Q2 and $22.9 million in the first half. Stockholders’ equity declined to $271.3 million from $296.0 million at year-end 2018.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $16.9 million, restricted cash was $22.7 million, and total assets were $1.277 billion.
- Total debt principal was approximately $986.8 million, including $934.3 million of mortgage debt and $52.5 million drawn on the corporate credit facility. The balance sheet presents debt net of deferred financing costs.
- Mortgage debt’s weighted-average rate was 3.94%; the adjusted rate was 3.16% after the effect of swaps. The company reported $949.5 million of floating-rate debt, of which $750 million was effectively fixed by swaps; caps covered another $320.1 million of floating-rate mortgage debt.
- Operating cash flow was $23.6 million; investing cash outflow was $152.3 million, largely reflecting acquisitions; financing cash inflow was $125.1 million. Cash, cash equivalents and restricted cash decreased $3.6 million to $39.6 million.
- The $75 million credit facility was increased to $125 million in June. At quarter-end, $52.5 million was drawn and $72.5 million remained available. The facility matures in January 2021, with a 12-month extension option.
- Management stated that available cash, expected operating cash flow and potential financing were expected to cover operations, scheduled debt service and dividends for the 12 months following June 30, 2019.
Material changes, outlook and risks
- Seven properties were classified as held for sale at June 30. A sale agreement covering these properties was signed June 25 for approximately $289.9 million; associated debt was $144.9 million and net carrying value was $158.5 million. Closing was expected on or before August 30, subject to customary conditions. No sale gain was recognized in the first half.
- After quarter-end, two properties totaling 702 units were acquired for $100 million. The company drew an additional $41.7 million on July 1 and $10 million on July 24; the reported facility balance was $104.2 million as of July 30.
- The board declared a quarterly dividend of $0.275 per share for Q2, paid June 28, and declared the same amount for Q3, payable September 30. The dividend was increased from $0.25 per share in Q2 2018.
- Management planned approximately $2.7 million of Green Program improvements during 2019 and reported $6.2 million of renovation reserves at quarter-end. First-half rehab expenditures were $10.6 million.
- Key risks include substantial indebtedness, floating-rate exposure, refinancing and capital-market access, property and market concentration, and execution of acquisitions and the value-add program. The company also noted that LIBOR-based contracts may require transition as LIBOR is expected to cease after 2021.
- The company introduced partial self-insurance effective March 1, retaining eligible first-loss property casualty claims up to an aggregate $1.2 million; no claims had been funded under the program through June 30. Management reported no material litigation or material change to previously disclosed risk factors. Disclosure controls were judged effective.
- No numerical earnings or operating guidance was provided. The Adviser’s voluntary waiver of certain fees is discretionary and may stop; waived amounts were approximately $3.3 million for the first half.
Most important facts for investors to verify
- Whether the six-property sale closed as expected, at what net proceeds, and how debt repayment and any resulting gain were recorded.
- Post-quarter acquisition funding, credit-facility availability and covenants, and the company’s debt maturities and refinancing needs.
- Same-store rent, occupancy, property-tax and expense trends, as well as the conversion of reported NOI and AFFO growth into sustainable cash flow.
- Interest-rate hedge coverage, hedge fair-value volatility, LIBOR transition plans, and sensitivity of interest expense to rate changes.
- Dividend sustainability relative to operating cash flow, REIT distribution requirements, and future capital expenditure needs.