NexPoint Residential Trust, Inc. — Q1 2017 Form 10-Q
Business context and period. The company is an externally managed REIT focused on value-add multifamily properties, primarily in the Southeastern and Southwestern United States. This unaudited report covers the three months ended March 31, 2017; financial amounts below are in millions unless otherwise stated. At quarter-end, the portfolio comprised 40 properties and 13,225 units, with 94.6% occupancy and weighted-average monthly effective rent of $883 per occupied unit.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $37.0 | $33.5 |
| Operating income | $3.9 | $5.5 |
| Interest expense | $7.2 | $5.2 |
| Net income (loss) | $(3.3) | $0.3 |
| Net income (loss) attributable to common stockholders | $(3.6); $(0.17) per share | $(0.02); approximately $0.00 per share |
| Net cash provided by operating activities | $7.6 | $4.1 |
| Net cash used in investing activities | $(30.0) | $(6.2) |
| Net cash provided by (used in) financing activities | $20.9 | $(6.0) |
| FFO / Core FFO / AFFO attributable to common stockholders | $8.0 / $8.1 / $9.1 | $8.6 / $8.6 / $8.9 |
| Dividends declared per common share | $0.220 | $0.206 |
Total revenue increased 10.4%. Rental income rose 8.6% to $31.9 million, reflecting rent growth, the value-add program and acquisitions, partly offset by property sales. Portfolio effective rent per occupied unit increased 8.9% year over year; occupancy was broadly stable versus 94.5% a year earlier.
Total expenses increased to $33.1 million from $28.0 million, including depreciation and amortization of $12.4 million (up $2.8 million) and interest expense up $1.9 million. Higher depreciation and interest contributed to the shift from modest GAAP net income to a loss. Same-store NOI increased 8.4% to $16.8 million; total NOI increased 11.4% to $19.7 million. Total NOI was approximately 53.2% of revenue, versus 52.8% in Q1 2016. Operating income was approximately 10.4% of revenue, versus 16.5%.
Balance sheet, debt and liquidity
- At March 31, total assets were $1,053.4 million and total equity was $248.3 million. Net real estate investments were $980.3 million.
- Debt principal was approximately $797.6 million: $368.5 million of operating-property mortgages, $70.1 million of mortgages on properties held for sale, $329.0 million drawn on credit facilities and $30.0 million on a bridge facility. Net carrying debt was approximately $791.0 million.
- Cash and cash equivalents were $27.7 million; restricted cash was $26.0 million. Combined cash and restricted cash totaled $53.7 million, compared with $55.3 million at year-end 2016. Restricted cash includes deposits, lender escrows and renovation reserves.
- Debt was predominantly floating rate. The company reported total debt weighted-average interest of 3.36% and adjusted weighted-average interest of 3.37%. As of March 31, swaps effectively fixed $500 million of floating-rate debt; caps covered $306.2 million and capped covered rates at a weighted average of 6.10%. Four floating-rate mortgages totaling $72.3 million had no caps.
- Scheduled debt maturities were concentrated in 2021, including $300 million under the principal credit facility. A $30 million bridge facility matured April 29, 2017, with an extension option to June 29.
- Management said available cash, expected operating cash flow and potential financings were expected to fund operations, scheduled debt service and dividends for the 12 months following March 31, 2017.
Material changes, outlook and risks
- Q1 operating cash flow increased to $7.6 million. Investing outflow increased mainly because the company acquired Hollister Place for $24.5 million, funded with debt; additions to real estate investments were $5.4 million.
- After quarter-end, the company sold four properties for aggregate stated sales prices of $83.9 million. It used proceeds and cash on hand to repay the $30 million bridge facility and reduce the $30 million credit facility by $10 million. The latter facility’s balance was $19 million as of May 2. The sales also completed reverse 1031 exchanges for Old Farm and Stone Creek at Old Farm. Regatta Bay remained under contract for sale at filing time.
- On May 1, the Board declared a $0.22 per-share quarterly dividend, payable June 30, 2017. The company reported that the Q1 dividend was funded from operating cash flow. As a REIT, it generally must distribute at least 90% of REIT taxable income to maintain qualification.
- No formal earnings or operating guidance was provided. The company expects to continue acquisitions and value-add improvements as opportunities and financing permit; it had $11.5 million reserved for planned capital expenditures, including about 1,700 interior rehabs. It completed full or partial interior rehabs on 430 units in Q1.
- Key risks include interest-rate increases and refinancing or capital-market access, substantial indebtedness, property-market and regional concentration risks, execution of acquisitions and renovations, real estate illiquidity, and maintaining REIT status. Management reported compliance with debt provisions and no material litigation; it said no material environmental liability was known, while noting that such liability cannot be ruled out. A possible BH Equity profit interest related to prior property sales was reasonably possible but not reasonably estimable, so no liability was accrued.
- The Advisory Agreement was renewed through March 16, 2018. The Adviser voluntarily waived fees on certain recently acquired, debt-financed properties for the quarter but is not required to continue doing so. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether rent growth and same-store NOI gains continue to offset property-cost inflation and higher interest expense.
- Current debt balances, maturity and covenant terms, refinancing plans for the 2021 concentration, and the extent to which floating-rate exposure remains hedged.
- Completed sale proceeds and debt repayments, including whether the remaining Regatta Bay sale closes and at what terms.
- Cash available for capital improvements and distributions, and the sustainability of the $0.22 quarterly dividend relative to taxable income and cash flow.
- Performance of recent acquisitions and the value-add program, including occupancy, renovation costs and realized rent increases.
- Potential contingent profit interests payable to BH Equity and any changes to related-party fees or Adviser waivers.