NexPoint Residential Trust, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The company is an externally managed REIT focused on value-add multifamily properties, primarily in the Southeastern and Southwestern United States.
Business context and portfolio
- At quarter-end, the portfolio comprised 35 properties and 12,555 apartment units; occupancy was 93.8% and weighted average monthly effective rent per occupied unit was $979.
- During the first nine months, NexPoint acquired three properties for approximately $131.0 million, sold one property for $30.0 million, and recognized a $13.7 million gain on that sale. Southpoint Reserve at Stoney Creek was classified as held for sale.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $36.5 million | $37.1 million | $107.2 million | $109.3 million |
| Operating income | $4.8 million | $4.8 million | $13.7 million | $10.5 million |
| Net income (loss) | $(5.3) million | $54.1 million | $3.2 million | $60.7 million |
| Net income (loss) attributable to common stockholders | $(5.2) million | $53.9 million | $3.2 million | $57.7 million |
| Basic EPS | $(0.25) | $2.56 | $0.15 | $2.74 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $30.5 million | $27.5 million |
Q3 rental income declined about 1.3% year over year, while effective rent per occupied unit increased 5.1% and occupancy edged down from 94.0% to 93.8%. For comparable same-store properties, NOI increased 8.3% in Q3 and 9.0% for the nine-month period. These are non-GAAP measures.
- Q3 diluted FFO was $0.28 per share, compared with $0.32; diluted Core FFO was $0.42 versus $0.35; diluted AFFO was $0.48 versus $0.40.
- Nine-month diluted FFO was $1.08 per share, versus $0.77; diluted Core FFO was $1.21 versus $1.01; diluted AFFO was $1.41 versus $1.18. FFO, Core FFO and AFFO are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Dividends declared were $0.25 per share in Q3 and $0.75 per share for the nine months, up from $0.22 and $0.66, respectively, in 2017.
Balance sheet, debt and liquidity
- At September 30, total assets were $1.176 billion, total liabilities $941.8 million and stockholders’ equity $231.5 million.
- Debt principal totaled approximately $925.9 million: $832.5 million of operating-property mortgages, $13.4 million on property held for sale, and $80.0 million under credit and bridge facilities. The mortgage portfolio’s weighted average rate was 3.83%; total indebtedness’ weighted average rate was 3.87%.
- Interest-rate swaps effectively fixed rates on $650 million, or about 80%, of floating-rate mortgage debt. Caps covered $382.1 million of floating-rate mortgage debt, with a weighted-average LIBOR cap of 5.47%.
- Cash and cash equivalents were $19.3 million; restricted cash was $26.3 million. Nine-month cash from operations was $30.5 million, investing cash use was $124.0 million, and financing cash provided was $95.9 million. Cash and restricted cash ended at $45.6 million.
- The $30 million bridge facility matures March 26, 2019; the $50 million drawn under the $60 million credit facility matures September 26, 2020, with one 12-month extension option. Management expected to repay the bridge facility using proceeds from a property sale or cash on hand.
Material changes and unusual items
- Q3 GAAP results swung from substantial 2017 income to a loss, primarily because the prior-year quarter included $58.5 million of gains from property sales; there were no Q3 2018 property-sale gains. Q3 2018 also included $2.9 million of debt extinguishment and modification costs.
- Nine-month net income fell sharply from 2017, principally because property-sale gains declined from $78.4 million to $13.7 million. The company sold nine properties in the 2017 comparable period and one in 2018.
- Operating-property mortgage balances and credit/bridge borrowings increased alongside acquisitions. Seven property mortgages were refinanced during the nine months; refinancing activity reduced borrowing spreads by a weighted average 54 basis points but incurred $3.6 million of extinguishment and modification costs.
- The company repurchased 382,941 shares for approximately $9.7 million during the nine months. Its repurchase authorization was increased to $40 million and extended through June 15, 2020.
Outlook, risks and contingencies
- Management stated that available cash, expected operating cash flows and potential debt or equity financing should be sufficient for operations, scheduled debt service and dividends for the twelve months after September 30, 2018. This is subject to capital-market access, leverage, lender restrictions and operating performance; no formal earnings guidance was provided.
- Management expects continued value-add investment and identified approximately $2.5 million of renovation reserves at quarter-end. It also expected approximately $0.7 million of additional green improvements in Q4 2018.
- Interest-rate exposure is material: $888.1 million of total indebtedness was floating rate before considering hedges. Management estimated a 0.25 percentage-point LIBOR increase would add about $0.6 million to annual interest expense after swap effects, until applicable caps are reached.
- The filing cites risks from economic and market conditions, geographic concentration, property ownership and acquisition execution, substantial indebtedness, refinancing and interest rates, real-estate illiquidity, REIT qualification, and reliance on the external adviser. The company reported no material litigation, no known material environmental liability, and no material change to previously disclosed risk factors.
- On October 29, 2018, the board declared a quarterly dividend of $0.275 per share, a 10% increase, payable December 31, 2018. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the company repaid or refinanced the $30 million bridge facility by its March 2019 maturity, and whether the planned property sale or other funding source was completed.
- Subsequent occupancy, rent growth and same-store NOI trends, particularly given the slight year-over-year occupancy decline.
- Debt maturities, covenant compliance, floating-rate exposure and the continued effectiveness and coverage of swaps and caps.
- Whether the $0.275 dividend is supported by recurring cash generation and taxable income; GAAP earnings, FFO and AFFO differ and are not equivalent to cash available for distribution.
- Execution and costs of the value-add and green-improvement programs, plus any change in the adviser’s voluntary fee waivers.