NexPoint Residential Trust, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Financial statements are unaudited. The nine-month 2015 comparison includes predecessor operations before the March 2015 spin-off, so it is not a like-for-like comparison of the public company alone.
Business context and operating results
The externally managed REIT focuses on value-add multifamily properties, primarily in the Southeastern and Southwestern United States. At quarter-end, it held interests in 36 properties with 11,626 units; portfolio occupancy was 93.6%, and average effective monthly rent per occupied unit was $848. The company acquired CityView in July and classified The Grove at Alban as held for sale.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $33.1 million | $30.8 million | $100.2 million | $85.1 million |
| Operating income | $4.9 million | $3.7 million | $17.2 million | $3.8 million |
| Net income (loss) | $8.8 million | $(0.9) million | $25.7 million | $(9.0) million |
| Net income (loss) attributable to common stockholders | $7.1 million | $(1.1) million | $21.7 million | $(8.7) million |
| Basic and diluted EPS | $0.33 | $(0.05) | $1.02 | $(0.41) |
| Operating cash flow | — | $28.5 million | $17.0 million |
Q3 operating margin was approximately 14.9%, compared with 12.1% a year earlier. Revenue growth reflected rent and occupancy gains, value-add work, and changes in the portfolio. Same-store Q3 revenue rose 10.2% and same-store NOI increased 12.8% to $14.6 million. Management attributed rent growth to value-add initiatives and organic market growth; portfolio effective rent was up 6.5% year over year.
Financial position, cash flow, and distributions
- At September 30, total assets were $886.2 million and total liabilities $636.6 million; equity was $249.6 million.
- Cash and cash equivalents were $34.1 million, plus $34.1 million of restricted cash. Management said available cash, expected operating cash flow, and potential financing were expected to cover operations, scheduled debt service, and dividend requirements for the following 12 months.
- Gross debt principal was approximately $625.7 million: $407.2 million of operating-property mortgages, $18.6 million secured by property held for sale, and $200.0 million drawn on the credit facility. The balance sheet reports these amounts net of financing costs and other adjustments.
- Nine-month investing cash flow was positive $116.4 million, largely reflecting $131.8 million in net property-sale proceeds; financing cash flow was negative $127.0 million. The company spent $18.0 million on real estate additions and retired its $29.0 million bridge facility.
- Quarterly dividends declared were $0.206 per share in Q3. On November 7, the board declared a higher $0.22 quarterly dividend, payable December 30, 2016.
Material changes and unusual items
- The company sold seven properties during the first nine months for $134.0 million in aggregate sales price, generating $131.8 million net cash proceeds and a $25.9 million gain. The gain materially contributed to the reported 2016 net profit; it is not recurring rental operating income.
- Q3 interest expense rose to $5.7 million from $4.6 million. Nine-month interest expense was $17.4 million versus $12.9 million, including financing-cost amortization and approximately $0.8 million of prepayment penalties related to property dispositions.
- The company entered a $200 million, interest-only credit facility in June, expandable to $300 million subject to conditions, with a 60-month initial term and one 12-month extension option. It also entered $400 million of interest-rate swaps, effectively fixing the rate on that notional amount; $306.9 million of floating-rate debt was covered by interest-rate caps. Three floating-rate mortgages totaling $58.9 million were uncapped.
- On October 11, after quarter-end, the company acquired The Colonnade, a 415-unit Phoenix property, for $44.6 million; it expanded the credit facility by $32.3 million and drew $29.5 million toward the purchase.
- The board authorized up to $30 million of share repurchases. By November 9, 233,346 shares had been repurchased for $4.3 million in total.
Outlook, risks, and contingencies
Management expects to fund near-term requirements through operations and cash, and longer-term investment and capital needs through a combination of operating cash flow, debt or equity financing, and property dispositions. It reported approximately $14.0 million reserved for the value-add program and stated that it believed the company had sufficient resources for the next 12 months. These expectations depend on operating performance and access to capital; the filing gives no earnings or revenue guidance.
Key risks include leverage and refinancing or interest-rate exposure, property-market and rental competition, concentration in the Southeast and Southwest, execution of acquisitions and renovations, access to capital, and maintaining REIT qualification. The company reported compliance with debt provisions and no material litigation or material changes to previously disclosed risk factors. A possible additional profit interest for BH Equity and affiliates related to certain Jacksonville properties was estimated at $0–$2.0 million; it was reasonably possible but not reasonably estimable, so no liability was accrued. Management reported disclosure controls effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings and AFFO growth reflects property-sale gains and other adjustments, versus recurring property operations; review the company’s non-GAAP reconciliations.
- Same-store rent, occupancy, and NOI trends, including whether repair and maintenance and property-tax increases pressure margins.
- Debt terms, maturity and refinancing exposure, floating-rate debt not protected by caps, hedge counterparties, and compliance with facility covenants.
- Execution and returns from the value-add program, including use of the $14.0 million reserve and ongoing capital needs.
- Related-party management and advisory fees, share repurchases, and any eventual Jacksonville portfolio profit-interest obligation.
- Whether the post-quarter acquisition, credit-facility expansion, and increased dividend remain consistent with liquidity and REIT distribution requirements.