NexPoint Residential Trust, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial amounts below are in millions unless stated otherwise. The company is an externally managed multifamily REIT focused on value-add properties, principally in the Southeastern and Southwestern United States. Comparisons with 2015 include predecessor operations before the March 31, 2015 spin-off and are not fully like-for-like.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $33.7 | $28.7 | $67.2 | $54.3 |
| Operating income | $6.7 | $2.0 | $12.2 | $0.1 |
| Net income (loss) | $16.6 | $(2.3) | $16.9 | $(8.2) |
| Net income (loss) attributable to common stockholders | $14.6 | $(2.3) | $14.6 | $(7.7) |
| Interest expense | $6.5 | $4.2 | $11.7 | $8.2 |
| FFO per share | $0.34 | $0.32 | $0.74 | $0.55 |
Q2 and six-month 2016 net income included a $16.4 million gain on real estate sales; reported earnings therefore do not solely reflect recurring property operations. Same-store Q2 NOI increased 11.0% to $15.1 million. Total portfolio occupancy was 93.7% and weighted average effective monthly rent per occupied unit was $830 at June 30. Management reported same-store rent growth and higher occupancy as contributors to operating improvement.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $20.4 million, versus $8.6 million in 2015. Investing activities provided $59.7 million, mainly from property-sale proceeds; financing activities used $67.8 million.
- Cash and cash equivalents were $28.6 million at June 30, up from $16.2 million at year-end. Restricted cash was another $34.2 million, including $15.8 million reserved for value-add work; it is not equivalent to unrestricted cash.
- Total assets were $917.4 million and total liabilities were $665.7 million. Equity was $251.7 million.
- Debt principal was approximately $659.9 million: $391.5 million of operating-property mortgages, $66.3 million of mortgages on properties held for sale, $200.0 million under the credit facility and $2.0 million under the bridge facility. The balance sheet reports debt net of financing costs and other adjustments. Weighted average mortgage interest rate was 2.62%.
- The company stated it expected available cash, operating cash flows and potential financings to cover operations, scheduled debt service and dividends for the 12 months after June 30, 2016. It had $15.8 million reserved for planned capital expenditures.
Material changes, outlook and risks
- Three properties were sold during the six months for $64.3 million in total sales price, producing $63.2 million net cash proceeds and a $16.4 million gain. Related mortgage repayments were approximately $35.4 million; prepayment penalties were about $0.35 million.
- On June 6, the company entered a $200 million, interest-only credit facility, expandable to $300 million subject to conditions, with a 60-month initial term and one 12-month extension option. It refinanced debt on 11 properties and used an additional draw to reduce the bridge facility. The remaining $2.0 million bridge balance was repaid August 2, 2016.
- Three $100 million interest-rate swaps became effective July 1, fixing a combined $300 million notional at a weighted average 1.0088% rate through June 2021. Management estimated the refinancing and swaps would reduce annual interest expense by about $0.3 million, based on June 30 LIBOR. Separately, caps covered $354.1 million of floating-rate debt, with a weighted average cap rate of 6.09%.
- After quarter-end, the company acquired CityView, a 217-unit Florida property, for $22.4 million, assuming $15.8 million of fixed-rate debt. It also declared a $0.206-per-share quarterly dividend payable September 30, 2016.
- Management’s value-add strategy targets approximately $4,000–$10,000 of investment per unit during the first 24–36 months of ownership at many properties. Q2 rehab expenditures were $4.6 million; first-half expenditures were $11.0 million.
- Key disclosed risks include floating-rate exposure, substantial indebtedness and dependence on access to debt or equity financing; real estate market, occupancy and rent risks; geographic concentration; related-party management and advisory arrangements; and maintaining REIT qualification. The filing reported no material litigation, no material changes to previously disclosed risk factors, and management considered the company compliant with debt covenants and REIT requirements at June 30. The company disclosed a possible $0–$2.0 million additional profit interest to a joint-venture affiliate related to Jacksonville properties, but did not accrue it because the amount was not reasonably estimable.
- No numerical earnings or FFO guidance was provided. Management said its liquidity sources were expected to be sufficient for the stated 12-month needs, subject to capital-market, operating and covenant risks.
Most important facts for investors to verify
- How much of reported earnings and AFFO reflects property-sale gains and related financing costs, versus recurring operating performance.
- Debt balances and terms after the bridge payoff, CityView acquisition and commencement of the swaps; confirm exposure to floating rates and cap/swap coverage.
- Unrestricted liquidity and the availability and use of restricted renovation reserves, alongside planned capital spending and dividend needs.
- Progress in same-store rent, occupancy and NOI, and whether value-add renovations generate the expected returns.
- Potential joint-venture profit interests, related-party fees and obligations, and continued compliance with REIT requirements and debt covenants.