Business context and reporting period
NexPoint Residential Trust, Inc. (NYSE: NXRT) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The externally managed REIT focuses on value-add multifamily properties, primarily in the Southeastern and Southwestern United States. Its portfolio comprised 41 properties and 15,387 units; management reported 94.1% leased and average effective monthly rent of $1,446 per occupied unit.
Financial performance and condition
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $68.1 | $56.4 | $194.6 | $160.7 |
| Operating income | $11.0 | $5.6 | $20.8 | $13.5 |
| Net loss attributable to common stockholders | $(0.6) | $(5.4) | $(13.0) | $(15.7) |
| Diluted loss per share | $(0.02) | $(0.21) | $(0.51) | $(0.62) |
| Operating margin | 16.1% | 9.9% | 10.7% | 8.4% |
- Property operations: Same-store NOI increased 13.1% in Q3 to $36.1 million and 15.8% for nine months to $101.5 million. Total NOI, a non-GAAP measure, rose 18.5% in Q3 and 23.2% for nine months.
- REIT supplemental measures: Q3 FFO, Core FFO and AFFO per share were $0.96, $0.85 and $0.95, respectively. Nine-month figures were $2.39, $2.43 and $2.71. These non-GAAP measures are not substitutes for GAAP earnings or cash flow.
- Cash flow: Nine-month operating cash flow was $69.6 million, versus $57.9 million; investing cash outflow was $179.5 million, versus $223.0 million; financing cash inflow was $87.9 million, versus $175.3 million. Cash, cash equivalents and restricted cash ended at $66.6 million, down $22.1 million from the start of the period.
- Debt and liquidity: Debt principal was approximately $1.69 billion, including $1.28 billion of operating-property mortgages, $83.0 million of mortgages on properties held for sale and $335.0 million drawn on the credit facility. Cash and cash equivalents were $15.8 million; restricted cash was $50.8 million. The filing reports $350 million available to borrow under the corporate facility at quarter-end.
- Mortgage debt’s weighted-average rate was 4.58% before hedging and an adjusted 2.80% after the company’s stated swap adjustment. The $1.2 billion notional swap portfolio covered about 91% of floating-rate mortgage debt; the $335 million credit-facility balance was not swap-covered. Nine-month interest expense was $34.8 million, versus $32.8 million.
- Quarter-end stockholders’ equity was $531.6 million, compared with $469.8 million at December 31, 2021. The balance sheet included $110.6 million of real estate held for sale and $82.7 million of related net mortgage debt.
Material changes versus the prior comparable period
- Revenue rose 20.7% in Q3 and 21.1% for nine months, principally reflecting higher rents and acquisitions. Management cited a 20.1% increase in portfolio effective rent per occupied unit year over year. Same-store occupancy declined about 1.3–1.4 percentage points, partly offsetting rent growth.
- Operating expenses increased 12.3% in Q3 and 18.1% for nine months. Same-store Q3 operating expenses rose 16.9%, including higher repairs and maintenance, taxes and insurance.
- GAAP net loss narrowed compared with the prior-year periods, while interest expense remained higher year to date amid sharply increased market rates. Interest on debt rose $15.1 million for nine months; favorable changes in swap and cap expense partly offset that increase.
- Unrealized gains on interest-rate derivatives contributed $106.9 million of nine-month other comprehensive income; these gains are not operating revenue. The balance-sheet fair value of swaps rose to $110.4 million from $3.5 million at year-end 2021.
- The company acquired two properties in April 2022 for a combined $143.4 million, adding 562 units, and classified three Houston-area properties as held for sale. It repurchased 168,473 shares for $11.1 million and issued 52,091 shares through its ATM program for $4.0 million net.
Outlook, commentary, risks and unusual items
- Management stated that available cash, expected operating cash flows and potential debt or equity financing should fund operations, scheduled debt service and dividends for the 12 months following September 30, 2022. No quantitative earnings or operating guidance was provided.
- On October 4, 2022, the company agreed to refinance $790.5 million of mortgage debt tied to 19 properties. The proposed loan was expected to have a 10-year term at 30-day average SOFR plus 155 basis points, with amortization beginning after five years; closing was expected by November 30, 2022. This was a subsequent-event agreement, not a completed quarter-end refinancing.
- After quarter-end, the company extended the revolving credit facility maturity to June 30, 2025. The Board also declared a $0.42-per-share dividend payable December 30, 2022; the Q3 dividend was $0.38 per share.
- Inflation and rising interest rates are key risks, potentially increasing property costs and borrowing expense or constraining refinancing and capital access. Management noted that hedges do not eliminate all exposure. The filing estimates each additional 0.25 percentage-point rate increase could raise annual interest expense by about $1.14 million, subject to stated assumptions.
- Ten properties had fire or flood damage; 81 units were excluded from the portfolio unit count while under reconstruction. The company reported $1.5 million of claims under its 2022 self-insurance allocation through September 30. Management recorded no real estate impairment and reported no material litigation known to it.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The Adviser’s voluntary fee waivers were significant but not contractually assured for future periods.
Important facts for investors to verify
- Whether the proposed $790.5 million refinancing closed, its final pricing and terms, and how it affects maturities and interest-rate exposure.
- Progress and proceeds from the planned sale of the three held-for-sale properties, and whether those assets’ debt is repaid or otherwise refinanced.
- Subsequent occupancy, effective rent growth, repair and maintenance costs, property taxes and insurance costs, particularly as rent growth moderates.
- Cash available for dividends and capital spending, credit-facility availability and covenant compliance; distinguish unrestricted cash from restricted cash.
- Future swap/cap coverage, derivative-related cash settlements and the transition from LIBOR to SOFR; assess non-GAAP NOI, FFO, Core FFO and AFFO alongside GAAP results.
- Whether Adviser fee waivers continue, and the extent of future casualty-related costs, insurance recoveries and reconstruction downtime.