NexPoint Residential Trust, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. NexPoint is an externally managed REIT focused on value-add multifamily properties, primarily in the Southeastern and Southwestern United States.
Business context and operating performance
- At quarter-end, the portfolio comprised 37 properties and 13,757 apartment units; occupancy was 93.6%, and weighted average monthly effective rent per occupied unit was $1,095.
- The company acquired eight properties for a combined purchase price of approximately $635.7 million and sold six properties for $289.9 million in sales price, generating $286.5 million net proceeds and a $127.7 million gain.
- Management attributed rental growth to acquisitions, its value-add program, and market rent growth. Same-store NOI increased 4.4% in Q3 and 5.1% for the nine months; same-store occupancy was 93.3%, versus 94.1% a year earlier.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $46.8 million | $36.5 million | $131.4 million | $107.2 million |
| Net income (loss) | $119.1 million | $(5.3) million | $112.7 million | $3.2 million |
| Net income (loss) attributable to common stockholders | $118.7 million | $(5.2) million | $112.4 million | $3.2 million |
| Diluted EPS | $4.84 | $(0.25) | $4.63 | $0.15 |
| FFO per diluted share | $0.35 | $0.28 | $1.26 | $1.08 |
| Core FFO per diluted share | $0.47 | $0.42 | $1.38 | $1.21 |
| AFFO per diluted share | $0.54 | $0.48 | $1.60 | $1.41 |
- GAAP earnings were dominated by the $127.7 million gain on property sales. Excluding that gain, operating income before sales gains was $4.2 million in Q3, down from $4.8 million. Net income is therefore not a direct indicator of recurring operating performance.
- Q3 NOI, a non-GAAP measure, was $26.1 million, up 30.8%; same-store NOI was $16.9 million, up 4.4%. Nine-month NOI was $74.3 million, up 26.0%; same-store NOI was $50.4 million, up 5.1%.
- For the nine months, net cash from operations was $38.9 million, investing cash use was $297.0 million, and financing cash provided was $276.4 million. Cash, cash equivalents, and restricted cash ended at $61.5 million, including $20.4 million unrestricted cash and $41.1 million restricted cash.
- At September 30, total assets were $1.624 billion and stockholders’ equity was $419.8 million. Balance-sheet debt, net of financing costs, included $1.028 billion of operating-property mortgages, $26.6 million of held-for-sale mortgages, and $106.0 million drawn on the credit facility. The facility had $43.0 million of unused capacity.
- Mortgage debt’s weighted average rate was 3.56% (3.01% adjusted for swaps). Swaps effectively fixed rates on $975 million of floating-rate mortgage debt; a $346.7 million notional amount of caps limited LIBOR to a weighted average 5.74%. The credit facility had $107 million principal outstanding, floating rates, and a January 2021 maturity.
- The quarterly dividend declared was $0.275 per share; the Board subsequently declared $0.3125 per share, payable December 31, 2019. Nine-month dividends declared were $0.825 per share. The ATM program raised approximately $49.9 million net during the nine months through issuance of 1.12 million shares.
Changes versus the prior comparable period
- Revenue rose 28.3% in Q3 and 22.6% year to date, reflecting portfolio activity and higher rents. Portfolio weighted average effective rent increased 11.8% from September 2018, while occupancy was slightly lower year over year (93.6% versus 93.8%).
- Eight acquisitions and six dispositions in 2019 drove substantial portfolio expansion and turnover, compared with three acquisitions and one disposition in the first nine months of 2018. The $127.7 million 2019 sales gain compares with $13.7 million in 2018.
- Interest expense increased to $10.0 million in Q3 from $7.1 million and to $26.6 million for the nine months from $20.7 million, principally reflecting higher debt balances associated with acquisitions. Depreciation and amortization also rose with the larger portfolio and acquired lease intangibles.
- Same-store rent growth was partly offset by lower occupancy and increased costs, including property taxes and repairs and maintenance. For the nine months, same-store property taxes and insurance increased 6.7%.
Outlook, risks, contingencies, and unusual items
- Management stated that available cash, expected operating cash flows, and potential financing should cover operations, scheduled debt service, and dividends for the 12 months following September 30, 2019. It expects to rely on debt or equity capital for longer-term acquisitions and capital needs; access depends on market conditions, leverage, covenants, and other factors. No earnings or operating guidance was provided.
- Approximately $16.5 million of renovation reserves were available at quarter-end, and $16.4 million of value-add rehabilitation expenditures were made in the first nine months. The company expected approximately $3.1 million of green improvements during 2019.
- Highland Capital Management, an affiliate of the sponsor, filed for Chapter 11 protection on October 16, 2019. The company warned of potential reputational, operational, commercial-relationship, and conflict-of-interest effects; outcomes were uncertain.
- A tornado damaged Cutter’s Point in Dallas on October 21, 2019. The company expected to fund the remainder of its $1.2 million aggregate self-insurance limit after the $100,000 per-occurrence deductible; it stated other repair costs and lost rent were insured and expected losses to be immaterial.
- Key risks include geographic concentration, real estate and acquisition risks, substantial indebtedness and refinancing or interest-rate exposure, reliance on external management, REIT qualification, and access to capital. The company also identified the LIBOR transition after 2021 as a risk to contracts and derivatives.
- Management reported no material litigation, no material environmental liability known, and no material deviations expected in rehabilitation project schedules or budgets. Disclosure controls were considered effective. The company expected to cease being an emerging growth company after December 31, 2019, with a financial-control audit required for fiscal 2019.
Important facts for investors to verify
- How much of reported earnings and year-over-year growth reflects recurring property operations versus the $127.7 million disposition gain; review FFO, Core FFO, AFFO, and the company’s non-GAAP definitions.
- Acquisition performance, same-store rent and occupancy trends, and whether value-add spending generates the expected rent and NOI returns.
- Debt maturities, credit-facility refinancing and extension terms, floating-rate exposure, covenant headroom, and the effectiveness and counterparties of interest-rate hedges.
- Cash available for dividends and capital spending, including restrictions on restricted cash and renovation reserves; compare dividend coverage with AFFO and cash flow.
- Potential consequences of Highland’s bankruptcy, the Cutter’s Point insurance claim, and the transition from LIBOR-linked financing and hedges.