NexPoint Residential Trust, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance sheet compared with December 31, 2018. The company is an externally managed REIT focused on value-add multifamily properties, primarily in the Southeastern and Southwestern United States. Unless otherwise noted, financial amounts below are in millions.
Business and operating context
- At quarter-end, the portfolio comprised 38 properties and 13,211 apartment units. Portfolio occupancy was 93.6%, and weighted average effective monthly rent per occupied unit was $1,007.
- Acquired three Arizona properties on January 28 for a combined $132.1 million: Bella Vista, The Enclave and The Heritage, totaling 656 units. The company reported no property sales in Q1 2019.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $41.5 | $35.1 |
| Operating income before property-sale gains | $3.7 | $3.7 |
| Net income (loss) | $(4.4) | $10.1 |
| Net income (loss) per diluted share | $(0.19) | $0.47 |
| Net cash provided by operating activities | $11.4 | $3.1 |
| FFO per diluted share | $0.46 | $0.36 |
| Core FFO per diluted share | $0.46 | $0.39 |
| AFFO per diluted share | $0.53 | $0.45 |
- Same-store NOI increased 7.0% to $20.4 million; total NOI increased 23.3% to $23.6 million. NOI is a non-GAAP measure and excludes significant costs, including interest, corporate overhead and capital expenditures.
- Q1 net loss included no property-sale gain, compared with a $13.7 million gain in Q1 2018. Interest expense rose to $8.1 million from $6.8 million. Depreciation and amortization increased to $15.4 million from $11.4 million.
- Cash and cash equivalents were $20.5 million and restricted cash was $17.7 million at March 31. Operating cash flow was $11.4 million; investing cash use was $139.4 million, mainly reflecting acquisitions; financing provided $123.2 million. Cash, cash equivalents and restricted cash totaled $38.3 million at quarter-end.
- Balance-sheet debt carrying amounts were $903.1 million of mortgages, $13.3 million of mortgage debt held for sale, and $51.9 million on the credit facility. Aggregate principal debt was $977.0 million, including $52.5 million drawn on a new $75 million facility. The facility is interest-only, initially matures in January 2021, and has one 12-month extension option.
- Mortgage debt was predominantly floating-rate. Seven swaps with $650 million notional effectively fixed rates on 73% of floating-rate mortgage debt; caps covered a further $310 million, subject to their stated terms. The filing estimates each 0.25 percentage-point rate increase would add approximately $0.72 million to annual interest expense, after swap effects, before cap limits.
- Common dividends declared were $0.275 per share, up from $0.250. Management declared another $0.275 quarterly dividend on April 29, payable June 28, 2019. Diluted AFFO coverage of Q1 declared dividends was 1.92x, a company-calculated non-GAAP ratio.
Material changes and management commentary
- Revenue increased 18.4%, reflecting acquisitions and higher rents. Management attributed a 5.1% increase in portfolio effective rent to the value-add program and organic rent growth; occupancy was 93.6% versus 94.0% a year earlier. Same-store effective rent rose 4.0% to $996, with same-store occupancy also down 0.4 percentage points.
- Higher operating costs included increased property taxes, repairs and maintenance, labor, and depreciation and amortization. Management noted that property reassessments after acquisition can raise real estate taxes.
- Despite GAAP net loss, FFO, Core FFO and AFFO per diluted share increased year over year. These supplemental measures are not substitutes for GAAP results or cash available for distribution.
- Q1 other comprehensive loss included $5.7 million of unrealized losses on interest-rate derivatives. The reported swap asset declined to $12.5 million from $18.1 million at year-end.
- The company entered into a $100 million at-the-market equity program in February but had made no sales under it by March 31. It had approximately $6.2 million of renovation/value-add reserves at quarter-end.
Outlook, risks and contingencies
- 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 March 31, 2019. This is not a quantified earnings forecast; the filing provides no specific revenue or earnings guidance.
- Management expects to spend approximately $1.1 million on green improvements during 2019 and said the program is intended to reduce water and sewer costs. It also noted that long-term acquisitions and capital improvements may require external debt or equity funding.
- Key disclosed risks include real-estate and regional concentration, acquisition execution, substantial debt and variable interest rates, access to capital, property taxes, REIT qualification and the ability to maintain distributions. The company is monitoring the planned cessation of USD LIBOR submissions after 2021 because material contracts reference LIBOR.
- Three acquired Arizona properties were held through exchange-accommodation titleholder entities in reverse like-kind exchanges at quarter-end; title was expected to transfer upon completion or by July 27, 2019, whichever came first.
- The company reported no material litigation, no material changes to previously disclosed risk factors, and no material environmental liability known to management. It reported no material real-estate impairment charges. Management said disclosure controls were effective as of March 31, 2019.
Important facts for investors to verify
- Whether occupancy, rent growth and same-store NOI trends continue, particularly given occupancy declined year over year and property taxes increased.
- Debt maturities, covenants, refinancing needs and floating-rate exposure, including swap and cap coverage and hedge expirations; the credit facility’s initial maturity is in 2021.
- Completion and title transfer of the three reverse 1031 Exchange acquisitions, and whether their operating performance meets expectations.
- Dividend sustainability against recurring cash flow and capital needs; compare GAAP cash flows with FFO/AFFO and account for REIT distribution requirements.
- Adviser fee waivers: approximately $1.6 million was voluntarily waived in Q1, but the Adviser is not obligated to continue waiving fees. Also monitor any future ATM issuance and resulting dilution.