NexPoint Residential Trust, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited. The company began operations as a separate public company on March 31, 2015, following a spin-off; reported prior-period results include predecessor operations.
Business context
NXRT is an externally managed multifamily REIT focused on value-add properties, primarily in the Southeastern and Southwestern United States. At June 30, the portfolio comprised 39 properties and 12,038 units, approximately 93% leased, with average effective monthly rent of $784 per occupied unit. Two additional properties acquired August 5 brought the portfolio to 41 properties and 12,822 units.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2015 | $28.7 million | $54.3 million |
| Revenue, 2014 | $6.8 million | $10.8 million |
| Operating income (loss), 2015 | $2.0 million | $0.1 million |
| Net loss, 2015 | $2.3 million | $8.2 million |
| Net loss attributable to common shareholders, 2015 | $2.3 million | $7.7 million |
| Basic and diluted loss per share, 2015 | $0.11 | $0.38 |
| FFO per share / AFFO per share, 2015 | $0.32 / $0.34 | $0.55 / $0.66 |
- Q2 operating margin was approximately 6.9%; six-month operating margin was approximately 0.2%. Q2 NOI, a company-defined non-GAAP measure, was $14.8 million, approximately 51.6% of revenue. NOI excludes significant costs and is not a substitute for GAAP income or cash flow.
- Six-month cash from operating activities was $7.4 million, compared with cash used of $0.8 million in 2014. Investing activities used $189.5 million; financing activities provided $193.6 million. Cash and cash equivalents at June 30 were $24.2 million.
- Restricted cash was $57.6 million, including $44.5 million reserved for value-add renovations; it is not equivalent to unrestricted cash.
- Total assets were $903.1 million and total equity $260.9 million. Mortgage debt was $623.5 million, versus $487.0 million at year-end 2014; weighted-average mortgage interest rate was 2.53%. The loans are generally non-recourse to the company, subject to customary exceptions.
- NXRT declared a $0.206 per-share dividend for Q2, payable July 1; the balance sheet records $4.4 million payable. A further $0.206 dividend was approved August 10 for payment September 30.
Changes versus the prior comparable period
- Revenue rose sharply, primarily because the company operated 29 more properties than in the prior-year comparison. The growth is therefore not a like-for-like comparison.
- For the nine same-store properties, Q2 rental income increased approximately 4.6%; management attributed this mainly to a 4.0% increase in monthly rent per unit and a 1.1% occupancy increase. Same-store property operating expenses rose approximately 12.7%.
- GAAP losses persisted despite higher revenue; depreciation and amortization and interest costs increased substantially as the portfolio and debt expanded. Q2 acquisition costs were lower than in 2014, while six-month acquisition costs remained significant.
- Management reported total real estate investments, net, of $808.8 million, up from $628.5 million at December 31, 2014.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management stated that available cash, expected operating cash flows and potential debt or equity financing should cover operations, scheduled debt service and dividends for the 12 months following June 30, 2015.
- Management expects to fund long-term acquisitions, renovations and other capital needs through operating cash, borrowings and possible debt or equity issuance. It said it intends over the next 36 months to reduce leverage through principal paydown, refinancing or lower-leverage future acquisitions.
- Interest-rate exposure is material: approximately $564 million of $624 million in mortgage debt was floating rate and covered by caps, generally for three to four years, at a weighted-average maximum rate of 6.00%. Management estimated each 0.25 percentage-point rate change would affect annual interest expense by approximately $1.4 million until rates reach the caps.
- August acquisitions of Madera Point and The Pointe at the Foothills totaled $74.8 million, funded in part by $44.9 million of property-level debt. The company also entered a $29.0 million, floating-rate bridge facility maturing August 4, 2016.
- The company intends to qualify as a REIT beginning with its 2015 tax year; qualification is not assured. The filing also identifies acquisition execution, real estate operating conditions, geographic concentration, leverage, access to capital, floating rates, related-party arrangements and value-add execution among relevant risks.
- Management reported no material litigation, no material changes to previously disclosed risk factors, and no anticipated material schedule or budget deviations for rehabilitation projects. Disclosure controls were assessed as effective; no material change in internal control was reported.
Investor verification priorities
- Reconcile reported cash-flow figures: the cash-flow statement reports six-month operating cash flow of $7.4 million, while MD&A narrative gives $5.5 million; MD&A also presents differing quarterly cash-flow amounts. Confirm the correct period figures in the filed statements.
- Assess the quality and sustainability of same-store rent and occupancy gains against the faster increase in same-store operating costs.
- Review debt maturities, floating-rate exposure, hedge coverage and the bridge facility repayment or refinancing plan.
- Confirm unrestricted liquidity after renovation reserves, subsequent acquisitions, debt service and declared dividends.
- Track REIT qualification and dividend coverage, recognizing that taxable income, GAAP earnings and cash available for distribution may differ.