NexPoint Residential Trust, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; balance sheet compared with December 31, 2017. Unless noted, financial amounts are in millions of dollars. The company is an externally managed REIT focused on value-add multifamily properties, primarily in the Southeastern and Southwestern United States.
Business context and portfolio
At quarter-end, the portfolio comprised 32 properties and 11,471 apartment units. Management reported 94.2% leased occupancy and weighted average monthly effective rent of $967 per occupied unit. The company sold Timberglen in January and classified Southpoint Reserve at Stoney Creek as held for sale.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $35.7 | $35.2 | $70.7 | $72.2 |
| Operating income | $5.2 | $1.9 | $8.9 | $5.8 |
| Net income (loss) | $(1.7) | $9.9 | $8.4 | $6.6 |
| Net income (loss) attributable to common stockholders | $(1.7) | $7.4 | $8.4 | $3.8 |
| Diluted EPS | $(0.08) | $0.34 | $0.39 | $0.18 |
| Operating cash flow | — | — | $17.3 | $14.2 |
- Q2 same-store NOI increased 11.0% to $17.5 million; six-month same-store NOI rose 8.2% to $33.5 million. Total NOI, a non-GAAP measure, was $19.8 million for Q2 and $39.0 million for the first half.
- Q2 FFO was $9.3 million ($0.44 diluted per share), Core FFO $8.7 million ($0.41), and AFFO $10.2 million ($0.48). For the first half, FFO was $17.0 million ($0.80 diluted per share), Core FFO $17.0 million ($0.80), and AFFO $19.8 million ($0.92). These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- Cash and cash equivalents were $18.3 million; restricted cash was $20.9 million. Cash and restricted cash together declined $4.0 million during the first half to $39.2 million.
- At June 30, total debt principal was approximately $785.7 million, including $737.2 million of operating-property mortgages, $13.5 million secured by the held-for-sale property, and $35.0 million under the credit facility. Mortgage debt’s weighted average rate was 3.80% (3.15% after the company’s stated swap adjustment). Total liabilities were $797.5 million.
- Seven swaps with $650 million notional effectively fixed rates on approximately 92% of floating-rate mortgage debt; caps covered another $182.4 million at a weighted average LIBOR cap of 4.62%. Interest-rate exposure nevertheless remains.
- Stockholders’ equity was $239.9 million. The company repurchased 382,941 shares during the first half for $9.7 million, at an average $25.26 per share. The board expanded the repurchase authorization to $40 million and extended it through June 2020.
Changes versus comparable periods
- Q2 revenue edged up 1.2%, while common-stockholder results moved from $7.4 million income to a $1.7 million loss. The main driver was the absence of the $19.9 million real-estate sale gain recorded in Q2 2017; lower operating costs and debt-extinguishment charges partly offset that comparison.
- For the first half, revenue declined 2.1%, but common-stockholder income increased to $8.4 million from $3.8 million. Lower expenses and debt-extinguishment costs more than offset reduced revenue and a $6.2 million decline in sale gains.
- Same-store performance strengthened: Q2 same-store revenue rose 4.7% and NOI 11.0%; first-half same-store revenue rose 4.1% and NOI 8.2%. Management cited higher rents and occupancy, along with lower property taxes. Portfolio rent per occupied unit rose 5.0% year over year and occupancy increased from 92.8% to 94.2%.
- Operating cash flow improved to $17.3 million from $14.2 million. Investing cash flow was positive $14.4 million versus negative $67.5 million, primarily reflecting no acquisitions in 2018 compared with acquisitions in 2017. Financing cash flow was negative $35.8 million, including debt repayments, dividends and share repurchases.
Outlook, risks and unusual items
- Management stated that available cash, expected operating cash flow and potential financings should fund operations, scheduled debt service and dividends for the 12 months after June 30, 2018. It expected to use proceeds from the planned Southpoint sale or cash on hand to repay the credit facility. No specific earnings or same-store growth guidance was provided.
- The $30 million credit-facility balance was scheduled to mature December 29, 2018, with one 12-month extension option. The additional $5 million temporary advance outstanding at quarter-end was repaid with cash on July 25, 2018. Management reported covenant compliance at quarter-end.
- On July 30, the board declared a $0.25-per-share quarterly dividend, payable September 28, 2018. Dividends declared were $0.25 per share for Q2 and $0.50 for the first half.
- The company sold Timberglen for $30.0 million, generating $29.6 million net cash proceeds and a $13.7 million gain. First-half 2017 included four property sales, compared with one in 2018. The filing attributes period comparisons in part to acquisition and disposition timing.
- Adoption of hedge-accounting guidance on January 1, 2018 changed the accounting for cash-flow hedges: the company recorded a $1.4 million cumulative increase to OCI with a corresponding decrease to accumulated earnings. First-half unrealized derivative gains recorded in OCI were $10.5 million.
- Value-add and green-improvement spending continues. The company reported $3.7 million of renovation reserves and $8.5 million of rehab expenditures in the first half; the green program had spent $1.8 million of a $4.2 million escrowed amount and was expected to be completed by year-end 2018.
- Key risks include floating-rate borrowing and rising rates, refinancing and capital-market access, geographic concentration, property operations and leasing conditions, execution of value-add plans, REIT qualification, and reliance on the external adviser. The filing reported no material litigation, no material change to previously disclosed risk factors, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress, timing, price and debt repayment impact of the Southpoint sale, and refinancing or extension of the $30 million facility due in December 2018.
- Whether same-store rent and occupancy gains persist, and whether casualty recoveries, lower taxes and utility savings are repeatable.
- Debt balances, floating-rate exposure, hedge coverage, maturity schedule and sensitivity to interest-rate changes.
- Cash available after distributions, share repurchases, capital spending and debt service; compare FFO/AFFO with recurring capital needs and dividend coverage.
- Execution and returns from the value-add and green-improvement programs, including the stated expected water/sewer savings.