NexPoint Residential Trust, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides quarterly results; it is an annual report, not a standalone fourth-quarter filing. Financial amounts below are in U.S. dollars.
Business context
NexPoint Residential Trust is an externally managed REIT focused on value-add multifamily properties, primarily in the Southeastern and Southwestern United States. At year-end, it owned 35 properties with 12,555 units across seven states; occupancy was 94.6% and weighted-average effective monthly rent was $985 per occupied unit. Rental income is the principal revenue source.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $146.6 million | $144.2 million |
| Operating income | $16.8 million | $13.3 million |
| Net income (loss) | $(1.6) million | $56.4 million |
| Net income (loss) per diluted share | $(0.08) | $2.49 |
| NOI | $80.2 million | $76.6 million |
| FFO attributable to common stockholders | $32.0 million | $25.1 million |
| Core FFO attributable to common stockholders | $35.1 million | $30.1 million |
| AFFO attributable to common stockholders | $40.8 million | $34.8 million |
| Cash provided by operating activities | $41.7 million | $37.5 million |
| Cash, cash equivalents and restricted cash, year-end | $43.1 million | $43.2 million |
| Total assets / total liabilities, year-end | $1,161.2 million / $862.6 million | $1,055.4 million / $813.8 million |
| Total mortgage debt outstanding, year-end | $845.7 million | Not stated here on the same basis |
Reported cash includes $23.3 million of restricted cash; the balance sheet separately shows $19.9 million of cash and cash equivalents. Management said cash on hand and expected operating cash flow were sufficient for near-term obligations, debt service, distributions and opportunistic acquisitions.
Changes versus the prior year
- Revenue rose 1.6%. For 29 same-store properties, NOI increased 7.4%; occupancy increased to 94.5% from 93.9%, and average effective monthly rent rose 4.1% to $963.
- Net income swung to a loss mainly because gains on real estate sales fell to $13.7 million from $78.4 million. The company sold one property in 2018 versus nine in 2017.
- FFO, Core FFO and AFFO increased 27.8%, 16.4% and 17.2%, respectively. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
- Operating cash flow increased by $4.2 million. Investing activities used $137.0 million, reflecting acquisitions and substantially lower property-sale proceeds; financing activities provided $95.1 million, including net offering proceeds.
Capital allocation, debt and outlook
- Acquired three properties for a combined $131.0 million and 1,084 units; sold Timberglen for $30.0 million, generating $29.6 million net cash proceeds and a $13.7 million gain.
- Raised $84.8 million net in a November 2018 share offering, issuing 2,702,500 shares at $33.00 gross per share. Most proceeds repaid $50.0 million on a credit facility and $30.0 million on a bridge facility.
- Mortgage debt was $845.7 million at a weighted-average rate of 4.07% (3.17% after the company’s stated swap adjustment). Of $808.0 million in floating-rate mortgage debt, $650.0 million was covered by swaps and $255.2 million by interest-rate caps. The filing estimates a 1 percentage-point LIBOR increase would add approximately $1.6 million to annual interest expense, before other effects.
- Debt maturities are heavily concentrated thereafter: scheduled principal includes $808.7 million after 2023. The company identifies refinancing access, interest rates, leverage and lender restrictions as material liquidity risks.
- Management’s stated leverage objective was to reduce loan-to-value to 40–45% over time. The company targeted regular quarterly dividends with a payout below Core FFO, but declared distributions remain at the Board’s discretion. 2018 dividends were $1.025 per share; 71% were classified as return of capital for tax purposes.
- Interior renovations completed during 2018 averaged $4,703 per unit. Across renovated units leased through year-end, management reported average rent growth of 10.6% and a 22.7% return on interior renovation capital.
Risks, contingencies and subsequent events
- Key risks include geographic concentration, short-term leases, competition and home-buying alternatives, execution and cost risks in the value-add program, substantial debt, floating-rate exposure, refinancing needs, and possible changes affecting Fannie Mae and Freddie Mac financing.
- The company had material contracts indexed to LIBOR and was monitoring the transition away from LIBOR after 2021. Derivative counterparties, hedge performance and potential breakage costs are additional risks.
- The REIT depends on meeting tax qualification and distribution requirements. It is externally managed, pays asset-based advisory fees, and disclosed potential conflicts involving its Adviser, Sponsor and affiliated property manager. Adviser fee waivers on newer assets were voluntary and may not continue.
- Management reported no material litigation or known environmental liability, while cautioning that environmental assessments may not identify all issues. No off-balance-sheet arrangements were reported.
- After year-end, the company acquired a three-property Phoenix portfolio for $132.1 million (656 units), funded partly with a $52.5 million draw on a new $75 million credit facility. The Board renewed the advisory agreement through March 16, 2020 and declared a $0.275-per-share quarterly dividend payable in March 2019.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end. KPMG issued an unqualified opinion on the audited financial statements; it did not audit internal control effectiveness.
Important facts for investors to verify
- How scheduled debt maturities—particularly the $808.7 million due after 2023—will be refinanced or repaid, and whether leverage is tracking toward the 40–45% target.
- Whether same-store rent and NOI growth, renovation returns and occupancy remain durable as new properties enter the portfolio and market conditions change.
- How recurring cash available for distributions compares with dividends, including the significance of the 71% return-of-capital tax classification and the use of non-GAAP FFO/AFFO measures.
- The sensitivity of interest costs and refinancing to LIBOR transition, rates, hedge coverage and counterparty performance.
- The effect of the Phoenix acquisitions and new credit facility on debt, liquidity and operating results, and whether voluntary Adviser fee waivers continue.