NexPoint Residential Trust, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in U.S. dollars; financial-statement amounts are in millions unless otherwise noted.
Business context and reporting period
NexPoint is an externally managed REIT focused on value-add multifamily properties, primarily in the Southeastern and Southwestern United States. At June 30, 2017, its portfolio comprised 37 properties and 12,735 apartment units, approximately 92.8% leased, with weighted-average effective monthly rent of $922 per occupied unit. The company reported one operating segment.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $35.2 | $33.7 | $72.2 | $67.2 |
| Operating income | $1.9 | $6.7 | $5.8 | $12.2 |
| Net income | $9.9 | $16.6 | $6.6 | $16.9 |
| Net income attributable to common stockholders | $7.4 | $14.6 | $3.8 | $14.6 |
| Basic/diluted EPS | $0.35/$0.34 | $0.69/$0.69 | $0.18/$0.18 | $0.68/$0.68 |
| Same-store NOI (non-GAAP) | $15.3 | $14.4 | $30.7 | $28.7 |
Q2 revenue rose 4.7%, while same-store NOI increased 6.2%; for the first half, revenue rose 7.5% and same-store NOI increased 7.2%. Management attributed rent growth to its value-add program and market rent increases. Portfolio occupancy was lower than the prior-year comparison (92.8% versus 93.7%); same-store occupancy was down 0.4% year over year.
Common-stockholder earnings declined materially despite higher revenue and property NOI. Higher depreciation and amortization, interest expense, and debt modification and extinguishment costs contributed to the decline. Q2 included a $19.9 million gain on property sales; without that item, reported net income would have been substantially lower. The company reported Q2 FFO of $1.7 million, Core FFO of $6.0 million, and AFFO of $7.4 million; these are non-GAAP measures.
For the six months, operating cash flow was $14.2 million, compared with $16.5 million in 2016. Investing cash flow was a $67.5 million outflow, including $138.0 million for two acquisitions, partly offset by $82.7 million in net property-sale proceeds. Financing cash flow was $53.7 million. Cash and restricted cash totaled $55.7 million at June 30, including $26.3 million of cash and cash equivalents and $29.4 million of restricted cash.
Total assets were $1.099 billion and total equity was $195.2 million at June 30, compared with $1.035 billion and $256.1 million, respectively, at year-end 2016. The company’s June 30 debt carrying values totaled approximately $884.2 million, net of deferred financing costs and other adjustments; principal debt, including debt on properties held for sale, was approximately $893.6 million. Floating-rate debt was $833.7 million. The weighted-average rate on total indebtedness was reported as 3.25%, or 3.34% after the company’s stated swap adjustment.
Material changes and significant transactions
- On June 30, the company bought out BH Equity’s approximately 8.4% joint-venture interest for about $51.7 million: $49.7 million cash and $2.0 million of OP units issued August 1. The buyout eliminated the reported noncontrolling-interest balance; the purchase price exceeded its carrying value.
- The company acquired Hollister Place for $24.5 million and Rockledge Apartments for $113.5 million, adding 968 units. Both were held through an exchange accommodation titleholder pending reverse 1031 exchanges.
- Four properties were sold in the first half for $83.9 million, producing $82.7 million net cash proceeds and a $19.9 million gain. Six properties, with $100.1 million net carrying value, were classified as held for sale at June 30.
- A June 30 refinancing replaced a $300 million credit facility and certain mortgages with 22 first mortgages totaling $502.1 million. The refinancing reduced the borrowing spread on $468.4 million of floating-rate debt by approximately 57 basis points, but incurred $4.8 million of debt extinguishment and modification costs in Q2.
- Total equity fell from year-end, principally reflecting the BH Equity buyout, dividends and distributions, and first-half earnings.
Liquidity, outlook, risks and unusual items
Management said 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 June 30. The short-term liquidity priority was the $65.9 million, interest-only bridge facility due October 31, 2017. Management intended to repay it with proceeds from held-for-sale properties or cash on hand. After the July sale of Regatta Bay, $11.3 million was applied to the facility, leaving $54.6 million outstanding as of August 1.
Interest-rate exposure remains significant: swaps effectively fixed $650 million of floating-rate debt (78% of floating-rate debt, as stated in the market-risk disclosure), while interest-rate caps covered $427.2 million. The filing estimates that a 1.00 percentage-point rate increase would raise annual interest expense by approximately $1.84 million, subject to the stated hedges and assumptions.
The board declared a $0.22-per-share quarterly dividend in May, paid June 30, and declared another $0.22 dividend on July 31, payable September 29. The company expects to continue its value-add program; approximately $8.8 million was reserved for planned capital expenditures at quarter-end. It gave no specific earnings or revenue guidance.
Key risks include refinancing and capital-market access, substantial indebtedness and variable rates, property-tax increases, market and occupancy conditions, real-estate illiquidity, execution of acquisitions and value-add investments, regional concentration, and maintaining REIT qualification. Management reported no material litigation, no material change in previously disclosed risk factors, and effective disclosure controls. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the planned sales of held-for-sale properties generate sufficient timely proceeds to repay the remaining bridge facility and whether any refinancing is needed.
- Portfolio occupancy, same-store rent growth, property-tax trends, and the operating results of recently acquired assets.
- Actual interest-rate sensitivity after swaps and caps, including hedge maturities, costs, and debt covenant compliance.
- Cash available for dividends and capital spending, and the sustainability of the $0.22 quarterly dividend relative to AFFO and REIT distribution requirements.
- The effect of the BH buyout and OP-unit redemption rights, as well as continuing adviser, property-manager, and other related-party arrangements.