NexPoint Residential Trust, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2020. NexPoint Residential Trust is an externally managed REIT focused on value-add multifamily properties, primarily in the Southeastern and Southwestern United States. At quarter-end, it owned 36 properties with 13,657 units; the portfolio was approximately 95.0% occupied, with average effective monthly rent of $1,122 per occupied unit.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $51.0 million | $46.8 million | $154.3 million | $131.4 million |
| Operating income before property-sale gains | $5.8 million | $4.2 million | $9.1 million | $14.6 million |
| Gain on real estate sales | $30.2 million | $127.7 million | $69.2 million | $127.7 million |
| Net income attributable to common stockholders | $29.6 million | $118.7 million | $48.2 million | $112.4 million |
| Diluted EPS | $1.19 | $4.84 | $1.91 | $4.63 |
| Operating cash flow | — | — | $46.5 million | $38.9 million |
| Net operating income (NOI, non-GAAP) | $28.8 million | $26.1 million | $88.0 million | $74.3 million |
- Revenue increased 8.9% for Q3 and 17.4% for the nine-month period. Management attributed rental growth to higher effective rents, the value-add program, organic rent growth, and portfolio changes.
- Same-store NOI rose 4.5% in Q3 and 4.7% over nine months. Same-store occupancy and effective rent also improved year over year.
- Net income was substantially affected by property-sale gains: those gains were lower than the prior-year comparison period. Nine-month operating income before sale gains declined despite higher revenue, reflecting higher expenses.
- Core FFO per diluted share was $0.53 for Q3 and $1.64 for nine months; AFFO per diluted share was $0.60 and $1.85, respectively. These are company-defined non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
- At September 30, cash and cash equivalents were $70.3 million, restricted cash was $38.3 million, and total assets were $1.814 billion. Net real estate investments were $1.685 billion.
- Mortgage principal was $1.122 billion and credit-facility principal was $215.0 million. The reported weighted average mortgage rate was 1.82%; management reported an adjusted rate of 3.10% after swaps. The credit facility rate was 2.65%.
- Cash, cash equivalents and restricted cash totaled $108.6 million at period-end. Nine-month investing activities provided $99.4 million, mainly reflecting property-sale proceeds, while financing activities used $108.5 million, including debt repayments, share repurchases and dividends.
Material changes and notable transactions
- The company sold four properties for $142.0 million in aggregate sales price and received $140.2 million in net cash proceeds; it recorded approximately $69.1 million of gains on those sales during the first nine months. No real estate acquisitions occurred in the period, compared with eight properties acquired in the first nine months of 2019.
- Interest expense increased to $33.7 million for nine months from $26.6 million, including higher swap expense, partly offset by lower interest on debt. Unrealized derivative losses reduced other comprehensive income by $54.5 million for the period; swap liabilities were $51.1 million at quarter-end.
- The company repurchased 1.645 million shares for $44.5 million during the nine months and issued shares through ATM programs. The 2020 ATM authorization is up to $225 million; $10.1 million gross proceeds were raised under it through September 30.
Outlook, risks and contingencies
- Management said available cash, expected operating cash flows and potential debt or equity financing should be sufficient for operations, scheduled debt service and dividend requirements for the 12 months following September 30, 2020. This is not a quantified earnings or revenue forecast.
- After quarter-end, the company extended its $215 million corporate credit facility maturity from January 28, 2021 to January 28, 2022, paying a $0.6 million extension fee. The facility extension mitigated the near-term maturity but does not remove refinancing and capital-access risks.
- COVID-19 could affect rent collections, property values, liquidity and the ability to refinance or repay debt. At September 30, 2,166 residents were on payment plans representing approximately $2.8 million of rent; the company reported no COVID-related rent concessions. Management stated that residents were expected to repay deferred amounts under their plans.
- The company declared a quarterly dividend of $0.3125 per share for Q3. On October 26, the board declared a subsequent dividend of $0.34125 per share, payable December 31, 2020 to holders of record December 15.
- Unusual property events included tornado damage at Cutter’s Point, which remained under reconstruction and was estimated to reopen in 2021, and a fire at Venue 8651. The company recorded a $0.5 million asbestos-related environmental liability at Cutter’s Point during Q3. It reported no material litigation and no real estate impairment charges for the nine months.
- Interest-rate exposure remains material: substantially all mortgage debt and the credit facility were floating rate, with swaps covering the mortgage debt and part of the facility. The company also identified the planned transition away from LIBOR as a risk for contracts indexed to that benchmark.
- Other risks include concentrated regional exposure, substantial indebtedness, real-estate operating and valuation risks, the ability to maintain REIT status, and the Adviser’s discretion to stop voluntary fee waivers. The filing reported the company believed it was in compliance with debt covenants and REIT requirements.
Most important facts for investors to verify
- Whether rent-payment plans convert to cash collections, and whether COVID-related restrictions or economic conditions worsen occupancy, rents or delinquencies.
- The company’s capacity to meet debt maturities and refinance, particularly the $395.2 million of mortgage principal scheduled for 2024 and its reliance on floating-rate financing and hedges.
- Whether underlying operating growth persists after separating recurring property performance from dispositions, casualty items and other nonrecurring gains.
- The cash implications of renovation spending, share repurchases and the increased dividend, including whether operating cash flow can support these commitments.
- The valuation and timing of the Cutter’s Point reconstruction, the asbestos liability and any further casualty or environmental costs.
- The terms and future availability of ATM equity issuance, and the impact of share issuance or repurchases on per-share results.