Edgar Filing: NexPoint Residential Trust, Inc.

nxrt-10q_20180930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-36663

NexPoint Residential Trust, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

47-1881359

(State or other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

300 Crescent Court, Suite 700, Dallas, Texas		75201
(Address of Principal Executive Offices)		(Zip Code)

(972) 628-4100

(Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☐	Accelerated Filer	☒
Non-Accelerated Filer	☐	Smaller reporting company	☐
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 2, 2018, the registrant had 20,797,135 shares of common stock, $0.01 par value, outstanding.

NEXPOINT RESIDENTIAL TRUST, INC.

Form 10-Q

Quarter Ended September 30, 2018

INDEX

			Page
Cautionary Statement Regarding Forward-Looking Statements			ii

	PART I—FINANCIAL INFORMATION

Item 1.		Financial Statements	5
		Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017	5
		Consolidated Unaudited Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2018 and 2017	6
		Consolidated Unaudited Statement of Equity for the Nine Months Ended September 30, 2017	7
		Consolidated Unaudited Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2018	8
		Consolidated Unaudited Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	9
		Notes to Consolidated Unaudited Financial Statements	11
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.		Controls and Procedures	58

	PART II—OTHER INFORMATION

Item 1.		Legal Proceedings	59
Item 1A.		Risk Factors	59
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.		Defaults Upon Senior Securities	59
Item 4.		Mine Safety Disclosures	59
Item 5.		Other Information	59
Item 6.		Exhibits	60
Signatures			61

Cautionary Statement Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. In particular, statements relating to our liquidity and capital resources, the performance of our properties and results of operations contain forward-looking statements. Furthermore, all of the statements regarding future financial performance (including market conditions and demographics) are forward-looking statements. We caution investors that any forward-looking statements presented in this quarterly report are based on management’s current beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “would,” “result” and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Forward-looking statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you therefore against relying on any of these forward-looking statements.

Some of the risks and uncertainties that may cause our actual results, performance, liquidity or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

•

unfavorable changes in market and economic conditions in the United States and globally and in the specific markets where our properties are located;

•

risks associated with ownership of real estate;

•

limited ability to dispose of assets because of the relative illiquidity of real estate investments;

•

our multifamily properties are concentrated in certain geographic markets in the Southeastern and Southwestern United States, which makes us more susceptible to adverse developments in those markets;

•

risks associated with our strategy of acquiring value-enhancement multifamily properties, which involves greater risks than more conservative investment strategies;

•

potential reforms to the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”);

•

competition could limit our ability to acquire attractive investment opportunities, which could adversely affect our profitability and impede our growth;

•

competition and any increased affordability of residential homes could limit our ability to lease our apartments or increase or maintain rents;

•

the relatively low residential mortgage rates may result in potential renters purchasing residences rather than leasing them, and as a result, cause a decline in our occupancy rates;

•

the risk that we may fail to consummate future pending property acquisitions;

•

failure of acquisitions to yield anticipated results;

•

risks associated with increases in interest rates and our ability to issue additional debt or equity securities in the future;

•

we are subject to certain risks associated with selling apartment communities, which could limit our operational and financial flexibility;

•

contingent or unknown liabilities related to properties or businesses that we have acquired or may acquire;

•

lack of or insufficient amounts of insurance;

•

the risk that our environmental assessments may not identify all potential environmental liabilities and our remediation actions may be insufficient;

•

high costs associated with the investigation or remediation of environmental contamination, including asbestos, lead-based paint, chemical vapor, subsurface contamination and mold growth;

•

high costs associated with the compliance with various accessibility, environmental, building and health and safety laws and regulations, such as the Americans with Disabilities Act and the Fair Housing Act;

•

risks associated with limited warranties we may obtain when purchasing properties;

•

exposure to decreases in market rents due to our short-term leases;

•

risks associated with operating through joint ventures and funds;

•

our dependence on information systems;

•

risks associated with breaches of our data security;

•

risks associated with our reduced public company reporting requirements as an “emerging growth company”;

•

costs associated with being a public company, including compliance with securities laws;

•

the risk that our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or internal control over financial reporting;

•

risks associated with our substantial current indebtedness and indebtedness we may incur in the future;

•

risks associated with derivatives or hedging activity;

•

the lack of experience of NexPoint Real Estate Advisors, L.P. (our “Adviser”) and property manager in operating under the constraints imposed on us as a real estate investment trust (“REIT”) may hinder the achievement of our investment objectives;

•

loss of key personnel of Highland Capital Management, L.P. (our “Sponsor” or “Highland”), our Adviser and our property manager;

•

the risk that we may not replicate the historical results achieved by other entities managed or sponsored by affiliates of our Adviser, members of our Adviser’s management team or by our Sponsor or its affiliates;

•

risks associated with our Adviser’s ability to terminate the Advisory Agreement (as defined below);

•

our ability to change our major policies, operations and targeted investments without stockholder consent;

•

the substantial fees and expenses we pay to our Adviser and its affiliates;

•

risks associated with any potential internalization of our management functions;

•

conflicts of interest and competing demands for time faced by our Adviser, our Sponsor and their officers and employees;

•

the risk that we may compete with other entities affiliated with our Sponsor or property manager for properties and tenants;

•

failure to maintain our status as a REIT;

•

failure of our operating partnership to be taxable as a partnership for federal income tax purposes, possibly causing us to fail to qualify for or to maintain REIT status;

•

compliance with REIT requirements, which may limit our ability to hedge our liabilities effectively and cause us to forgo otherwise attractive opportunities, liquidate certain of our investments or incur tax liabilities;

•

risks associated with our ownership of interests in taxable REIT subsidiaries;

•

the recognition of taxable gains from the sale of properties as a result of the inability to complete certain like-kind exchanges (“1031 Exchanges”) in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”);

•

the risk that the Internal Revenue Service (the “IRS”) may consider certain sales of properties to be prohibited transactions, resulting in a 100% penalty tax on any taxable gain;

•

the ineligibility of dividends payable by REITs for the reduced tax rates available for some dividends;

•

risks associated with the stock ownership restrictions of the Code for REITs and the stock ownership limit imposed by our charter;

•

the ability of our board of directors (the “Board”) to revoke our REIT qualification without stockholder approval;

•

recent and potential legislative or regulatory tax changes or other actions affecting REITs;

•

risks associated with the market for our common stock and the general volatility of the capital and credit markets;

iii

•

failure to generate sufficient cash flows to service our outstanding indebtedness or pay distributions at expected levels;

•

risks associated with limitations of liability for and our indemnification of our directors and officers; and

•

any other risks included under Part I, Item 1A, “Risk Factors” of our annual report on Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 15, 2018 (our “Annual Report”).

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. They are based on estimates and assumptions only as of the date of this quarterly report. We undertake no obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law.

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	September 30, 2018			December 31, 2017
	(Unaudited)
ASSETS
Operating Real Estate Investments
Land	$	202,347		$	189,615
Buildings and improvements		929,275			806,981
Intangible lease assets		3,049			1,340
Construction in progress		5,048			3,786
Furniture, fixtures, and equipment		57,655			44,725
Total Gross Operating Real Estate Investments		1,197,374			1,046,447
Accumulated depreciation and amortization		(120,292	)		(88,252	)
Total Net Operating Real Estate Investments		1,077,082			958,195
Real estate held for sale, net of accumulated depreciation of $897 and $3,397, respectively		17,406			32,961
Total Net Real Estate Investments		1,094,488			991,156
Cash and cash equivalents		19,324			16,036
Restricted cash		26,253			27,212
Accounts receivable		5,014			2,932
Prepaid and other assets		2,660			1,559
Fair market value of interest rate swaps		27,974			16,480
TOTAL ASSETS	$	1,175,713		$	1,055,375

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages payable, net	$	824,546		$	724,057
Mortgages payable held for sale, net		13,368			30,348
Credit facility, net		49,100			29,843
Bridge facility, net		29,550			8,576
Accounts payable and other accrued liabilities		6,181			6,226
Accrued real estate taxes payable		13,492			9,684
Accrued interest payable		2,284			2,074
Security deposit liability		1,917			1,518
Prepaid rents		1,359			1,470
Total Liabilities		941,797			813,796

Redeemable noncontrolling interests in the Operating Partnership		2,431			2,135

Stockholders' Equity:
Preferred stock, $0.01 par value: 100,000,000 shares authorized; 0 shares issued		—			—
Common stock, $0.01 par value: 500,000,000 shares authorized; 20,797,135 and 21,049,565 shares issued and outstanding, respectively		207			210
Additional paid-in capital		199,661			206,227
Accumulated earnings less dividends		4,798			17,885
Accumulated other comprehensive income		26,819			15,122
Total Stockholders' Equity		231,485			239,444
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,175,713		$	1,055,375

See Notes to Consolidated Financial Statements

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share amounts)

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Revenues
Rental income	$	31,724		$	32,148		$	93,366		$	94,564
Other income		4,771			4,949			13,841			14,758
Total revenues		36,495			37,097			107,207			109,322
Expenses
Property operating expenses		9,231			10,075			26,339			29,611
Real estate taxes and insurance		5,048			4,853			14,492			14,911
Property management fees (1)		1,085			1,110			3,205			3,280
Advisory and administrative fees (2)		1,885			1,870			5,586			5,544
Corporate general and administrative expenses		1,932			1,623			5,731			4,842
Property general and administrative expenses		1,280			1,594			4,475			4,756
Depreciation and amortization		11,228			11,215			33,638			35,866
Total expenses		31,689			32,340			93,466			98,810
Operating income		4,806			4,757			13,741			10,512
Interest expense		(7,119	)		(8,257	)		(20,739	)		(22,479	)
Loss on extinguishment of debt and modification costs		(2,947	)		(914	)		(3,576	)		(5,717	)
Gain on sales of real estate		—			58,490			13,742			78,386
Net income (loss)		(5,260	)		54,076			3,168			60,702
Net income attributable to noncontrolling interests		—			—			—			2,836
Net income (loss) attributable to redeemable noncontrolling interests in the Operating Partnership		(15	)		162			10			162
Net income (loss) attributable to common stockholders	$	(5,245	)	$	53,914		$	3,158		$	57,704
Other comprehensive income (loss)
Unrealized gains (losses) on interest rate derivatives		1,222			214			11,732			(835	)
Total comprehensive income (loss)		(4,038	)		54,290			14,900			59,867
Comprehensive income attributable to noncontrolling interests		—			—			—			2,720
Comprehensive income (loss) attributable to redeemable noncontrolling interests in the Operating Partnership		(12	)		163			45			163
Comprehensive income (loss) attributable to common stockholders	$	(4,026	)	$	54,127		$	14,855		$	56,984

Weighted average common shares outstanding - basic		20,775			21,085			20,847			21,057
Weighted average common shares outstanding - diluted		21,262			21,453			21,328			21,407

Earnings (loss) per share - basic	$	(0.25	)	$	2.56		$	0.15		$	2.74
Earnings (loss) per share - diluted	$	(0.25	)	$	2.51		$	0.15		$	2.70

Dividends declared per common share	$	0.25		$	0.22		$	0.75		$	0.66

(1)	Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the Company’s operating partnership (see Notes 10 and 11).

(2)	Fees incurred to the Adviser (see Note 11).

See Notes to Consolidated Financial Statements

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(dollars in thousands)

(Unaudited)

	Preferred Stock				Common Stock						Additional			Accumulated Earnings			Accumulated Other			Common Stock Held in
	Number of Shares		Par Value		Number of Shares			Par Value			Paid-in Capital			Less Dividends			Comprehensive Income			Treasury at Cost			Noncontrolling Interests			Total
Balances, December 31, 2016		—	$	—		21,293,825		$	213		$	241,450		$	(14,584	)	$	9,052		$	(4,587	)	$	24,558		$	256,102
Net loss attributable to common stockholders												—			(3,616	)		—			—			—			(3,616	)
Net income attributable to noncontrolling interests												—			—			—			—			312			312
Contributions by noncontrolling interests												—			—			—			—			13			13
Distributions to noncontrolling interests												—			—			—			—			(1,433	)		(1,433	)
Vesting of stock-based compensation												608			—			—			—			—			608
Common stock dividends declared												—			(4,724	)		—			—			—			(4,724	)
Other comprehensive income												—			—			946			—			100			1,046
Balances, March 31, 2017		—	$	—		21,293,825		$	213		$	242,058		$	(22,924	)	$	9,998		$	(4,587	)	$	23,550		$	248,308
Net income attributable to common stockholders												—			7,406			—			—			—			7,406
Net income attributable to noncontrolling interests												—			—			—			—			2,524			2,524
Contributions by noncontrolling interests												—			—			—			—			25			25
Distributions to noncontrolling interests												—			—			—			—			(3,356	)		(3,356	)
Purchase of noncontrolling interests												(31,313	)		—			—			—			(22,527	)		(53,840	)
Vesting of stock-based compensation												984			—			—			—			—			984
Common stock dividends declared												—			(4,724	)		—			—			—			(4,724	)
Other comprehensive loss												—			—			(1,879	)		—			(216	)		(2,095	)
Balances, June 30, 2017		—	$	—		21,293,825		$	213		$	211,729		$	(20,242	)	$	8,119		$	(4,587	)	$	—		$	195,232
Net income attributable to common stockholders												—			53,914			—			—			—			53,914
Repurchase of common stock												—			—			—			(1,354	)		—			(1,354	)
Retirement of common stock held in treasury						(308,313	)		(3	)		(5,938	)		—			—			5,941			—			—
Vesting of stock-based compensation						110,257			1			822			—			—			—			—			823
Common stock dividends declared												—			(4,712	)		—			—			—			(4,712	)
Other comprehensive income												—			—			213			—			—			213
Balances, September 30, 2017		—	$	—		21,095,769		$	211		$	206,613		$	28,960		$	8,332		$	—		$	—		$	244,116

See Notes to Consolidated Financial Statements

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018

(dollars in thousands)

(Unaudited)

	Preferred Stock				Common Stock						Additional		Accumulated Earnings		Accumulated Other		Common Stock Held in
	Number of Shares		Par Value		Number of Shares			Par Value			Paid-in Capital		Less Dividends		Comprehensive Income		Treasury at Cost			Total
Balances, December 31, 2017		—	$	—		21,049,565		$	210		$	206,227	$	17,885	$	15,122	$	—		$	239,444
Net income attributable to common stockholders												—		10,064		—		—			10,064
Repurchase of common stock												—		—		—		(5,058	)		(5,058	)
Retirement of common stock held in treasury						(203,953	)		(2	)