NexPoint Residential Trust(NXRT) - 2019 Q3 - Quarterly Report

Cautionary Statement Regarding Forward-Looking Statements This section provides a standard cautionary statement warning investors that the report contains forward-looking statements based on current management beliefs and assumptions Forward-Looking Statements and Risk Factors This section highlights that actual results may differ materially due to a wide range of risks and uncertainties, including market conditions, real estate ownership, competition, financing, and regulatory compliance - The company identifies numerous risk factors that could impact future performance, including but not limited to[10][11] - Market and Economic Conditions: Unfavorable changes in the U.S. economy and in specific geographic markets where properties are located - Real Estate Concentration: The portfolio is concentrated in the Southeastern and Southwestern United States, making it susceptible to adverse developments in those markets - Financing Risks: Risks associated with increases in interest rates and the ability to issue additional debt or equity - Competition: Competition could limit the ability to acquire attractive investments and maintain rental rates - REIT Status: Failure to maintain status as a Real Estate Investment Trust (REIT) could result in significant tax liabilities PART I—FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements and management's discussion and analysis for NexPoint Residential Trust, Inc Item 1. Financial Statements This section presents the unaudited consolidated financial statements for NexPoint Residential Trust, Inc. as of September 30, 2019, and for the three and nine-month periods then ended Consolidated Balance Sheets The balance sheet shows a significant increase in total assets from $1.16 billion at year-end 2018 to $1.62 billion as of September 30, 2019, primarily driven by an increase in Net Operating Real Estate Investments Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 (Unaudited) | Dec 31, 2018 | | :--- | :--- | :--- | | Total Net Real Estate Investments | $1,554,016 | $1,087,542 | | Cash and cash equivalents | $20,373 | $19,864 | | Total Assets | $1,624,282 | $1,161,210 | | Mortgages payable, net | $1,027,947 | $824,702 | | Credit facility, net | $106,034 | $— | | Total Liabilities | $1,201,047 | $862,615 | | Total Stockholders' Equity | $419,811 | $296,028 | Consolidated Statements of Operations For the third quarter of 2019, the company reported a net income of $119.1 million, a substantial increase from a net loss of $5.3 million in Q3 2018, primarily due to a $127.7 million gain on the sale of real estate Key Operating Results (in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | Nine Months 2019 | Nine Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $46,833 | $36,495 | $131,390 | $107,207 | | Total expenses | $42,600 | $31,689 | $116,839 | $93,466 | | Gain on sales of real estate | $127,700 | $— | $127,700 | $13,742 | | Net income (loss) | $119,104 | ($5,260) | $112,744 | $3,168 | | Net income (loss) attributable to common stockholders | $118,747 | ($5,245) | $112,406 | $3,158 | | Earnings (loss) per share - diluted | $4.84 | ($0.25) | $4.63 | $0.15 | Consolidated Statements of Cash Flows For the nine months ended September 30, 2019, net cash from operating activities increased to $38.9 million, while investing activities used $297.0 million, primarily for property acquisitions Cash Flow Summary for the Nine Months Ended Sep 30 (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $38,943 | $30,452 | | Net cash used in investing activities | ($297,025) | ($123,984) | | Net cash provided by financing activities | $276,434 | $95,861 | | Net increase in cash | $18,352 | $2,329 | Notes to Consolidated Financial Statements The notes provide detailed information supporting the financial statements, covering accounting policies, real estate investments, debt, derivatives, equity, related party transactions, and subsequent events - During the first nine months of 2019, the company acquired eight properties for a total purchase price of $635.7 million[66][67] - The company sold six properties during the first nine months of 2019 for a total sales price of $289.9 million, realizing a gain of $127.7 million[68][69] - On January 28, 2019, the company entered into a new $75.0 million corporate credit facility, which was subsequently upsized to $150 million by September 30, 2019[79] - The company issued 1,119,487 shares of common stock through its at-the-market (ATM) offering program during the first nine months of 2019, generating net proceeds of approximately $49.9 million[109] - Subsequent to the quarter's end, on October 21, 2019, the Cutter's Point property was damaged by a tornado in Dallas, TX, but the company expects any resulting losses to be immaterial due to comprehensive insurance coverage[134] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, results of operations, liquidity, and capital resources, highlighting strong revenue growth driven by property acquisitions and increased rental rates Results of Operations The analysis of operating results shows a significant increase in net income for Q3 and the first nine months of 2019 compared to 2018, primarily driven by a $127.7 million gain on property sales - The primary driver for the substantial increase in net income for Q3 2019 was a $127.7 million gain on the sale of six properties[149][160] - Q3 2019 vs. Q3 2018: Total revenues increased by $10.3 million (28.3%), while total expenses rose by $10.9 million[149][161] - YTD 2019 vs. YTD 2018: Total revenues increased by $24.2 million (22.6%), while total expenses rose by $23.4 million[149][161] - Rental income growth was supported by an 11.8% increase in the weighted average monthly effective rent per occupied unit, rising to $1,095 as of September 30, 2019, from $979 a year prior[150][162] Non-GAAP Measurements This section provides key non-GAAP metrics used to evaluate the company's performance, showing strong organic growth and improved dividend coverage ratios - Q3 Same Store NOI (for 26 properties) increased by 4.4% year-over-year, from $16.2 million to $16.9 million[179] - Year-to-date Same Store NOI increased by 5.1% year-over-year, from $47.9 million to $50.4 million[188] FFO, Core FFO, and AFFO per Diluted Share | Metric per Diluted Share | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | FFO | $0.35 | $0.28 | $1.26 | $1.08 | | Core FFO | $0.47 | $0.42 | $1.38 | $1.21 | | AFFO | $0.54 | $0.48 | $1.60 | $1.41 | - The dividend coverage ratio, based on AFFO per diluted share, improved to 1.97x in Q3 2019 from 1.93x in Q3 2018[205][206] Liquidity and Capital Resources The company's liquidity position is supported by operating cash flow, existing cash, and a $150 million corporate credit facility with $43.0 million of unused capacity - As of September 30, 2019, the company had $43.0 million of unused capacity on its Corporate Credit Facility[213] - The company had approximately $16.5 million of renovation value-add reserves for its planned capital expenditures, sufficient to complete approximately 1,600 interior rehabs[234] Value-Add Program Capital Expenditures (in thousands) | Rehab Expenditures | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Interior | $3,322 | $2,582 | $8,783 | $6,138 | | Exterior and common area | $2,524 | $2,322 | $7,661 | $7,314 | | Total rehab expenditures | $5,846 | $4,904 | $16,444 | $13,452 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk associated with its $1.1 billion in floating-rate debt, which is mitigated through interest rate swaps and caps - As of September 30, 2019, the company had $1.17 billion in total indebtedness, of which $1.10 billion was floating-rate debt[253] - The company utilizes interest rate swaps to effectively fix the interest rate on $975 million of its floating-rate mortgage debt at a weighted average fixed rate of 1.4147%[255] Interest Rate Sensitivity Analysis | Change in Interest Rates | Annual Increase to Interest Expense (in thousands) | | :--- | :--- | | 0.25% | $300 | | 0.50% | $600 | | 0.75% | $900 | | 1.00% | $1,200 | Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal control over financial reporting identified - The President and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[259] - There were no changes in internal control over financial reporting during the third quarter of 2019 that materially affected, or are reasonably likely to materially affect, internal controls[261] PART II—OTHER INFORMATION This part covers other information including legal proceedings, updated risk factors, and unregistered sales of equity securities Item 1. Legal Proceedings The company reports that it is not a party to any legal proceedings that are reasonably likely to have a material adverse effect on its financial condition or results of operations - The company is not aware of any legal proceedings that are reasonably likely to have a material adverse effect on its business[264] Item 1A. Risk Factors A new material risk factor is disclosed concerning the Chapter 11 bankruptcy filing of Highland Capital Management, L.P., an affiliate of the company's Sponsor - A new risk factor has emerged from the October 16, 2019, Chapter 11 bankruptcy filing of Highland Capital Management, L.P., an affiliate of the company's Sponsor[265] - Potential adverse consequences include negative publicity, diversion of management resources, and potential conflicts of interest that could harm the company's business and financial condition[265][266] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports that there were no repurchases of its equity securities during the nine months ended September 30, 2019, under its authorized Share Repurchase Program - No shares of the company's common stock were repurchased during the nine months ended September 30, 2019[267]