Quarterly Report (10-q)

Date : 04/30/2019 @ 9:29PM
Source : Edgar (US Regulatory)
Stock : NexPoint Residential Trust Inc (NXRT)
Quote : 48.12  -0.27 (-0.56%) @ 9:02PM
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Quarterly Report (10-q)

 

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 March 31, 2019

OR

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 April 30, 2019, the registrant had 23,643,277 shares of its common stock, par value $0.01 per share, outstanding.

 

 

 


 

NEXPOINT RESIDENTIAL TRUST, INC.

Form 10-Q

Quarter Ended March 31, 2019

INDEX

 

 

 

Page

Cautionary Statement Regarding Forward-Looking Statements

 

ii

 

 

 

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

Item 1.

 

Financial Statements

 

1

 

 

Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018

 

1

 

 

Consolidated Unaudited Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018

 

2

 

 

Consolidated Unaudited Statement of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018

 

3

 

 

Consolidated Unaudited Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

 

4

 

 

Notes to Consolidated Unaudited Financial Statements

 

6

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

28

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

44

Item 4.

 

Controls and Procedures

 

45

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

 

Legal Proceedings

 

46

Item 1A.

 

Risk Factors

 

46

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

46

Item 3.

 

Defaults Upon Senior Securities

 

46

Item 4.

 

Mine Safety Disclosures

 

46

Item 5.

 

Other Information

 

46

Item 6.

 

Exhibits

 

47

Signatures

 

 

 

48

 

i


 

Cautionary Statement Regardin g 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;

 

increased risks associated with our strategy of acquiring value-enhancement multifamily properties rather 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 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;

 

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 of 1990 (the “ADA”) and the Fair Housing Act (the “FHA”);

 

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;

ii


 

 

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 relative 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;

 

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 19, 2019 (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.

 

iii


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Operating Real Estate Investments

 

 

 

 

 

 

 

 

Land

 

$

231,170

 

 

$

202,347

 

Buildings and improvements

 

 

1,038,797

 

 

 

935,604

 

Intangible lease assets

 

 

2,438

 

 

 

3,049

 

Construction in progress

 

 

1,594

 

 

 

1,881

 

Furniture, fixtures, and equipment

 

 

66,661

 

 

 

61,456

 

Total Gross Operating Real Estate Investments

 

 

1,340,660

 

 

 

1,204,337

 

Accumulated depreciation and amortization

 

 

(146,473

)

 

 

(134,124

)

Total Net Operating Real Estate Investments

 

 

1,194,187

 

 

 

1,070,213

 

Real estate held for sale, net of accumulated depreciation of $897 and $897, respectively

 

 

17,347

 

 

 

17,329

 

Total Net Real Estate Investments

 

 

1,211,534

 

 

 

1,087,542

 

Cash and cash equivalents

 

 

20,536

 

 

 

19,864

 

Restricted cash

 

 

17,747

 

 

 

23,265

 

Accounts receivable

 

 

3,418

 

 

 

3,340

 

Prepaid and other assets

 

 

3,807

 

 

 

9,058

 

Fair market value of interest rate swaps

 

 

12,467

 

 

 

18,141

 

TOTAL ASSETS

 

$

1,269,509

 

 

$

1,161,210

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Mortgages payable, net

 

$

903,143

 

 

$

824,702

 

Mortgages payable held for sale, net

 

 

13,269

 

 

 

13,318

 

Credit facility, net

 

 

51,910

 

 

 

 

Accounts payable and other accrued liabilities

 

 

5,795

 

 

 

5,765

 

Accrued real estate taxes payable

 

 

5,480

 

 

 

12,607

 

Accrued interest payable

 

 

3,210

 

 

 

2,852

 

Security deposit liability

 

 

1,955

 

 

 

1,889

 

Prepaid rents

 

 

1,616

 

 

 

1,482

 

Total Liabilities

 

 

986,378

 

 

 

862,615

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests in the Operating Partnership

 

 

2,808

 

 

 

2,567

 

 

 

 

 

 

 

 

 

 

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; 23,643,277 and 23,499,635 shares issued and outstanding, respectively

 

 

235

 

 

 

234

 

Additional paid-in capital

 

 

286,580

 

 

 

285,511

 

Accumulated earnings less dividends

 

 

(17,891

)

 

 

(6,764

)

Accumulated other comprehensive income

 

 

11,399

 

 

 

17,047

 

Total Stockholders' Equity

 

 

280,323

 

 

 

296,028

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

1,269,509

 

 

$

1,161,210

 

 

See Notes to Consolidated Financial Statements

 

1


 

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 March 31,

 

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

Rental income

 

$

36,322

 

 

$

30,573

 

Other income

 

 

5,169

 

 

 

4,484

 

Total revenues

 

 

41,491

 

 

 

35,057

 

Expenses

 

 

 

 

 

 

 

 

Property operating expenses

 

 

9,639

 

 

 

8,877

 

Real estate taxes and insurance

 

 

5,758

 

 

 

4,856

 

Property management fees (1)

 

 

1,240

 

 

 

1,054

 

Advisory and administrative fees (2)

 

 

1,850

 

 

 

1,838

 

Corporate general and administrative expenses

 

 

2,233

 

 

 

1,813

 

Property general and administrative expenses

 

 

1,658

 

 

 

1,547

 

Depreciation and amortization

 

 

15,398

 

 

 

11,372

 

Total expenses

 

 

37,776

 

 

 

31,357

 

Operating income before gain on sales of real estate

 

 

3,715

 

 

 

3,700

 

Gain on sales of real estate

 

 

 

 

 

13,742

 

Operating income

 

 

3,715

 

 

 

17,442

 

Interest expense

 

 

(8,088

)

 

 

(6,797

)

Loss on extinguishment of debt and modification costs

 

 

 

 

 

(551

)

Net income (loss)

 

 

(4,373

)

 

 

10,094

 

Net income (loss) attributable to redeemable noncontrolling interests in the Operating Partnership

 

 

(13

)

 

 

30

 

Net income (loss) attributable to common stockholders

 

$

(4,360

)

 

$

10,064

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

Unrealized gains (losses) on interest rate derivatives

 

 

(5,665

)

 

 

7,761

 

Total comprehensive income (loss)

 

 

(10,038

)

 

 

17,855

 

Comprehensive income (loss) attributable to redeemable noncontrolling interests in the Operating Partnership

 

 

(30

)

 

 

53

 

Comprehensive income (loss) attributable to common stockholders

 

$

(10,008

)

 

$

17,802

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

23,550

 

 

 

20,987

 

Weighted average common shares outstanding - diluted

 

 

24,044

 

 

 

21,430

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share - basic

 

$

(0.19

)

 

$

0.48

 

Earnings (loss) per share - diluted

 

$

(0.19

)

 

$

0.47

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.275

 

 

$

0.250

 

 

(1)

Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the Company’s operating partnership, NexPoint Residential Trust Operating Partnership, L.P. (see Note 10).

(2)

Fees incurred to the Adviser (see Note 11).

 

See Notes to Consolidated Financial Statements

 

 

2


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(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 (Loss)

 

 

Treasury

at Cost

 

 

Total

 

Balances, December 31, 2018

 

 

 

 

$

 

 

 

23,499,635

 

 

$

234

 

 

$

285,511

 

 

$

(6,764

)

 

$

17,047

 

 

$

 

 

$

296,028

 

Net loss attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,360

)

 

 

 

 

 

 

 

 

(4,360

)

Vesting of stock-based compensation

 

 

 

 

 

 

 

 

 

 

143,642

 

 

 

1

 

 

 

1,069

 

 

 

 

 

 

 

 

 

 

 

 

1,070

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,641

)

 

 

 

 

 

 

 

 

(6,641

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,648

)

 

 

 

 

 

(5,648

)

Adjustment to reflect redemption value of redeemable noncontrolling interests in the Operating Partnership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(126

)

 

 

 

 

 

 

 

 

(126

)

Balances, March 31, 2019

 

 

 

 

$

 

 

 

23,643,277

 

 

$

235

 

 

$

286,580

 

 

$

(17,891

)

 

$

11,399

 

 

$

 

 

$

280,323

 

 

 

 

 

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

 

 

$

19,288

 

 

$

13,719

 

 

 

 

 

 

$

239,444

 

Cumulative effect upon adoption of ASU

   2017-12 (see Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,403

)

 

 

1,403

 

 

 

 

 

 

 

 

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

)

 

 

(5,056

)

 

 

 

 

 

 

 

 

5,058

 

 

 

 

Vesting of stock-based compensation

 

 

 

 

 

 

 

 

 

 

80,743

 

 

 

1

 

 

 

914

 

 

 

 

 

 

 

 

 

 

 

 

915

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,380

)

 

 

 

 

 

 

 

 

(5,380

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,738

 

 

 

 

 

 

7,738

 

Balances, March 31, 2018

 

 

 

 

$

 

 

 

20,926,355

 

 

$

209

 

 

$

202,085

 

 

$

22,569

 

 

$

22,860

 

 

$

 

 

$

247,723

 

 

See Notes to Consolidated Financial Statements

 

 

3


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(4,373

)

 

$

10,094

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Gain on sales of real estate

 

 

 

 

 

(13,742

)

Depreciation and amortization

 

 

15,398

 

 

 

11,372

 

Amortization/write-off of deferred financing costs

 

 

432

 

 

 

768

 

Change in fair value on derivative instruments included in interest expense

 

 

(1,854

)

 

 

(349

)

Net cash received on derivative settlements

 

 

1,810

 

 

 

331

 

Amortization/write-off of fair market value adjustment of assumed debt

 

 

(24

)

 

 

(51

)

Vesting of stock-based compensation

 

 

1,070

 

 

 

915

 

Changes in operating assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

 

 

 

Operating assets

 

 

5,333

 

 

 

(1,036

)

Operating liabilities

 

 

(6,416

)

 

 

(5,171

)

Net cash provided by operating activities

 

 

11,376

 

 

 

3,131

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Net proceeds from sales of real estate

 

 

 

 

 

29,553

 

Additions to real estate investments

 

 

(6,897

)

 

 

(6,830

)

Acquisitions of real estate investments

 

 

(132,482

)

 

 

 

Net cash provided by (used in) investing activities

 

 

(139,379

)

 

 

22,723

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Mortgage proceeds received

 

 

78,987

 

 

 

 

Mortgage payments

 

 

(238

)

 

 

(17,929

)

Credit facilities proceeds received

 

 

52,500

 

 

 

 

Bridge facility payments

 

 

 

 

 

(8,597

)

Deferred financing costs paid

 

 

(1,355

)

 

 

 

Interest rate cap fees paid

 

 

(20

)

 

 

 

Repurchase of common stock

 

 

 

 

 

(5,058

)

Dividends paid to common stockholders

 

 

(6,717

)

 

 

(5,325

)

Net cash provided by (used in) financing activities

 

 

123,157

 

 

 

(36,909

)

 

 

 

 

 

 

 

 

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(4,846

)

 

 

(11,055

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

43,129

 

 

 

43,248

 

Cash, cash equivalents and restricted cash, end of period

 

$

38,283

 

 

$

32,193

 

 

See Notes to Consolidated Financial Statements

4


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

9,176

 

 

$

6,683

 

Prepayment penalties

 

 

 

 

 

172

 

Supplemental Disclosure of Noncash Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capitalized construction costs included in accounts payable and other accrued liabilities

 

 

1,542

 

 

 

1,150

 

Change in fair value on derivative instruments designated as hedges

 

 

(5,665

)

 

 

7,761

 

Other assets acquired from acquisitions

 

 

87

 

 

 

 

Liabilities assumed from acquisitions

 

 

271

 

 

 

 

Increase in dividends payable on restricted stock units

 

 

(76

)

 

 

55

 

 

See Notes to Consolidated Financial Statements

 

 

5


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Description of Business

NexPoint Residential Trust, Inc. (the “Company”, “we”, “our”) was incorporated in Maryland on September 19, 2014, and has elected to be taxed as a real estate investment trust (“REIT”). The Company is focused on “value-add” multifamily investments primarily located in the Southeastern and Southwestern United States. Substantially all of the Company’s business is conducted through NexPoint Residential Trust Operating Partnership, L.P. (the “OP”), the Company’s operating partnership. The Company owns its properties (the “Portfolio”) through the OP and its wholly owned taxable REIT subsidiary (“TRS”). The OP owns approximately 99.9% of the Portfolio; the TRS owns approximately 0.1% of the Portfolio. The Company’s wholly owned subsidiary, NexPoint Residential Trust Operating Partnership GP, LLC (the “OP GP”), is the sole general partner of the OP. As of March 31, 2019, there were 23,819,402 common units in the OP (“OP Units”) outstanding, of which 23,746,169, or 99.7%, were owned by the Company and 73,233, or 0.3%, were owned by a noncontrolling limited partner (see Note 10).

The Company is externally managed by NexPoint Real Estate Advisors, L.P. (the “Adviser”), through an agreement dated March 16, 2015, as amended, and renewed on February 13, 2019 for a one-year term set to expire on March 16, 2020 (the “Advisory Agreement”), by and among the Company, the OP and the Adviser. The Adviser conducts substantially all of the Company’s operations and provides asset management services for its real estate investments. The Company expects it will only have accounting employees while the Advisory Agreement is in effect. All of the Company’s investment decisions are made by the Adviser, subject to general oversight by the Adviser’s investment committee and the Company’s board of directors (the “Board”). The Adviser is wholly owned by NexPoint Advisors, L.P., which is an affiliate of Highland Capital Management, L.P. (the “Sponsor” or “Highland”). 

The Company’s investment objectives are to maximize the cash flow and value of properties owned, acquire properties with cash flow growth potential, provide quarterly cash distributions and achieve long-term capital appreciation for its stockholders through targeted management and a value-add program. Consistent with the Company’s policy to acquire assets for both income and capital gain, the Company intends to hold at least majority interests in its properties for long-term appreciation and to engage in the business of directly or indirectly acquiring, owning, and operating well-located multifamily properties with a value-add component in large cities and suburban submarkets of large cities primarily in the Southeastern and Southwestern United States consistent with its investment objectives. Economic and market conditions may influence the Company to hold properties for different periods of time. From time to time, the Company may sell a property if, among other deciding factors, the sale would be in the best interest of its stockholders.

2. Summary of Significant Accounting Policies

Basis of Accounting

The accompanying unaudited consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation. There have been no significant changes to the Company’s significant accounting policies during the three months ended March 31, 2019.

The accompanying unaudited consolidated financial statements have been prepared according to the rules and regulations of the SEC.  Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.

In the opinion of management, all adjustments and eliminations necessary for the fair presentation of the Company’s financial position as of March 31, 2019 and results of operations for the three months ended March 31, 2019 and 2018 have been included.  Such adjustments are normal and recurring in nature.  The unaudited information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2018 and notes thereto included in its annual report on Form 10-K filed with the SEC on February 19, 2019.

6


 

Principles of Consolidation

The Company accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation . The Company first evaluates whether each entity is a variable interest entity (“VIE”). Under the VIE model, the Company consolidates an entity when it has control to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest. The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries, including the OP and its subsidiaries.

Revenue Recognition

The Company’s primary operations consist of rental income earned from its residents under lease agreements typically with terms of one year or less. Rental income is recognized when earned. This policy effectively results in income recognition on the straight-line method over the related terms of the leases. Resident reimbursements and other income consist of charges billed to residents for utilities, carport and garage rental, and pets, administrative, application and other fees and are recognized when earned.  The Company implemented the provisions of ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) as of January 1, 2019 using the modified retrospective approach.  The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements as a substantial portion of its revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU 2014-09. 

Purchase Price Allocation

Upon acquisition of a property, the purchase price and related acquisition costs (“total consideration”) are allocated to land, buildings, improvements, furniture, fixtures, and equipment, and intangible lease assets in accordance with FASB ASC 805, Business Combinations. Acquisition costs are capitalized in accordance with FASB ASC 805.

The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (“ASC 820”) (see Note 7), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. The allocation of the total consideration to intangible lease assets represents the value associated with the in-place leases, which may include lost rent, leasing commissions, legal and other related costs, which the Company, as buyer of the property, did not have to incur to obtain the residents. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.

Real estate assets, including land, buildings, improvements, furniture, fixtures and equipment, and intangible lease assets are stated at historical cost less accumulated depreciation and amortization. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. Expenditures for improvements, renovations, and replacements are capitalized at cost. Real estate-related depreciation and amortization are computed on a straight-line basis over the estimated useful lives as described in the following table:

 

Land

 

Not depreciated

Buildings

 

30 years

Improvements

 

15 years

Furniture, fixtures, and equipment

 

3 years

Intangible lease assets

 

6 months

 

Construction in progress includes the cost of renovation projects being performed at the various properties. Once a project is complete, the historical cost of the renovation is placed into service in one of the categories above depending on the type of renovation project and is depreciated over the estimated useful lives as described in the table above.

Impairment

Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such cases, the Company will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value.

7


 

The Company periodically classifies real estate assets as held for sale when certain cri teria are met, in accordance with GAAP. At that time, the Company presents the net real estate assets and the net debt associated with the real estate held for sale separately in its consolidated balance sheet, and the Company ceases recording depreciation and amortization expense related to that property. Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell.

Income Taxes

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and expects to continue to qualify as a REIT. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute annually at least 90% of its “REIT taxable income,” as defined by the Code, to its stockholders. As a REIT, the Company will be subject to federal income tax on its undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions it pays with respect to any calendar year are less than the sum of (1) 85% of its ordinary income, (2) 95% of its capital gain net income and (3) 100% of its undistributed income from prior years. The Company intends to operate in such a manner so as to qualify as a REIT, but no assurance can be given that the Company will operate in a manner so as to qualify as a REIT. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. The Company had no significant taxes associated with its TRS for the three months ended March 31, 2019 and 2018.

If the Company fails to meet these requirements, it could be subject to federal income tax on all of the Company’s taxable income at regular corporate rates for that year. The Company would not be able to deduct distributions paid to stockholders in any year in which it fails to qualify as a REIT. Additionally, the Company will also be disqualified from electing to be taxed as a REIT for the four taxable years following the year during which qualification was lost unless the Company is entitled to relief under specific statutory provisions. As of March 31, 2019, the Company believes it is in compliance with all applicable REIT requirements.

The Company evaluates the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” (greater than 50 percent probability) of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. The Company’s management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. The Company has no examinations in progress and none are expected at this time.

The Company recognizes its tax positions and evaluates them using a two-step process. First, the Company determines whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, the Company will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.

The Company had no material unrecognized tax benefit or expense, accrued interest or penalties as of March 31, 2019. The Company and its subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2018, 2017 and 2016 tax years remain open to examination by tax jurisdictions to which the Company and its subsidiaries are subject. When applicable, the Company recognizes interest and/or penalties related to uncertain tax positions on its consolidated statements of operations and comprehensive income (loss).

Accounting Pronouncements Adopted in the Current Year

In May 2014, the FASB issued ASU 2014-09, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date , which amends ASU 2014-09 to defer the effective date by one year. The new standard is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Entities are allowed to use either the full or modified retrospective approach when transitioning to the ASU. The Company implemented the provisions of ASU 2014-09 as of January 1, 2019 using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements as a substantial portion of its revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU 2014-09.   

8


 

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”) , which changes certain recognition, measurement, presentation, and disclosure requirements for financial instruments. The ASU requires all equity investments, except those accounted for under the equity met hod of accounting or resulting in consolidation, to be measured at fair value with changes in fair value recognized in net income. The ASU also simplifies the impairment assessment for equity investments without readily determinable fair values, amends the presentation requirements for changes in the fair value of financial liabilities, requires presentation of financial instruments by measurement category and form of financial asset, and eliminates the requirement to disclose the methods and significant as sumptions used in estimating the fair value of financial instruments. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. The Company implemented the provisions of ASU 2016-01 as of January 1, 2019, and it did not have a material impact on the Company’s consolidated financial statements as the Company does not, nor does it expect to, have a material amount of financial assets or financial liabilities that would be subject to the provisions of ASU 2016-01.

Recent Accounting Pronouncements

Section 107 of the Jumpstart Our Business Startups Act (“JOBS Act”) provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for complying with new or revised accounting standards applicable to public companies. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take advantage of this extended transition period. The emerging growth company transition period ends December 31, 2020, or if the Company’s public float exceeds $700 million at June 30, 2019, the transition period ends at December 31, 2019.  At the point the transition period ends, the Company will follow the adoption criteria for public companies. As a result of this election, the Company’s financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. The Company may elect to comply with public company effective dates at any time, and such election would be irrevocable pursuant to Section 107(b) of the JOBS Act. The following recent accounting pronouncements reflect effective dates that delay the adoption until those standards would otherwise apply to private companies.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) (“ASU 2017-12”), which clarifies hedge accounting requirements, improves disclosure of hedging arrangements, and better aligns risk management activities and financial reporting for hedging relationships. The Company early adopted ASU 2017-12 on January 1, 2018, on a modified retrospective basis. For cash flow hedges existing as of the date of adoption, the Company eliminated the separate measurement of ineffectiveness by means of a cumulative-effect adjustment to accumulated other comprehensive income (“OCI”) with a corresponding adjustment to the opening balance of accumulated earnings less dividends on January 1, 2018. The cumulative-effect adjustment, which eliminated the cumulative ineffectiveness that was previously reported in interest expense, resulted in an increase to OCI of approximately $1.4 million, with a corresponding decrease to accumulated earnings less dividends.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which supersedes the current accounting for leases and while retaining two distinct types of leases, finance and operating, (1) requires lessees to record a right of use asset and a related liability for the rights and obligations associated with a lease, regardless of lease classification, and recognize lease expense in a manner similar to current accounting, (2) eliminates most real estate specific lease provisions and (3) aligns many of the underlying lessor model principles with those in the new revenue standard. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Entities are required to use a modified retrospective approach when transitioning to the ASU for leases that exist as of or are entered into after the beginning of the earliest comparative period presented in the financial statements. The Company expects to implement the provisions of ASU 2016-02 as of January 1, 2020. As lessors, substantially all of the Company’s agreements have a term of 12 months or less. For lessors, accounting for leases under the new standard will be substantially the same as existing guidance for sales-type leases, direct financing leases, and operating leases, but eliminates current real estate specific provisions and changes the treatment of initial direct costs. The Company is continuing its evaluation, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.

In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements (“ASU 2018-11”), which provides entities with relief from the costs of implementing certain aspects of ASU 2016-02. The ASU provides a practical expedient which allows lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Company intends to elect the practical expedient to account for lease and non-lease components as a single component in lease contracts where the Company is the lessor. The ASU also provides a transition option that permits entities to not recast the comparative periods presented when transitioning to the standard. The Company also intends to elect the transition option.

9


 

In August 2018, the SEC adopted SEC Release No. 33-10532, Disclosure Update and Simplification (the “SEC Release”), which amends certain disclosure requirements that were redundant, duplicative, overlapping or superseded by other SEC disclosure requirement s or GAAP. The amendments generally eliminated or otherwise reduced certain disclosure requirements of various SEC rules and regulations. However, in some cases, the amendments require additional information to be disclosed, including changes in stockholde rs’ equity in interim periods. Under the SEC Release, registrants will be required to disclose in interim periods on Form 10-Q the changes in each caption of stockholders’ equity and noncontrolling interests for the current and comparative year-to-date per iods, with subtotals for each interim period and the amount of dividends per share for each class of shares. The amendments require registrants, including smaller reporting companies, to provide information as prescribed by Rule 3-04 of Regulation S-X. The refore, the interim disclosures of changes in stockholders’ equity, including dividends per share amounts, may be given in a note to the financial statements or in a separate financial statement. Under Rule 3-04, the interim disclosures of the changes in s tockholders’ equity should be in the form of a reconciliation of the beginning balance to the ending balance for each period for which an income statement is required to be filed, with all significant reconciling items described by appropriate captions. Th e reconciliation should also reflect any adjustments to the balance at the beginning of the earliest period presented for items retroactively applied to periods prior to that period. The Company adopted the provisions of the SEC Release on September 30, 20 18, on a retrospective basis.

3. Investments in Subsidiaries

The Company conducts its operations through the OP, which owns the properties through single asset limited liability companies that are special purpose entities (“SPEs”). The Company consolidates the SPEs that it controls as well as any VIEs where it is the primary beneficiary. In connection with its indirect equity investments in the properties acquired, the Company, through the OP and the TRS, directly or indirectly holds 100% of the membership interests in SPEs that directly own the properties. All of the properties the Company has acquired are consolidated in the Company’s consolidated financial statements. The assets of each entity can only be used to settle obligations of that particular entity, and the creditors of each entity have no recourse to the assets of other entities or the Company.

Additionally, the Company has in the past and may in the future enter into purchase and sale transactions structured as reverse like-kind exchanges (“1031 Exchanges”) under Section 1031 of the Code. For a reverse 1031 Exchange in which the Company purchases a new property prior to selling the property to be matched in the like-kind exchange (the Company refers to the new property being acquired in the 1031 Exchange prior to the sale of the related property as a “Parked Asset”), legal title to the Parked Asset is held by an Exchange Accommodation Titleholder (“EAT”) engaged to execute the 1031 Exchange until the sale transaction and the 1031 Exchange are completed. The Company, through a wholly owned subsidiary, enters into a master lease agreement with the EAT whereby the EAT leases the acquired property and all other rights acquired in connection with the acquisition to the Company. The term of the master lease agreement is the earlier of the completion of the reverse 1031 Exchange or 180 days from the date that the property was acquired. The EAT is classified as a VIE as it does not have sufficient equity investment at risk to finance its activities without additional subordinated financial support. The Company consolidates the EAT as its primary beneficiary because it has the ability to control the activities that most significantly impact the EAT’s economic performance and the Company retains all of the legal and economic benefits and obligations related to the Parked Assets prior to completion of the 1031 Exchange. As such, the Parked Assets are included in the Company’s consolidated financial statements as VIEs until legal title is transferred to the Company upon either completion of the 1031 Exchange or termination of the master lease agreement, at which time they will be consolidated as wholly owned subsidiaries.

10


 

As of March 31, 2019 , the Company, through the OP and the wholly owned TRS, owned 38 properti es through single-asset LLCs. The following table represents the Company’s ownership in each property by virtue of its 100% ownership of the single-asset LLCs that directly own the title to each property as of March 31, 2019 and December 31, 201 8 :

 

 

 

 

 

 

 

Effective Ownership Percentage at

 

 

Property Name

 

Location

 

Year   Acquired

 

March 31, 2019

 

 

December 31, 2018

 

 

Arbors on Forest Ridge

 

Bedford, Texas

 

2014

 

 

100

%

 

 

100

%

 

Cutter's Point

 

Richardson, Texas

 

2014

 

 

100

%

 

 

100

%

 

Eagle Crest

 

Irving, Texas

 

2014

 

 

100

%

 

 

100

%

 

Silverbrook

 

Grand Prairie, Texas

 

2014

 

 

100

%

 

 

100

%

 

Edgewater at Sandy Springs

 

Atlanta, Georgia

 

2014

 

 

100

%

 

 

100

%

 

Beechwood Terrace

 

Antioch, Tennessee

 

2014

 

 

100

%

 

 

100

%

 

Willow Grove

 

Nashville, Tennessee

 

2014

 

 

100

%

 

 

100

%

 

Woodbridge

 

Nashville, Tennessee

 

2014

 

 

100

%

 

 

100

%

 

Abbington Heights

 

Antioch, Tennessee

 

2014

 

 

100

%

 

 

100

%

 

The Summit at Sabal Park

 

Tampa, Florida

 

2014

 

 

100

%

 

 

100

%

 

Courtney Cove

 

Tampa, Florida

 

2014

 

 

100

%

 

 

100

%

 

Radbourne Lake

 

Charlotte, North Carolina

 

2014

 

 

100

%

 

 

100

%

 

Timber Creek

 

Charlotte, North Carolina

 

2014

 

 

100

%

 

 

100

%

 

Belmont at Duck Creek

 

Garland, Texas

 

2014

 

 

100

%

 

 

100

%

 

Sabal Palm at Lake Buena Vista

 

Orlando, Florida

 

2014

 

 

100