10-Q 1 nxrt-10q_20160630.htm FORM 10-Q nxrt-10q_20160630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended June 30, 2016

OR

o

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  x   No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes  x   No  o

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

 

Large Accelerated Filer

o

 

Accelerated Filer

o

Non-Accelerated Filer

x

      (Do not check if a smaller reporting company)

Smaller reporting company

o

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

As of August 8, 2016, the registrant had 21,266,770 shares of common stock, $0.01 par value, outstanding.

 

 

 

 


 

NEXPOINT RESIDENTIAL TRUST, INC.

Form 10-Q

Quarter Ended June 30, 2016

 

Page

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2016 (Unaudited) and December 31, 2015

1

 

 

 

 

Consolidated Unaudited Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended June 30, 2016 and 2015 and Combined Consolidated Unaudited Statements of Operations and Comprehensive Income (Loss) for the Six Months Ended June 30, 2016 and 2015

2

 

 

 

 

Consolidated Unaudited Statement of Equity for the Six Months Ended June 30, 2016

3

 

 

 

 

Consolidated Unaudited Statements of Cash Flows for the Six Months Ended June 30, 2016 and Combined Consolidated Unaudited Statements of Cash Flows for the Six Months Ended June 30, 2015

4

 

 

 

 

Notes to Combined 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

42

 

 

 

Item 4.

Controls and Procedures

43

 

 

 

PART II—OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

44

 

 

 

Item 1A.

Risk Factors

44

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

 

 

 

Item 3.

Defaults Upon Senior Securities

44

 

 

 

Item 4.

Mine Safety Disclosures

44

 

 

 

Item 5.

Other Information

44

 

 

 

Item 6.

Exhibits

45

 

 

 

Signatures

46

 

 

i


 

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, results of operations, strategy, plans or intentions 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 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.

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;

 

·

intense competition in the real estate market that, combined with low residential mortgage rates that could encourage potential renters to purchase residences rather than lease them, may limit our ability to acquire or lease and re-lease property or increase or maintain rent;

 

·

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

 

·

failure of acquisitions and development projects to yield anticipated results;

 

·

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

 

·

the lack of experience of NexPoint Real Estate Advisors, L.P. (our “Adviser”) in operating under the constraints imposed by REIT requirements;

 

·

loss of key personnel;

 

·

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 Highland Capital Management, L.P. (our “Sponsor” or “Highland”) or its affiliates;

 

·

risks associated with our Adviser’s ability to terminate the Advisory Agreement;

 

·

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

 

·

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

 

·

risks associated with the potential internalization of our management functions;

 

·

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

 

·

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

 

·

our dependence on information systems;

 

·

lack of or insufficient amounts of insurance;

 

·

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

 

·

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

ii


 

 

·

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 compliance with various accessibility, environmental, building and health and safety laws and regulations, such as the ADA and FHA;

 

·

risks associated with our high concentrations of investments in the Southeastern and Southwestern United States;

 

·

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;

 

·

potential reforms to Fannie Mae and Freddie Mac;

 

·

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;

 

·

risks associated with breaches of our data security;

 

·

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 risk that we may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off;

 

·

failure to qualify as or to maintain our status as a REIT;

 

·

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;

 

·

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

 

·

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 the Board of Directors to revoke our REIT qualification without stockholder approval;

 

·

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; or

 

·

any of the other risks included under Part I, Item 1A, “Risk Factors” of our annual report on Form 10-K, filed with the Securities and Exchange Commission on March 21, 2016.

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


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

 

 

June 30, 2016

 

 

December 31, 2015

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Operating Real Estate Investments

 

 

 

 

 

 

 

 

Land (including from VIEs of $94,962 and $163,462, respectively)

 

$

152,132

 

 

$

177,152

 

Buildings and improvements (including from VIEs of $363,453 and $642,936, respectively)

 

 

630,943

 

 

 

729,675

 

Intangible lease assets

 

 

 

 

 

2,573

 

Construction in progress (including from VIEs of $1,678 and $5,070, respectively)

 

 

2,562

 

 

 

5,346

 

Furniture, fixtures, and equipment (including from VIEs of $16,649 and $25,715, respectively)

 

 

29,867

 

 

 

28,009

 

Total Gross Operating Real Estate Investments

 

 

815,504

 

 

 

942,755

 

Accumulated depreciation and amortization (including from VIEs of $24,788 and $36,112, respectively)

 

 

(46,788

)

 

 

(39,873

)

Total Net Operating Real Estate Investments

 

 

768,716

 

 

 

902,882

 

Real estate held for sale (net of accumulated depreciation of $7,016 and $0, respectively) (including from VIEs of $81,090 and $0, respectively)

 

 

81,090

 

 

 

 

Total Net Real Estate Investments

 

 

849,806

 

 

 

902,882

 

Cash and cash equivalents (including from VIEs of $14,270 and $13,271, respectively)

 

 

28,550

 

 

 

16,226

 

Restricted cash (including from VIEs of $27,279 and $43,500, respectively)

 

 

34,200

 

 

 

46,869

 

Accounts receivable (including from VIEs of $878 and $1,517, respectively)

 

 

1,783

 

 

 

2,122

 

Prepaid and other assets (including from VIEs of $1,510 and $1,724, respectively)

 

 

3,093

 

 

 

1,961

 

TOTAL ASSETS

 

$

917,432

 

 

$

970,060

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Mortgages payable, net (including from VIEs of $161,239 and $609,703, respectively)

 

$

388,337

 

 

$

676,324

 

Mortgages payable held for sale, net (including from VIEs of $65,726 and $0, respectively)

 

 

65,726

 

 

 

 

Credit facility, net

 

 

196,290

 

 

 

 

Bridge facility, net

 

 

1,972

 

 

 

28,805

 

Accounts payable and other accrued liabilities (including from VIEs of $1,525 and $4,049, respectively)

 

 

3,789

 

 

 

5,106

 

Accrued real estate taxes payable (including from VIEs of $3,572 and $5,723, respectively)

 

 

5,988

 

 

 

6,057

 

Accrued interest payable (including from VIEs of $895 and $1,332, respectively)

 

 

1,031

 

 

 

1,462

 

Security deposit liability (including from VIEs of $780 and $1,277, respectively)

 

 

1,324

 

 

 

1,544

 

Prepaid rents (including from VIEs of $832 and $1,633, respectively)

 

 

1,231

 

 

 

1,824

 

Total Liabilities

 

 

665,688

 

 

 

721,122

 

NexPoint Residential Trust, Inc. 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; 21,293,825 shares issued

 

 

213

 

 

 

213

 

Additional paid-in capital

 

 

240,625

 

 

 

240,625

 

Accumulated deficit

 

 

(12,791

)

 

 

(18,593

)

Accumulated other comprehensive loss

 

 

(737

)

 

 

(697

)

Common stock held in treasury at cost; 5,000 and 0 shares, respectively

 

 

(88

)

 

 

 

Noncontrolling interests

 

 

24,522

 

 

 

27,390

 

Total Equity

 

 

251,744

 

 

 

248,938

 

TOTAL LIABILITIES AND EQUITY

 

$

917,432

 

 

$

970,060

 

 

See Notes to Combined Consolidated Financial Statements

 

 

1


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

29,404

 

 

$

25,528

 

 

$

58,774

 

 

$

48,219

 

Other income

 

 

4,253

 

 

 

3,219

 

 

 

8,394

 

 

 

6,066

 

Total revenues

 

 

33,657

 

 

 

28,747

 

 

 

67,168

 

 

 

54,285

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

9,691

 

 

 

8,293

 

 

 

19,073

 

 

 

15,612

 

Acquisition costs

 

 

 

 

 

238

 

 

 

 

 

 

2,169

 

Real estate taxes and insurance

 

 

4,090

 

 

 

3,577

 

 

 

8,353

 

 

 

6,955

 

Property management fees (related party)

 

 

1,013

 

 

 

858

 

 

 

2,018

 

 

 

1,617

 

Advisory and administrative fees (related party)

 

 

1,630

 

 

 

1,439

 

 

 

3,246

 

 

 

2,715

 

Corporate general and administrative expenses

 

 

844

 

 

 

831

 

 

 

1,626

 

 

 

831

 

Property general and administrative expenses

 

 

1,612

 

 

 

1,488

 

 

 

2,946

 

 

 

2,635

 

Depreciation and amortization

 

 

8,084

 

 

 

10,050

 

 

 

17,696

 

 

 

21,660

 

Total expenses

 

 

26,964

 

 

 

26,774

 

 

 

54,958

 

 

 

54,194

 

Operating income

 

 

6,693

 

 

 

1,973

 

 

 

12,210

 

 

 

91

 

Interest expense

 

 

(6,467

)

 

 

(4,239

)

 

 

(11,693

)

 

 

(8,248

)

Gain on sales of real estate

 

 

16,370

 

 

 

 

 

 

16,370

 

 

 

 

Net income (loss)

 

 

16,596

 

 

 

(2,266

)

 

 

16,887

 

 

 

(8,157

)

Net income (loss) attributable to noncontrolling interests

 

 

2,006

 

 

 

(12

)

 

 

2,312

 

 

 

(506

)

Net income (loss) attributable to common stockholders

 

$

14,590

 

 

$

(2,254

)

 

$

14,575

 

 

$

(7,651

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net losses related to interest rate cap valuations

 

 

(12

)

 

 

(126

)

 

 

(44

)

 

 

(396

)

Total comprehensive income (loss)

 

 

16,584

 

 

 

(2,392

)

 

 

16,843

 

 

 

(8,553

)

Comprehensive income (loss) attributable to noncontrolling interests

 

 

2,005

 

 

 

(25

)

 

 

2,308

 

 

 

(543

)

Comprehensive income (loss) attributable to common stockholders

 

$

14,579

 

 

$

(2,367

)

 

$

14,535

 

 

$

(8,010

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

 

21,294

 

 

 

21,294

 

 

 

21,294

 

 

 

21,294

 

Dividends declared per common share

 

$

0.206

 

 

$

0.206

 

 

$

0.412

 

 

$

0.206

 

Earnings (loss) per share - basic and diluted (see Note 2)

 

$

0.69

 

 

$

(0.11

)

 

$

0.68

 

 

$

(0.36

)

 

See Notes to Combined Consolidated Financial Statements

 

 

 

2


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

(in thousands)

(Unaudited)

 

 

 

Preferred Stock

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Shares

 

 

Par Value

 

 

Number of Shares

 

 

Par Value

 

 

Additional

Paid-in

Capital

 

 

Accumulated Deficit

 

 

Accumulated Other Comprehensive Loss

 

 

Common Stock Held in Treasury at Cost

 

 

Noncontrolling Interests

 

 

Total

 

Balances, December 31, 2015

 

 

 

 

$

 

 

 

21,294

 

 

$

213

 

 

$

240,625

 

 

$

(18,593

)

 

$

(697

)

 

$

 

 

$

27,390

 

 

$

248,938

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(88

)

 

 

 

 

 

(88

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions / Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,773

)

 

 

 

 

 

 

 

 

(5,176

)

 

 

(13,949

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

   (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(40

)

 

 

 

 

 

(4

)

 

 

(44

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,575

 

 

 

 

 

 

 

 

 

2,312

 

 

 

16,887

 

Balances, June 30, 2016

 

 

 

 

$

 

 

 

21,294

 

 

$

213

 

 

$

240,625

 

 

$

(12,791

)

 

$

(737

)

 

$

(88

)

 

$

24,522

 

 

$

251,744

 

 

See Notes to Combined Consolidated Financial Statements

 

 

 

3


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

For the Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

16,887

 

 

$

(8,157

)

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

 

 

 

 

 

 

 

 

Gain on sales of real estate

 

 

(16,370

)

 

 

 

Depreciation and amortization

 

 

17,696

 

 

 

21,660

 

Amortization of deferred financing costs

 

 

983

 

 

 

540

 

Change in fair value on derivative instruments included in interest expense

 

 

6

 

 

 

166

 

Amortization of fair market value adjustment of assumed debt

 

 

(55

)

 

 

(55

)

Noncash contributions

 

 

 

 

 

1,277

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

339

 

 

 

(668

)

Prepaid and other assets

 

 

(1,182

)

 

 

(418

)

Restricted cash

 

 

3,950

 

 

 

(4,253

)

Accounts payable and other accrued liabilities

 

 

(1,830

)

 

 

(1,478

)

Net cash provided by operating activities

 

 

20,424

 

 

 

8,614

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Net proceeds from sales of real estate

 

 

63,220

 

 

 

 

Change in restricted cash

 

 

8,719

 

 

 

(5,558

)

Prepaid acquisition deposits

 

 

 

 

 

(2,088

)

Additions to operating real estate investments

 

 

(12,265

)

 

 

(17,230

)

Acquisitions of operating real estate investments

 

 

 

 

 

(164,578

)

Net cash provided by (used in) investing activities

 

 

59,674

 

 

 

(189,454

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Mortgage proceeds received

 

 

 

 

 

124,990

 

Mortgage payments

 

 

(224,199

)

 

 

(6,391

)

Credit facility proceeds received

 

 

200,000

 

 

 

 

Bridge facility payments

 

 

(27,000

)

 

 

 

Deferred financing fees paid

 

 

(2,538

)

 

 

(1,519

)

Interest rate cap fees paid

 

 

 

 

 

(253

)

Due to affiliates

 

 

 

 

 

454

 

Purchase of common stock held in treasury

 

 

(88

)

 

 

 

 

Distributions to noncontrolling interests

 

 

(5,176

)

 

 

(1,136

)

Dividends

 

 

(8,773

)

 

 

 

Contributions from noncontrolling interests

 

 

 

 

 

7,628

 

Contributions

 

 

 

 

 

68,561

 

Net cash provided by (used in) financing activities

 

 

(67,774

)

 

 

192,334

 

 

 

 

 

 

 

 

 

 

Net increase in cash

 

 

12,324

 

 

 

11,494

 

Cash, beginning of period

 

 

16,226

 

 

 

12,662

 

Cash, end of period

 

$

28,550

 

 

$

24,156

 

 

See Notes to Combined Consolidated Financial Statements

 

 

4


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

11,178

 

 

$

7,309

 

Supplemental Disclosure of Noncash Investing and Financing Activities

 

 

 

 

 

 

 

 

Capitalized construction costs included in accounts payable and other accrued liabilities

 

 

800

 

 

 

1,322

 

Change in fair value on hedging instruments designated as hedges

 

 

44

 

 

 

396

 

Dividend declared and payable

 

 

 

 

 

4,387

 

Liabilities assumed from acquisitions

 

 

 

 

 

1,104

 

Other assets acquired from acquisitions

 

 

 

 

 

298

 

Assumed debt on acquisitions of operating real estate investments

 

 

 

 

 

18,000

 

 

See Notes to Combined Consolidated Financial Statements

 

 

 

5


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. Organization and Description of Business

NexPoint Residential Trust, Inc. (the “Company”, “we”, “our”) was incorporated on September 19, 2014, and intends 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 holds all or a majority interest in its properties (the “Portfolio”) through the OP. The Company’s wholly owned subsidiary, NexPoint Residential Trust Operating Partnership GP, LLC (the “OP GP”) is the sole general partner of the OP. The sole limited partner of the OP is the Company.

The Company began operations on March 31, 2015 as a result of the transfer and contribution by NexPoint Credit Strategies Fund (“NHF”) of all but one of the multifamily properties owned by NHF through its subsidiary Freedom REIT, LLC (“Freedom REIT”). We use the term “predecessor” to mean the carve-out business of Freedom REIT. On March 31, 2015, NHF distributed all of the outstanding shares of the Company's common stock held by NHF to holders of NHF common shares. We refer to the distribution of our common stock by NHF as the “Spin-Off.”

We are externally managed by NexPoint Real Estate Advisors, L.P., (the “Adviser”), through an agreement, as amended, dated March 16, 2015 (the “Advisory Agreement”), by and among the Company, the OP and our Adviser. The Advisory Agreement has a term of two years. Our Adviser conducts substantially all of our operations and provides asset management for our real estate investments. We will only have accounting employees while the Advisory Agreement is in effect. All of our investment decisions are made by our Adviser, subject to general oversight by our Adviser’s investment committee and our Board of Directors (the “Board”). Our Adviser is wholly owned by NexPoint Advisors, L.P. and is an affiliate of Highland Capital Management, L.P. (our “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 capex value-add program. Consistent with the Company’s policy to acquire assets for both income and capital gain, the Company intends to hold majority interests in the 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.

The Company may also participate with third parties in property ownership, through limited liability companies (“LLCs”), funds or other types of co-ownership or acquire real estate or interests in real estate in exchange for the issuance of common stock, units, preferred stock or options to purchase stock. These types of investments may permit the Company to own interests in larger assets without unduly restricting diversification which provides flexibility in structuring the Company’s portfolio.

The Company may allocate up to thirty percent of the portfolio to investments in real estate-related debt and securities with the potential for high current income or total returns. These allocations may include first and second mortgages, subordinated, bridge, mezzanine, construction and other loans, as well as debt securities related to or secured by multifamily real estate and common and preferred equity securities, which may include securities of other REIT or real estate companies.

 

 

2. Summary of Significant Accounting Policies

Predecessor

With the exception of a nominal amount of initial cash funded at inception, the Company did not own any assets prior to March 31, 2015. The business and operations of the Company prior to March 31, 2015 occurred under the predecessor. Our predecessor included all of the properties in our Portfolio that were held directly or indirectly by Freedom REIT, a wholly owned subsidiary of NHF, prior to the Spin-Off that occurred on March 31, 2015. However, our combined consolidated statements of operations and comprehensive income (loss) and combined consolidated statements of cash flows reflect operations of our predecessor through March 31, 2015 as if they were incurred by us. Our predecessor was determined in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). References throughout these combined consolidated financial statements to the “Company”, “we”, or “our”, include the activity of the predecessor defined above.

6


 

Basis of Accounting

The accompanying unaudited combined consolidated financial statements of the Company are prepared in accordance with Generally Accepted Accounting Principles (“GAAP”). The consolidated balance sheets include the accounts of the Company and its subsidiaries. Our predecessor combined consolidated financial statements were derived from the historical accounting records of our predecessor and reflect the historical results of operations and cash flows for the period prior to the Spin-Off. All intercompany balances and transactions are eliminated in combination and consolidation. The financial statements of the Company’s subsidiaries are prepared using accounting polices consistent with those of the Company. In addition, the Company evaluates relationships with other entities to identify whether there are variable interest entities (“VIE’s”) as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the financial statements in accordance with FASB ASC 810. In the opinion of the Company’s management, the accompanying combined consolidated financial statements include all adjustments and eliminations, consisting only of normal recurring items necessary for their fair presentation in conformity with GAAP. The unaudited information included in this quarterly report on Form 10-Q should be read in conjunction with our audited financial statements for the year ended December 31, 2015 and notes thereto included in our annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 21, 2016. There have been no significant changes to the Company’s significant accounting policies during the six months ended June 30, 2016.

Use of Estimates

The preparation of the combined consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the combined consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. It is at least reasonably possible that these estimates could change in the near term.

Real Estate Investments

Upon acquisition, in accordance with FASB ASC 805, Business Combinations, the purchase price of a property is allocated to land, buildings, improvements, furniture, fixtures, and equipment, and intangible lease assets. The purchase price allocation is based on management’s estimate of the property’s “as-if” vacant fair value, which 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 purchase price 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 and the face value of debt is recorded as a premium or discount and amortized to interest expense over the life of the debt assumed. Costs associated with the acquisition of a property, including acquisition fees paid, are expensed upon closing the acquisition.

The results of operations for acquired properties are included in the combined consolidated statements of operations and comprehensive income (loss) from their respective acquisition dates.

 

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.

The Company periodically classifies real estate assets as held for sale. An asset is classified as held for sale after an active program to sell the asset has commenced or the asset is under contract for sale and after the evaluation of other factors. Upon the

7


 

classification of a real estate asset as held for sale, the carrying value of the asset is reduced to the lower of its net book value or its estimated fair value, less costs to sell the asset, and no further depreciation expense is recorded. Upon a decision to no longer market an asset for sale, the asset is classified as an operating asset and depreciation expense is reinstated. Real estate assets and the related debt held for sale are stated separately on the accompanying consolidated balance sheets.

Impairment

Real estate assets that are determined to be held and used will be reviewed periodically for impairment and 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. For the three and six month periods ended June 30, 2016 and 2015, the Company did not record any impairment charges related to real estate assets.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value.

Restricted Cash

Restricted cash is comprised of security deposits, operating escrows, and renovation value-add reserves. Security deposits are held until they are due to tenants and are credited against the balance. Operating escrows are required and held by our first mortgage lender(s) for items such as real estate taxes, insurance, and required repairs. Lender held escrows are released back to the joint venture upon the borrower’s proof of payment of such expenses. Renovation value-add reserves are funds identified to finance our value-add renovations at each of our properties and are not required to be held in escrow by a third party. The Company may reallocate these funds, at its discretion, to pursue other investment opportunities. The following is a summary of the restricted cash held as of June 30, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

June 30, 2016

 

 

December 31, 2015

 

Security deposits

 

$

963

 

 

$

1,034

 

Operating escrows

 

 

17,433

 

 

 

21,312

 

Renovation value-add reserves

 

 

15,804

 

 

 

24,523

 

 

 

$

34,200

 

 

$

46,869

 

 

Deferred Financing Costs

The Company defers costs incurred in obtaining financing and amortizes the costs over the terms of the related loans using the straight-line method, which approximates the effective interest method. Upon repayment of or in conjunction with a material change in the terms of the underlying debt agreement, any unamortized costs are charged to interest expense. Deferred financing costs, net of amortization, of $4.0 million and $6.0 million are recorded as a deduction from mortgages payable on the accompanying consolidated balance sheets as of June 30, 2016 and December 31, 2015, respectively. Deferred financing costs, net of amortization, of $3.7 million and $0.2 million are recorded as a deduction from the debt related to the Company’s credit facility and bridge facility on the accompanying consolidated balance sheets as of June 30, 2016 and December 31, 2015, respectively. Amortization of deferred financing costs of $0.7 million and $0.2 million is included in interest expense on the consolidated statements of operations and comprehensive income (loss) for the three months ended June 30, 2016 and 2015, respectively. For the three months ended June 30, 2016, the Company incurred amortization of deferred financing costs of approximately $0.3 million related to its sales of three properties (see Note 4). Amortization of deferred financing costs of $1.0 million and $0.6 million is included in interest expense on the combined consolidated statements of operations and comprehensive income (loss) for the six months ended June 30, 2016 and 2015, respectively.  

Noncontrolling Interests

Noncontrolling interests are comprised of the Company’s joint venture partners’ interests in the joint ventures in multifamily properties that the Company consolidates. The Company reports its joint venture partners’ interests in its consolidated real estate joint ventures and other subsidiary interests held by third parties as noncontrolling interests. The Company records these noncontrolling interests at their initial fair value, adjusting the basis prospectively for their share of the respective consolidated investment’s net

8


 

income or loss and equity contributions and distributions. These noncontrolling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are allocated to the noncontrolling interest holder based on its economic ownership percentage.

Accounting for Joint Ventures

The Company first analyzes its investments in joint ventures to determine if the joint venture is a VIE in accordance with FASB ASC 810, and if so, whether the Company is the primary beneficiary requiring consolidation. A VIE is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that potentially could be significant to the primary beneficiary. Variable interests in a VIE are contractual, ownership, or other financial interests that change with changes in the fair value of the VIE’s net assets. The Company assesses at each level of the joint venture whether the entity is (i) a VIE, and (ii) if the Company is the primary beneficiary of the VIE. If an entity in which the Company holds a joint venture interest qualifies as a VIE and the Company is determined to be the primary beneficiary, the joint venture is consolidated.

The following table represents the Company’s investments in VIEs as of June 30, 2016 and December 31, 2015:

 

Property Name

 

Location

 

Year Acquired

 

Effective Ownership Percentage at

June 30, 2016

 

 

Effective Ownership Percentage at

December 31, 2015

 

Meridian

 

Austin, Texas

 

2014

 

 

 

(2)

 

90

%

The Grove at Alban

(1)

Frederick, Maryland

 

2014

 

 

76

%

 

 

76

%

Willowdale Crossing

(1)

Frederick, Maryland

 

2014

 

 

80

%

 

 

80

%

Abbington Heights

 

Antioch, Tennessee

 

2014

 

 

90

%

 

 

90

%

The Summit at Sabal Park

 

Tampa, Florida

 

2014

 

 

90

%

 

 

90

%

Courtney Cove

 

Tampa, Florida

 

2014

 

 

90

%

 

 

90

%

Colonial Forest

(1)

Jacksonville, Florida

 

2014

 

 

90

%

 

 

90

%

Park at Blanding

(1)

Orange Park, Florida

 

2014

 

 

90

%

 

 

90

%

Park at Regency

 

Jacksonville, Florida

 

2014

 

 

 

(2)

 

90

%

Jade Park

(1)

Daytona Beach, Florida

 

2014

 

 

90

%

 

 

90

%

Mandarin Reserve

 

Jacksonville, Florida

 

2014

 

 

 

(2)

 

90

%

Radbourne Lake

 

Charlotte, North Carolina

 

2014

 

 

90

%

 

 

90

%

Timber Creek

 

Charlotte, North Carolina

 

2014

 

 

90

%

 

 

90

%

Belmont at Duck Creek

 

Garland, Texas

 

2014

 

 

90

%

 

 

90

%

The Arbors

 

Tucker, Georgia

 

2014

 

 

90

%

 

 

90

%

The Crossings

 

Marietta, Georgia

 

2014

 

 

90

%

 

 

90

%

The Crossings at Holcomb Bridge

 

Roswell, Georgia

 

2014

 

 

90

%

 

 

90

%

The Knolls

 

Marietta, Georgia

 

2014

 

 

90

%

 

 

90

%

Regatta Bay

 

Seabrook, Texas

 

2014

 

 

90

%

 

 

90

%

Sabal Palm at Lake Buena Vista

 

Orlando, Florida

 

2014

 

 

90

%

 

 

90

%

Southpoint Reserve at Stoney Creek

 

Fredericksburg, Virginia

 

2014

 

 

85

%

 

 

85

%

Cornerstone

 

Orlando, Florida

 

2015

 

 

90

%

 

 

90

%

McMillan Place

 

Dallas, Texas

 

2015

 

 

90

%

 

 

90

%

Barrington Mill

 

Marietta, Georgia

 

2015

 

 

90

%

 

 

90

%

Dana Point

 

Dallas, Texas

 

2015

 

 

90

%

 

 

90

%

Heatherstone

 

Dallas, Texas

 

2015

 

 

90

%

 

 

90

%

Versailles

 

Dallas, Texas

 

2015

 

 

90

%

 

 

90

%

Seasons 704 Apartments

 

West Palm Beach, Florida

 

2015

 

 

90

%

 

 

90

%

 

 

(1)

Properties are classified as held for sale as of June 30, 2016.

 

(2)

Properties were sold during the six months ended June 30, 2016.

 

 

9


 

The following table represents the Company’s investments in voting interest entities as of June 30, 2016 and December 31, 2015:

 

Property Name

 

Location

 

Year Acquired

 

Effective Ownership Percentage at

June 30, 2016

 

 

Effective Ownership Percentage at

December 31, 2015

 

 

The Miramar Apartments

 

Dallas, Texas

 

2013

 

 

100

%

 

 

100

%

 

Arbors on Forest Ridge