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EX-31.1 - EX-31.1 - NexPoint Residential Trust, Inc.nxrt-ex311_7.htm
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EX-32.1 - EX-32.1 - NexPoint Residential Trust, Inc.nxrt-ex321_6.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 September 30, 2015

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 or 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 ST (§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 12b2 of the Exchange Act).  Yes  o   No  x

As of November 16, 2015, the registrant had 21,293,825 shares of common stock, $0.01 par value, outstanding.

 

 

 


NEXPOINT RESIDENTIAL TRUST, INC.

Form 10-Q

September 30, 2015

 

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

 

 

 

 

 

Consolidated Balance Sheet as of September 30, 2015 (Unaudited) and Combined Consolidated Balance Sheet as of December 31, 2014

1

 

 

 

 

Combined Consolidated Unaudited Statements of Operations and Comprehensive Loss for the Three Months Ended September 30, 2015 and 2014 and the Nine Months Ended September 30, 2015 and 2014

2

 

 

 

 

Combined Consolidated Unaudited Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014

3

 

 

 

 

Combined Consolidated Unaudited Statement of Equity for the Nine Months Ended September 30, 2015

5

 

 

 

 

Notes to Combined Consolidated Unaudited Financial Statements

6

 

 

 

Item 2.

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

26

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

36

 

 

 

Item 4.

Controls and Procedures.

36

 

 

 

PART II—OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings.

37

 

 

 

Item 1A.

Risk Factors.

37

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

37

 

 

 

Item 3.

Defaults Upon Senior Securities.

37

 

 

 

Item 4.

Mine Safety Disclosures.

37

 

 

 

Item 5.

Other Information.

37

 

 

 

Item 6.

Exhibits.

37

 

 

 

Signatures

38

 

 

 

 

i


Cautionary Statement Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements 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 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;

 

·

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

 

·

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 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;  

 

·

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 NXRT board 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 the heading “Risk Factors,” in the information statement filed as an exhibit to our Registration Statement on Form 10, as amended (Registration No. 001-36663), which was declared effective on March 18, 2015.

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

COMBINED CONSOLIDATED BALANCE SHEETS

 

 

 

September 30, 2015

 

 

December 31, 2014

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Operating Real Estate Investments

 

 

 

 

 

 

 

 

Land (including from VIEs of $172,621,771 and $127,740,000, respectively)

 

$

174,201,771

 

 

$

129,320,000

 

Buildings and improvements (including from VIEs of $702,737,605 and $479,904,527,

   respectively)

 

 

711,276,465

 

 

 

488,260,399

 

Intangible lease assets (including from VIEs of $2,463,000 and $17,594,000,

   respectively)

 

 

2,463,000

 

 

 

17,884,000

 

Construction in progress (including from VIEs of $5,422,306 and $6,529,884,

   respectively)

 

 

5,473,414

 

 

 

6,529,884

 

Furniture, fixtures, and equipment (including from VIEs of $20,952,485 and $7,886,210,

   respectively)

 

 

21,507,521

 

 

 

8,319,564

 

Total Gross Operating Real Estate Investments

 

 

914,922,171

 

 

 

650,313,847

 

Accumulated depreciation and amortization (including from VIEs of $29,663,316 and

   $21,109,832, respectively)

 

 

(30,268,602

)

 

 

(21,787,940

)

Total Net Operating Real Estate Investments

 

 

884,653,569

 

 

 

628,525,907

 

Cash and cash equivalents (including from VIEs of $15,030,783 and $11,868,779,

   respectively)

 

 

18,957,993

 

 

 

12,661,535

 

Restricted cash (including from VIEs of $54,676,804 and $47,192,578, respectively)

 

 

54,915,959

 

 

 

47,817,342

 

Accounts receivable (including from VIEs of $1,556,287 and $1,134,869, respectively)

 

 

1,926,320

 

 

 

1,151,225

 

Prepaid and other assets (including from VIEs of $2,763,366 and $2,545,660, respectively)

 

 

3,627,395

 

 

 

2,568,933

 

Deferred financing costs, net (including from VIEs of $5,672,905 and $4,535,381,

   respectively)

 

 

6,103,250

 

 

 

4,632,429

 

TOTAL ASSETS

 

$

970,184,486

 

 

$

697,357,371

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Bridge facility

 

$

29,000,000

 

 

$

 

Mortgages payable (including from VIEs of $659,424,170 and $480,976,130,

   respectively)

 

 

667,824,170

 

 

 

486,976,130

 

Accounts payable and other accrued liabilities (including from VIEs of $3,579,018 and

   $5,322,045, respectively)

 

 

4,166,043

 

 

 

5,642,297

 

Accrued real estate taxes payable (including from VIEs of $7,606,737 and $3,858,836,

   respectively)

 

 

7,731,513

 

 

 

3,858,836

 

Accrued interest payable (including from VIEs of $1,377,263 and $1,030,962,

   respectively)

 

 

1,394,193

 

 

 

1,030,962

 

Security deposit liability (including from VIEs of $1,584,779 and $1,484,004,

   respectively)

 

 

1,611,953

 

 

 

1,513,431

 

Prepaid rents (including from VIEs of $1,251,345 and $760,046, respectively)

 

 

1,266,899

 

 

 

791,810

 

Due to affiliates (including from VIEs of $0 and $20,000, respectively)

 

 

759,286

 

 

 

20,000

 

Total Liabilities

 

 

713,754,057

 

 

 

499,833,466

 

Invested Equity

 

 

 

 

 

176,549,066

 

NexPoint Residential Trust, Inc. stockholders' equity:

 

 

 

 

 

 

 

 

Preferred Stock: 100,000,000 shares authorized and 0 shares issued at par value $0.01

 

 

 

 

 

 

Common Stock: 500,000,000 shares authorized and 21,293,825 shares issued at par value $0.01

 

 

212,938

 

 

 

 

Additional paid-in capital

 

 

240,596,354

 

 

 

 

Accumulated deficit

 

 

(12,090,619

)

 

 

 

Accumulated other comprehensive loss

 

 

(813,409

)

 

 

(305,860

)

Noncontrolling interests

 

 

28,525,165

 

 

 

21,280,699

 

Total Equity

 

 

256,430,429

 

 

 

197,523,905

 

TOTAL LIABILITIES AND EQUITY

 

$

970,184,486

 

 

$

697,357,371

 

 

 

 

 

 

 

 

 

 

 

See Notes to Combined Consolidated Financial Statements

 

 

1

 


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

26,965,236

 

 

$

10,680,828

 

 

$

75,183,751

 

 

$

20,344,820

 

Other

 

 

3,805,657

 

 

 

1,239,307

 

 

 

9,871,907

 

 

 

2,387,162

 

Total revenues

 

 

30,770,893

 

 

 

11,920,135

 

 

 

85,055,658

 

 

 

22,731,982

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

 

9,187,089

 

 

 

3,532,626

 

 

 

24,799,053

 

 

 

6,471,191

 

Acquisition costs

 

 

617,670

 

 

 

3,606,312

 

 

 

2,786,932

 

 

 

6,352,836

 

Real estate taxes and insurance

 

 

3,774,978

 

 

 

1,587,284

 

 

 

10,730,118

 

 

 

3,073,585

 

Property management fees (related party)

 

 

910,015

 

 

 

357,821

 

 

 

2,526,514

 

 

 

687,132

 

Advisory and administrative fees (related party)

 

 

1,454,476

 

 

 

517,594

 

 

 

4,169,830

 

 

 

758,314

 

Corporate general and administrative expenses

 

 

816,821

 

 

 

 

 

 

1,647,805

 

 

 

 

Property general and administrative expenses

 

 

1,142,679

 

 

 

867,174

 

 

 

3,777,834

 

 

 

1,246,872

 

Depreciation and amortization

 

 

9,135,353

 

 

 

5,846,387

 

 

 

30,795,663

 

 

 

11,425,607

 

Total expenses

 

 

27,039,081

 

 

 

16,315,198

 

 

 

81,233,749

 

 

 

30,015,537

 

Operating income (loss)

 

 

3,731,812

 

 

 

(4,395,063

)

 

 

3,821,909

 

 

 

(7,283,555

)

Interest expense

 

 

(4,621,715

)

 

 

(2,046,306

)

 

 

(12,869,376

)

 

 

(4,116,164

)

Net loss

 

 

(889,903

)

 

 

(6,441,369

)

 

 

(9,047,467

)

 

 

(11,399,719

)

Net income (loss) attributable to noncontrolling interests

 

 

174,417

 

 

 

(697,881

)

 

 

(331,649

)

 

 

(1,370,052

)

Net loss attributable to common shareholders

 

$

(1,064,320

)

 

$

(5,743,488

)

 

$

(8,715,818

)

 

$

(10,029,667

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net losses related to interest rate cap valuations

 

 

(111,918

)

 

 

(62,188

)

 

 

(507,549

)

 

 

(62,188

)

Total comprehensive loss

 

 

(1,001,821

)

 

 

(6,503,557

)

 

 

(9,555,016

)

 

 

(11,461,907

)

Comprehensive income (loss) attributable to noncontrolling

   interest

 

 

164,355

 

 

 

(704,100

)

 

 

(378,313

)

 

 

(1,376,271

)

Comprehensive loss attributable to common shareholders

 

$

(1,166,176

)

 

$

(5,799,457

)

 

$

(9,176,703

)

 

$

(10,085,636

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and

   diluted

 

 

21,293,825

 

 

 

21,293,825

 

 

 

21,293,825

 

 

 

21,293,825

 

Dividends declared per common share

 

$

0.206

 

 

$

 

 

$

0.412

 

 

$

 

Loss per share: Basic and diluted  (See Note 2)

 

$

(0.04

)

 

$

(0.30

)

 

$

(0.42

)

 

$

(0.54

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Combined Consolidated Financial Statements

 

 

 

2

 


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months

Ended September 30,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(9,047,467

)

 

$

(11,399,719

)

Adjustments to reconcile net loss to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

30,795,663

 

 

 

11,425,607

 

Amortization of deferred financing fees

 

 

808,906

 

 

 

188,242

 

Change in fair value on derivative instruments included in interest expense

 

 

182,302

 

 

 

629,428

 

Noncash contributions

 

 

 

 

 

745,500

 

Gain on disposal from eminent domain

 

 

(157,882

)

 

 

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(775,095

)

 

 

(2,409,167

)

Prepaid and other assets

 

 

(770,817

)

 

 

(493,335

)

Restricted cash

 

 

(7,160,690

)

 

 

(5,733,012

)

Accounts payable and other accrued liabilities

 

 

1,928,046

 

 

 

3,968,993

 

Due to affiliates

 

 

 

 

 

12,814

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

 

15,802,966

 

 

 

(3,064,649

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Change in restricted cash

 

 

62,073

 

 

 

(29,014,002

)

Cash from eminent domain disposal

 

 

326,111

 

 

 

 

Additions to operating real estate investments

 

 

(29,608,659

)

 

 

(5,745,873

)

Acquisitions of operating real estate investments

 

 

(238,462,941

)

 

 

(449,441,587

)

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(267,683,416

)

 

 

(484,201,462

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Mortgage proceeds received

 

 

169,865,553

 

 

 

349,507,000

 

Bridge facility proceeds received

 

 

29,000,000

 

 

 

 

Mortgage payments

 

 

(7,017,513

)

 

 

(15,660

)

Deferred financing fees paid

 

 

(2,279,727

)

 

 

(4,275,815

)

Interest rate cap fees paid

 

 

(307,231

)

 

 

(1,159,272

)

Due to affiliates

 

 

454,286

 

 

 

 

Distributions to noncontrolling interest

 

 

(1,743,937

)

 

 

(206,693

)

Distributions

 

 

(8,773,678

)

 

 

(7,484,764

)

Contributions from noncontrolling interest

 

 

9,320,052

 

 

 

18,029,104

 

Contributions

 

 

69,659,103

 

 

 

140,290,633

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

258,176,908

 

 

 

494,684,533

 

 

 

 

 

 

 

 

 

 

Net increase in cash

 

 

6,296,458

 

 

 

7,418,422

 

 

 

 

 

 

 

 

 

 

Cash, beginning of period

 

 

12,661,535

 

 

 

189,868

 

 

 

 

 

 

 

 

 

 

Cash, end of period

 

$

18,957,993

 

 

$

7,608,290

 

 

 

 

 

 

 

 

 

 

 

See Notes to Combined Consolidated Financial Statements

3

 


 

 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

11,514,937

 

 

$

2,662,835

 

Supplemental Disclosure of Noncash Investing and Financing Activities

 

 

 

 

 

 

 

 

Capitalized construction costs included in accounts payable and other accrued liabilities

 

 

532,877

 

 

 

1,163,495

 

Capitalized construction costs included in due to affiliates

 

 

 

 

 

84,755

 

Prepaid acquisition deposits included in due to affiliates

 

 

285,000

 

 

 

 

Change in fair value on hedging derivative instruments

 

 

507,549

 

 

 

62,188

 

Liabilities assumed from acquisitions

 

 

1,938,096

 

 

 

2,350,080

 

Other assets acquired from acquisitions

 

 

385,265

 

 

 

1,903,760

 

Assumed debt on acquisitions of operating real estate investments

 

 

18,000,000

 

 

 

22,643,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Combined Consolidated Financial Statements

 

 

4

 


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

COMBINED CONSOLIDATED STATEMENT OF EQUITY

(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

 

 

Invested Equity

 

 

Noncontrolling Interest

 

 

Total

 

Balances, December 31, 2014

 

 

 

 

$

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

(305,860

)

 

$

176,549,066

 

 

$

21,280,699

 

 

$

197,523,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69,659,103

 

 

 

9,320,052

 

 

 

78,979,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions / Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,773,678

)

 

 

 

 

 

 

 

 

(1,743,937

)

 

 

(10,517,615

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(507,549

)

 

 

 

 

 

 

 

 

(507,549

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,316,941

)

 

 

 

 

 

(5,398,877

)

 

 

(331,649

)

 

 

(9,047,467

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange of predecessor

   invested equity for common stock

 

 

 

 

 

 

 

 

21,293,825

 

 

 

212,938

 

 

 

240,596,354

 

 

 

 

 

 

 

 

 

(240,809,292

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, September 30, 2015

 

 

 

 

$

 

 

 

21,293,825

 

 

$

212,938

 

 

$

240,596,354

 

 

$

(12,090,619

)

 

$

(813,409

)

 

$

 

 

$

28,525,165

 

 

$

256,430,429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 elect to be taxed as a real estate investment trust (“REIT”) for the 2015 tax year. We are 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 subsidiary, NexPoint Residential Trust Operating Partnership GP, LLC 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").  NHF is a publicly listed closed-end fund that commenced operations on June 29, 2006 and is managed by NexPoint Advisors, L.P. ("NexPoint Advisors"), an SEC-registered investment adviser and affiliate of Highland Capital Management, L.P. and our Adviser. We use the term “predecessor" to mean the carve out business of Freedom REIT, which owned all or a majority interest in the multifamily properties transferred or contributed to the Company by NHF through its subsidiary 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." The combined consolidated financial statements represent the operations and activities of the predecessor until the Spin-Off. The Company recorded the assets and liabilities associated with the multifamily properties involved in the Spin-Off at their respective historical carrying values at the time of the Spin-Off in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 505-60, Spinoffs and Reverse Spinoffs. Certain properties included in the Spin-Off have interests owned by parties other than the Company that are reflected at historical carrying values in the financial statements of the Company as “noncontrolling interests”, as required under accounting principles generally accepted in the United States of America (“GAAP”).

We are externally managed by NexPoint Real Estate Advisors, L.P., (our "Adviser"), through an agreement dated March 16, 2015 (the “Advisory Agreement”), by and among the Company, the OP and our Adviser. Our Adviser conducts substantially all of our operations and provides asset management for our real estate investments. We will have only accounting employees while the Advisory Agreement is in effect. All of our investment decisions will be made by our Adviser, subject to general oversight by our Adviser’s investment committee and our Board of Directors. Our Adviser is an affiliate of NexPoint Advisors.

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 our investment objectives.

The Company may also participate with third parties in property ownership, through limited liability companies, 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 loss and statements of cash flows reflect operations of our predecessor through March 31, 2015 as if they were

6

 


 

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.

 

 

Basis of Accounting

The accompanying unaudited interim combined consolidated financial statements of the Company are prepared in accordance with GAAP and with Rule 10-01 of Regulation S-X for interim financial statements. The consolidated balance sheet includes 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 financial position, results of operations and cash flows for the periods 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 FASB 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. Interim results are not necessarily indicative of operating results for a full year. The unaudited information included in this quarterly report on Form 10-Q should be read in conjunction with our predecessor audited financial statements identified as “Freedom REIT Contribution Group” for the year ended December 31, 2014 and notes thereto included in the information statement filed as an exhibit to our registration statement on Form 10 filed on March 12, 2015. There have been no significant changes to the Company’s significant accounting policies during the nine months ended September 30, 2015.  

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, building, 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 loss from their respective acquisition dates.

 

Real estate assets, including land, building, 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. 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

Building

 

30 years

Improvements

 

15 years

Furniture, fixtures, and equipment

 

3 years

Intangible lease assets

 

6 months

 

7

 


 

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 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 periods ended September 30, 2015 and 2014, 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 entity 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 actually held in escrow by a third party. The Company may reallocate these funds, at its discretion, to capitalize other investment opportunities. The following is a summary of the restricted cash held as of September 30, 2015 and December 31, 2014:

 

 

September 30, 2015

 

 

December 31, 2014

 

Security Deposits

$

1,141,732

 

 

$

1,574,302

 

Operating Escrows

 

14,892,686

 

 

 

7,299,426

 

Renovation value-add reserves

 

38,881,541

 

 

 

38,943,614

 

 

$

54,915,959

 

 

$

47,817,342

 

 

Prepaid acquisition deposits

The Company incurs costs in connection with future acquisitions that may include good faith deposits prior to possible acquisitions that are expected to be rolled into the costs of the closing. Until an acquisition closes, the Company reflects these costs as prepaid costs on the balance sheet. As of September 30, 2015, prepaid costs were $285,000. These prepaid costs were held in escrow and will be rolled into the cost of the property at closing in connection with a subsequent acquisition (see Note 10). These costs are included in prepaid and other assets on the consolidated balance sheet and are also accrued and owed to an affiliate and included in due to affiliate on the consolidated balance sheet. No such costs existed as of December 31, 2014.

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 earnings. Deferred financing costs, net of amortization, of $6,103,250 and $4,632,429 are recorded on the accompanying combined consolidated balance sheets as of September 30, 2015 and at December 31, 2014, respectively. Amortization of deferred financing costs of $268,379 and $106,293 is included in interest expense in the combined consolidated statements of operations and comprehensive loss for the three month periods ended September 30, 2015 and 2014, respectively. Amortization of deferred financing costs of $808,906 and $188,242 is included in interest expense in the combined consolidated statements of operations and comprehensive loss for the nine month periods ended September 30, 2015 and 2014, respectively.

 

8

 


 

Noncontrolling Interests

Noncontrolling interests are comprised of the Company’s joint venture partners’ interests in the joint ventures in multifamily properties that the Company combines and 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 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 entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant to the entity. 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. 

9

 


 

The following table represents the Company’s investments at September 30, 2015 and December 31, 2014:

 

Properties

 

Location

 

Year Acquired

 

Effective Ownership

Percentage at

September 30, 2015

 

 

 

Effective Ownership

Percentage at

December 31, 2014

 

 

The Miramar Apartments

 

Dallas, Texas

 

2013

 

 

100

%

 

 

 

100

%

(1)

Arbors on Forest Ridge

 

Bedford, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

Cutter's Point

 

Richardson, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

Eagle Crest

 

Irving, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

Meridian

 

Austin, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

Silverbrook

 

Grand Prairie, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

Timberglen

 

Dallas, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

Toscana

 

Dallas, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

The Grove at Alban

 

Frederick, Maryland