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EX-32.1 - EX-32.1 - NexPoint Residential Trust, Inc.nxrt-ex321_9.htm
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EX-31.1 - EX-31.1 - NexPoint Residential Trust, Inc.nxrt-ex311_11.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2017

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 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     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

(Do not check if a smaller reporting company)

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 May 2, 2017, the registrant had 21,043,669 shares of common stock, $0.01 par value, outstanding.

 

 

 

 

 


 

NEXPOINT RESIDENTIAL TRUST, INC.

Form 10-Q

Quarter Ended March 31, 2017

 

Page

 

 

Cautionary Statement Regarding Forward-Looking Statements

ii

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016

1

 

 

 

 

Consolidated Unaudited Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2017 and 2016

2

 

 

 

 

Consolidated Unaudited Statement of Equity for the Three Months Ended March 31, 2017

3

 

 

 

 

Consolidated Unaudited Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016

4

 

 

 

 

Notes to Consolidated Unaudited Financial Statements

6

 

 

 

Item 2.

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

32

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

Item 4.

Controls and Procedures

48

 

 

 

PART II—OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

49

 

 

 

Item 1A.

Risk Factors

49

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

 

 

 

Item 3.

Defaults Upon Senior Securities

49

 

 

 

Item 4.

Mine Safety Disclosures

49

 

 

 

Item 5.

Other Information

49

 

 

 

Item 6.

Exhibits

50

 

 

 

Signatures

51

 

 

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 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;

 

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

 

failure of acquisitions 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 real estate investment trust (“REIT”) requirements;

 

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;

 

loss of key personnel of our Sponsor, our Adviser and our property manager;

 

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 Freddie Mac and Fannie Mae;

 

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 (as defined below);

 

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

 

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

 

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 in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”);

 

the risk that the Internal Revenue Service, or 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;

 

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 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 15, 2017.

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)

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Operating Real Estate Investments

 

 

 

 

 

 

 

 

Land (including from VIEs of $100,925 and $99,803, respectively)

 

$

166,985

 

 

$

165,863

 

Buildings and improvements (including from VIEs of $431,235 and $425,945, respectively)

 

 

739,099

 

 

 

733,374

 

Intangible lease assets (including from VIEs of $4,858 and $3,926, respectively)

 

 

5,581

 

 

 

5,140

 

Construction in progress (including from VIEs of $1,138 and $1,891, respectively)

 

 

2,895

 

 

 

2,828

 

Furniture, fixtures, and equipment (including from VIEs of $22,496 and $21,289, respectively)

 

 

39,361

 

 

 

36,616

 

Total Gross Operating Real Estate Investments

 

 

953,921

 

 

 

943,821

 

Accumulated depreciation and amortization (including from VIEs of $38,372 and $32,053, respectively)

 

 

(70,551

)

 

 

(60,214

)

Total Net Operating Real Estate Investments

 

 

883,370

 

 

 

883,607

 

Real estate held for sale, net of accumulated depreciation of $7,714 and $6,099, respectively (including from VIEs of $78,190 and $60,578, respectively)

 

 

96,904

 

 

 

79,430

 

Total Net Real Estate Investments

 

 

980,274

 

 

 

963,037

 

Cash and cash equivalents (including from VIEs of $11,266 and $9,394, respectively)

 

 

27,741

 

 

 

22,705

 

Restricted cash (including from VIEs of $19,511 and $22,387, respectively)

 

 

26,001

 

 

 

32,556

 

Accounts receivable (including from VIEs of $1,253 and $2,009, respectively)

 

 

2,252

 

 

 

3,008

 

Prepaid and other assets (including from VIEs of $1,948 and $905, respectively)

 

 

3,733

 

 

 

1,678

 

Fair market value of interest rate swaps

 

 

13,424

 

 

 

12,413

 

TOTAL ASSETS

 

$

1,053,425

 

 

$

1,035,397

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Mortgages payable, net (including from VIEs of $305,711 and $306,235, respectively)

 

$

366,926

 

 

$

367,453

 

Mortgages payable held for sale, net (including from VIEs of $61,043 and $47,421, respectively)

 

 

69,311

 

 

 

55,685

 

Credit facilities, net

 

 

324,768

 

 

 

310,492

 

Bridge facility, net

 

 

29,969

 

 

 

29,874

 

Accounts payable and other accrued liabilities (including from VIEs of $1,948 and $2,232, respectively)

 

 

5,036

 

 

 

5,551

 

Accrued real estate taxes payable (including from VIEs of $2,770 and $2,724, respectively)

 

 

4,640

 

 

 

6,534

 

Accrued interest payable (including from VIEs of $895 and $855, respectively)

 

 

1,117

 

 

 

1,067

 

Security deposit liability (including from VIEs of $852 and $774, respectively)

 

 

1,475

 

 

 

1,364

 

Prepaid rents (including from VIEs of $1,053 and $728, respectively)

 

 

1,875

 

 

 

1,275

 

Total Liabilities

 

 

805,117

 

 

 

779,295

 

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

 

 

242,058

 

 

 

241,450

 

Accumulated deficit

 

 

(22,924

)

 

 

(14,584

)

Accumulated other comprehensive income

 

 

9,998

 

 

 

9,052

 

Common stock held in treasury at cost; 250,156 shares

 

 

(4,587

)

 

 

(4,587

)

Noncontrolling interests

 

 

23,550

 

 

 

24,558

 

Total Equity

 

 

248,308

 

 

 

256,102

 

TOTAL LIABILITIES AND EQUITY

 

$

1,053,425

 

 

$

1,035,397

 

 

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,

 

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

Rental income

 

$

31,908

 

 

$

29,370

 

Other income

 

 

5,083

 

 

 

4,141

 

Total revenues

 

 

36,991

 

 

 

33,511

 

Expenses

 

 

 

 

 

 

 

 

Property operating expenses

 

 

9,871

 

 

 

9,382

 

Real estate taxes and insurance

 

 

4,965

 

 

 

4,263

 

Property management fees (related party)

 

 

1,113

 

 

 

1,005

 

Advisory and administrative fees (related party)

 

 

1,825

 

 

 

1,616

 

Corporate general and administrative expenses

 

 

1,333

 

 

 

782

 

Property general and administrative expenses

 

 

1,586

 

 

 

1,334

 

Depreciation and amortization

 

 

12,443

 

 

 

9,612

 

Total expenses

 

 

33,136

 

 

 

27,994

 

Operating income

 

 

3,855

 

 

 

5,517

 

Interest expense

 

 

(7,159

)

 

 

(5,226

)

Net income (loss)

 

 

(3,304

)

 

 

291

 

Net income attributable to noncontrolling interests

 

 

312

 

 

 

306

 

Net loss attributable to common stockholders

 

$

(3,616

)

 

$

(15

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

Unrealized gains (losses) on interest rate derivatives

 

 

1,046

 

 

 

(32

)

Total comprehensive income (loss)

 

 

(2,258

)

 

 

259

 

Comprehensive income attributable to noncontrolling interests

 

 

412

 

 

 

303

 

Comprehensive loss attributable to common stockholders

 

$

(2,670

)

 

$

(44

)

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

21,044

 

 

 

21,294

 

Weighted average common shares outstanding - diluted

 

 

21,293

 

 

 

21,294

 

 

 

 

 

 

 

 

 

 

Loss per share - basic and diluted (see Note 2)

 

$

(0.17

)

 

$

(0.00

)

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.220

 

 

$

0.206

 

 

See Notes to 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

Income

 

 

Common Stock

Held in Treasury

at Cost

 

 

Noncontrolling

Interests

 

 

Total

 

Balances, December 31, 2016

 

 

 

 

$

 

 

 

21,294

 

 

$

213

 

 

$

241,450

 

 

$

(14,584

)

 

$

9,052

 

 

$

(4,587

)

 

$

24,558

 

 

$

256,102

 

Contributions by noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

13

 

Vesting of stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

608

 

Distributions / Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,724

)

 

 

 

 

 

 

 

 

(1,433

)

 

 

(6,157

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

946

 

 

 

 

 

 

100

 

 

 

1,046

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,616

)

 

 

 

 

 

 

 

 

312

 

 

 

(3,304

)

Balances, March 31, 2017

 

 

 

 

$

 

 

 

21,294

 

 

$

213

 

 

$

242,058

 

 

$

(22,924

)

 

$

9,998

 

 

$

(4,587

)

 

$

23,550

 

 

$

248,308

 

 

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,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(3,304

)

 

$

291

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

12,443

 

 

 

9,612

 

Amortization of deferred financing costs

 

 

532

 

 

 

324

 

Change in fair value on derivative instruments included in interest expense

 

 

449

 

 

 

4

 

Net cash paid for derivative settlements

 

 

(216

)

 

 

 

Amortization of fair market value adjustment of assumed debt

 

 

(51

)

 

 

(27

)

Vesting of stock-based compensation

 

 

608

 

 

 

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

756

 

 

 

213

 

Prepaid and other assets

 

 

(2,059

)

 

 

(1,560

)

Accounts payable and other accrued liabilities

 

 

(1,593

)

 

 

(4,800

)

Net cash provided by operating activities

 

 

7,565

 

 

 

4,057

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Additions to real estate investments

 

 

(5,443

)

 

 

(6,200

)

Acquisitions of real estate investments

 

 

(24,580

)

 

 

 

Net cash used in investing activities

 

 

(30,023

)

 

 

(6,200

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Mortgage proceeds received

 

 

13,475

 

 

 

 

Mortgage payments

 

 

(332

)

 

 

(533

)

Credit facilities proceeds received

 

 

14,000

 

 

 

 

Deferred financing costs paid

 

 

(155

)

 

 

 

Dividends

 

 

(4,629

)

 

 

(4,387

)

Contributions from noncontrolling interests

 

 

13

 

 

 

 

Distributions to noncontrolling interests

 

 

(1,433

)

 

 

(1,059

)

Net cash provided by (used in) financing activities

 

 

20,939

 

 

 

(5,979

)

 

 

 

 

 

 

 

 

 

Net decrease in cash and restricted cash

 

 

(1,519

)

 

 

(8,122

)

Cash and restricted cash, beginning of period

 

 

55,261

 

 

 

63,095

 

Cash and restricted cash, end of period

 

$

53,742

 

 

$

54,973

 

 

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

 

$

6,179

 

 

$

4,756

 

Supplemental Disclosure of Noncash Activities

 

 

 

 

 

 

 

 

Capitalized construction costs included in accounts payable and other accrued liabilities

 

 

1,047

 

 

 

578

 

Change in fair value on derivative instruments designated as hedges

 

 

1,046

 

 

 

32

 

Liabilities assumed from acquisitions

 

 

104

 

 

 

 

Increase in dividends payable on restricted stock units

 

 

95

 

 

 

 

 

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. With the exception of three properties (“Parked Assets”) held by an Exchange Accommodation Titleholder (“EAT”) to complete reverse like-kind exchanges (“1031 Exchange”) under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”) (see Notes 2, 4 and 10), 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 wholly owned subsidiary NexPoint Real Estate Opportunities, LLC (fka Freedom REIT, LLC) (“NREO”). We use the term “predecessor” to mean the carve-out business of NREO. 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 Company is externally managed by NexPoint Real Estate Advisors, L.P. (the “Adviser”), through an agreement, as amended, dated March 16, 2015 and renewed on March 13, 2017 for an additional one-year term set to expire on March 16, 2018 (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. and 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 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 and 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 REITs 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. The predecessor included all of the properties in the Portfolio that were held directly or indirectly by NREO prior to the Spin-Off that occurred on March 31, 2015. However, the Company’s consolidated financial statements reflect operations of the predecessor through March 31, 2015 as if they were incurred by the Company. The predecessor was determined in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). References throughout these consolidated financial statements to the “Company”, “we”, or “our”, include the activity of the predecessor defined above.

6


 

Basis of Accounting

The accompanying unaudited consolidated financial statements of the Company are prepared in accordance with Generally Accepted Accounting Principles (“GAAP”). The consolidated financial statements include the accounts of the Company, its subsidiaries and the consolidated EAT variable interest entities (“VIEs”) (see “Accounting for Joint Ventures” below and Note 4). All intercompany balances and transactions are eliminated in 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 the other entities are VIEs as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, and if so, to assess whether the Company is the primary beneficiary of such entities requiring consolidation. 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 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 the Company’s audited financial statements for the year ended December 31, 2016 and notes thereto included in its annual report on Form 10-K filed with the SEC on March 15, 2017. There have been no significant changes to the Company’s significant accounting policies during the three months ended March 31, 2017.

Use of Estimates

The preparation of the 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 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 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, and Accounting Standards Update (“ASU”) 2017-01, Clarifying the Definition of a Business (Topic 805) (“ASU 2017-01”), which the Company early adopted on October 1, 2016 (see “Recent Accounting Pronouncements” below). The Company believes most future acquisition costs will be capitalized in accordance with ASU 2017-01. Prior to the Company’s adoption of ASU 2017-01, acquisition costs were expensed as incurred.

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 (see “Fair Value Measurements” below), 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.

The results of operations for acquired properties are included in the 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

 

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.

Held For Sale Properties

The Company periodically classifies real estate assets as held for sale when certain criteria 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.

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. For the three months ended March 31, 2017 and 2016, 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, short-term investments, and cash placed with a qualified intermediary for reinvestment under a 1031 Exchange. Short-term investments are stated at cost, which approximates fair value. Cash placed with a qualified intermediary may not be immediately accessible; however, due to the short-term nature of the restrictions imposed by a qualified intermediary, the Company considers such cash to be cash equivalents.

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 to be segregated and held by the Company’s 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 the Company’s value-add renovations at each of its 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 March 31, 2017 and December 31, 2016 (in thousands):

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Security deposits

 

$

822

 

 

$

852

 

Operating escrows

 

 

13,668

 

 

 

18,256

 

Renovation value-add reserves

 

 

11,511

 

 

 

13,448

 

 

 

$

26,001

 

 

$

32,556

 

 

Prepaid Acquisition Deposits

In the normal course of business, the Company incurs costs in connection with future acquisitions that may include good faith deposits made prior to probable acquisitions. Prepaid acquisition deposits are held in escrow and are applied upon closing of the acquisition. Until an acquisition closes, the Company records these deposits in prepaid and other assets on the consolidated balance sheet. No such costs existed as of March 31, 2017 and December 31, 2016.

8


 

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, are recorded as a reduction from the related debt on the Company’s consolidated balance sheet. Amortization of deferred financing costs of $0.5 million and $0.3 million is included in interest expense on the consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2017 and 2016, respectively. The following is a summary of the Company’s outstanding debt and deferred financing costs, net of accumulated amortization, as of March 31, 2017 and December 31, 2016 (in thousands): 

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Mortgages payable

 

$

368,484

 

 

$

369,220

 

Deferred financing costs, net

 

 

(2,514

)

 

 

(2,774

)

Fair market value adjustment (see Note 5)

 

 

956

 

 

 

1,007

 

Mortgages payable, net

 

$

366,926

 

 

$

367,453

 

 

 

 

 

 

 

 

 

 

Mortgages payable held for sale

 

$

70,085

 

 

$

56,206

 

Deferred financing costs, net

 

 

(774

)

 

 

(521

)

Mortgages payable held for sale, net

 

$

69,311

 

 

$

55,685

 

 

 

 

 

 

 

 

 

 

Credit facilities

 

$

329,000

 

 

$

315,000

 

Deferred financing costs, net

 

 

(4,232

)

 

 

(4,508

)

Credit facilities, net

 

$

324,768

 

 

$

310,492

 

 

 

 

 

 

 

 

 

 

Bridge facility

 

$

30,000

 

 

$

30,000

 

Deferred financing costs, net

 

 

(31

)

 

 

(126

)

Bridge facility, net

 

$

29,969

 

 

$

29,874

 

 

Noncontrolling Interests

Noncontrolling interests are comprised of the Company’s joint venture partners’ interests in the Company’s consolidated joint ventures. The Company reports its joint venture partners’ interests in its consolidated 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, equity contributions, return of capital, 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 (1) insufficient equity to permit it to finance its activities without additional subordinated financial support or (2) 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 (1) a VIE, and (2) 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. In accordance with FASB ASC 810, the Company consolidates joint ventures that are not VIEs where the Company owns a majority of the voting interests in the entity, which is referred to as a voting interest entity.

9


 

The following table represents the Company’s investments in variable interest entities as of March 31, 2017 and December 31, 2016:

 

Property Name

 

Location

 

Year Acquired

 

Effective Ownership Percentage at

March 31, 2017

 

 

Effective Ownership Percentage at

December 31, 2016

 

 

The Grove at Alban

(1)

Frederick, Maryland

 

2014

 

 

76

%

 

 

76

%

 

Abbington Heights

 

Antioch, Tennessee

 

2014

 

 

90

%

 

 

90

%

 

The Summit at Sabal Park

 

Tampa, Florida

 

2014

 

 

90

%

 

 

90

%

 

Courtney Cove

 

Tampa, Florida

 

2014

 

 

90

%

 

 

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

(1)

Seabrook, Texas

 

2014

 

 

90

%

 

 

90

%

 

Sabal Palm at Lake Buena Vista

 

Orlando, Florida

 

2014

 

 

90

%

 

 

90

%

 

Southpoint Reserve at Stoney Creek

(1)

Fredericksburg, Virginia

 

2014

 

 

85

%

 

 

85

%

 

Cornerstone

 

Orlando, Florida

 

2015

 

 

90

%

 

 

90

%

 

Twelve 6 Ten at the Park

(1)

Dallas, Texas

 

2015

 

 

90

%

 

 

90

%

 

The Preserve at Terrell Mill

 

Marietta, Georgia

 

2015

 

 

90

%

 

 

90

%

 

The Ashlar

 

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

%

 

Old Farm

(2)

Houston, Texas

 

2016

 

 

100

%

 

 

100

%

 

Stone Creek at Old Farm

(2)

Houston, Texas

 

2016

 

 

100

%

 

 

100

%

 

Hollister Place

(2)

Houston, Texas

 

2017

 

 

100

%

 

 

 

(3)

(1)

Properties are classified as held for sale as of March 31, 2017.

(2)

Properties are Parked Assets as of March 31, 2017 (see Notes 4 and 10).

(3)

Property was acquired in 2017; therefore, no ownership as of December 31, 2016.

10


 

The following table represents the Company’s investments in voting interest entities as of March 31, 2017 and December 31, 2016:

 

Property Name

 

Location

 

Year Acquired

 

Effective Ownership Percentage at

March 31, 2017

 

 

Effective Ownership Percentage at

December 31, 2016

 

The Miramar Apartments

(1)

Dallas, Texas

 

2013

 

 

100

%

 

 

100

%

Arbors on Forest Ridge

 

Bedford, Texas

 

2014

 

 

90

%

 

 

90

%

Cutter’s Point

 

Richardson, Texas

 

2014

 

 

90

%

 

 

90

%

Eagle Crest

 

Irving, Texas

 

2014

 

 

90

%

 

 

90

%

Silverbrook

 

Grand Prairie, Texas

 

2014

 

 

90

%

 

 

90

%

Timberglen

 

Dallas, Texas

 

2014

 

 

90

%

 

 

90

%

Toscana

(1)

Dallas, Texas

 

2014

 

 

90

%

 

 

90

%

Edgewater at Sandy Springs

 

Atlanta, Georgia

 

2014

 

 

90

%

 

 

90

%

Beechwood Terrace

 

Nashville, Tennessee

 

2014

 

 

90

%

 

 

90

%

Willow Grove

 

Nashville, Tennessee

 

2014

 

 

90

%

 

 

90

%

Woodbridge

 

Nashville, Tennessee

 

2014

 

 

90

%

 

 

90

%

Madera Point

 

Mesa, Arizona

 

2015

 

 

95

%

 

 

95

%

The Pointe at the Foothills

 

Mesa, Arizona

 

2015

 

 

95

%

 

 

95

%

Venue at 8651

 

Fort Worth, Texas

 

2015

 

 

95

%

 

 

95

%

Parc500 (fka CityView)

 

West Palm Beach, Florida

 

2016

 

 

91

%

 

 

91

%

The Colonnade

 

Phoenix, Arizona

 

2016

 

 

97

%

 

 

97

%

(1)

Properties are classified as held for sale as of March 31, 2017.

In connection with its indirect equity investments in the properties acquired, the Company, through the OP, directly or indirectly holds membership interests in single-asset LLCs that directly own the properties. In instances where the Company acquires multiple properties under a single purchase and sale agreement (a “Portfolio Acquisition”), the Company, through a multiple-asset LLC, directly or indirectly holds membership interests in the single-asset LLCs that directly own the properties. Under these arrangements, the multiple-asset LLC is the sole member of all single-asset LLCs that d