With the sale of two apartment properties, NexPoint Residential Trust took another step toward reducing the risk on its balance sheet.
Earlier this month, the Dallas-based REIT sold Old Farm in Houston and Silverbrook in Dallas to separate institutional investors, according to a news release. The two properties should generate approximately $67 million to $69 million of net sales proceeds at a combined approximate trailing nominal cap rate of 4.96% and tax and insurance-adjusted cap rate of 4.82%.
Once the sales close in early October, NexPoint will use the funds to pay off the entire $57 million outstanding balance on its corporate credit facility. In the process, the REIT will reduce portfolio-level debt by approximately $156 million. Its hedged debt will increase from 88% to 97%. Going forward, the portfolio will be hedged by the following sources:
- 77% swaps.
- 18% property-level rate caps.
- 2% first mortgage fixed debt.
Fixing the balance
Overall, the Texas sales are a step in the right direction for NexPoint, which needed to shore up its financial situation, according to Robert Stevenson, head of real estate research for financial advisory firm Janney Montgomery Scott. “Reducing expensive floating rate debt is a positive, as NexPoint has been the worst performing apartment REIT year to date primarily due to its balance sheet,” he wrote in an analyst note.
NexPoint began to chip away at its balance sheet issues in November 2022, when it refinanced 22 properties and lowered its weighted average floating rate spreads while pushing out maturities seven plus years, NexPoint Chief Investment Officer Matt McGraner said on the company’s second-quarter earnings call.
Despite the progress made with the dispositions in Texas, Raymond James Equity Research analyst Buck Horne said NexPoint’s interest expense continues to be a moving target in this volatile debt environment, given the complexity of its hedging portfolio.
“Though the disposition of its Houston and Charlotte assets are expected to ease some of the pressure going into next year, nearly 10% of NexPoint’s interest rate swaps roll off in 2024 followed by another ~20% in 2025, potentially causing more headwinds further out if interest rates stay higher for longer,” Horne wrote.
More sales are on the way
In its next move, NexPoint is currently marketing three properties for sale — Timber Creek and Radbourne Lake in Charlotte, North Carolina, and Stone Creek at Old Farm in Houston. The REIT has held the Charlotte properties for more than nine years and expects them to provide a 25% internal rate of return and 4.5- to 6-times multiples on invested capital.
Those sales should be completed in late 2023 or early 2024. After the Charlotte dispositions, NexPoint expects to retire the first mortgage on Hudson High House in Cary, North Carolina, which has the REIT’s highest cost of debt outside of its corporate credit facility, according to McGraner.
Depending on the REIT’s stock price, NexPoint may use an additional $25 million in proceeds from the Charlotte sales to buy back stock, McGraner said on the earnings call. It is also considering selling three more properties in Dallas late this year or early next and using the funds in 1031 exchanges.
In a recent analyst note, Stevenson suggested that NexPoint should focus on two things after the sales: “At the current stock price, we believe all disposition proceeds should be used to reduce expensive debt and repurchase common shares,” he wrote.
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