NexPoint Residential Trust (NXRT) risk factors, FY2024 10-K

Risks Related to Our Business and Industry

1. 01Macroeconomic trends including inflation, high interest rates or recession may adversely affect our financial condition and results of operations
2. 02We are subject to risks inherent in ownership of real estate
3. 03Real estate investments are relatively illiquid and may limit our flexibility
4. 04Our multifamily properties are concentrated in certain geographic markets, which makes us more susceptible to adverse developments in those markets
5. 05Failure to succeed in new markets may have adverse consequences on our performance
6. 06Our strategy for acquiring value-enhancement multifamily properties involves greater risks than more conservative investment strategies
7. 07Potential reforms or changes to Freddie Mac could adversely affect our business
8. 08Competition could limit our ability to acquire attractive investment opportunities, which could adversely affect our profitability and impede our growth
9. 09Competition and any increased affordability of residential homes could limit our ability to lease our apartments or increase or maintain rents
10. 10We depend on our residents for substantially all of our revenues. Poor resident selection and defaults and nonrenewals by our residents may adversely affect our reputation, financial performance and ability to make distributions
11. 11We may fail to consummate future property acquisitions, and we may not be able to find suitable alternative investment opportunities
12. 12Acquisitions may not yield anticipated results, which could negatively affect our financial condition and results of operations
13. 13We are subject to certain risks associated with selling apartment communities, which could limit our operational and financial flexibility
14. 14We may be subject to contingent or unknown liabilities related to properties or businesses that we have acquired or may acquire for which we may have limited or no recourse against the sellers
15. 15We are subject to losses that are either uninsurable, not economically insurable or that are in excess of our insurance coverage
16. 16Compliance with various laws and regulations, including accessibility, building and health and safety laws and regulations, may be costly, may adversely affect our operations or expose us to liability
17. 17Representations and warranties made by us in connection with sales of our properties may subject us to liability that could result in losses and could harm our operating results and, therefore, distributions we make to our stockholders
18. 18Short-term apartment leases expose us to the effects of declining market rent, which could adversely affect our ability to make cash distributions to our stockholders
19. 19We may be subject to risks involved in real estate activity through joint ventures
20. 20The Company’s real estate assets may be subject to impairment charges
21. 21Our business and reputation depend on our ability to continue providing high quality housing and consistent operation of our communities, the failure of which could adversely affect our business, financial condition and results of operations
22. 22We are dependent on a concentration of our investments in a single asset class, making our results of operations more vulnerable to a downturn in the sector

Risks Related to Health and the Environment

1. 23Our environmental assessments may not identify all potential environmental liabilities and our remediation actions may be insufficient
2. 24We may face high costs associated with the investigation or remediation of environmental contamination, including asbestos, lead-based paint, chemical vapor, subsurface contamination and mold growth
3. 25Risk of Pandemics or Other Health Crises
4. 26The potential inability to maintain adequate staffing at our properties and corporate offices due to an outbreak and/or changes in employee preferences causing them to leave their jobs

Risks Related to Indebtedness

1. 27Variable rate debt is subject to interest rate risk, which could increase our interest expense, increase the cost to refinance and increase the cost of issuing new debt
2. 28We may incur mortgage indebtedness and other borrowings, which we have broad authority to incur, that may increase our business risks and decrease the value of your investment
3. 29We have a substantial amount of indebtedness, which may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs
4. 30place us at a competitive disadvantage to competitors that have relatively less debt than we have
5. 31We may be unable to refinance current or future indebtedness on favorable terms, if at all
6. 32Our debt agreements include restrictive covenants, which could limit our flexibility and our ability to make distributions
7. 33If we are required to make payments under any “bad boy” carve out guarantees that we have provided in connection with certain mortgages and related loans, our business and financial results could be materially adversely affected
8. 34Derivatives and hedging activity could adversely affect cash flow

Risks Related to Our Structure

1. 35The Chapter 11 bankruptcy filing by Highland Capital Management, L.P. (“Highland”) may have materially adverse consequences on our business, financial condition and results of operations
2. 36Litigation against James Dondero and others may have materially adverse consequences on our business, financial condition and results of operations
3. 37We depend upon key personnel of our Adviser and its affiliates and our property manager
4. 38Our Adviser can resign on 30 days’ notice from its role as adviser, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business, and results of operations and cash flows
5. 39You will have limited control over changes in our policies and operations, which increases the uncertainty and risks you face as a stockholder
6. 40We may change our targeted investments without stockholder consent
7. 41If we internalize our management functions, the percentage of our outstanding common stock owned by our other stockholders could be reduced, and we could incur other significant costs associated with being self-managed
8. 42As a result of our arrangements with our Adviser, there may be times when our Adviser or its affiliates have interests that differ from those of our stockholders, giving rise to a conflict of interest
9. 43Our Adviser faces conflicts of interest relating to the fee structure under our Advisory Agreement, which could result in actions that are not necessarily in the long-term best interest of our stockholders
10. 44Our Adviser, Sponsor and their officers and employees face competing demands relating to their time, and this may cause our operating results to suffer
11. 45We may compete with other entities affiliated with our Sponsor and property manager for residents

Risks Related to Legal, Regulatory, Tax and Accounting

1. 46Our failure to qualify as a REIT for U.S federal income tax purposes would reduce the amount of income we have available for distribution and limit our ability to make distributions to our stockholders
2. 47If our OP failed to qualify as a partnership or is not otherwise disregarded for U.S. federal income tax purposes, we would cease to qualify as a REIT
3. 48Complying with REIT requirements may force us to liquidate otherwise attractive investments
4. 49Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities
5. 50Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows
6. 51Our ownership of interests in TRSs raises certain tax risks
7. 52The sale of certain properties could result in significant tax liabilities unless we are able to defer the taxable gain through 1031 Exchanges
8. 53Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on your investment
9. 54To continue qualifying as a REIT, we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce your overall return
10. 55Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends
11. 56The share ownership restrictions of the Code for REITs and the 6.2% share ownership limit in our charter may inhibit market activity in shares of our stock and restrict our business combination opportunities
12. 57election is made. To help ensure that we meet these tests, among other purposes, our charter restricts the acquisition, ownership and transfer of shares of our common stock
13. 58The ability of the Board to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders
14. 59New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify or remain qualified as a REIT
15. 60There can be no assurance that future changes to the U.S. federal income tax laws or regulatory changes will not be proposed or enacted that could adversely impact our business and financial results
16. 61We and our subsidiaries and stockholders may be subject to state, local or foreign tax filing and payment obligations taxation in various jurisdictions including those in which we or they transact business, own property or reside

Risks Related to the Ownership of our Common Stock

1. 62Our common stock is listed on the NYSE and broad market fluctuations could negatively affect the market price of our stock
2. 63failure to meet and maintain REIT qualifications
3. 64The form, timing and/or amount of dividend distributions in future periods may vary and be impacted by economic and other considerations
4. 65We may be unable to make distributions at expected levels, which could result in a decrease in the market price of our common stock
5. 66Our charter permits the Board to issue stock with terms that may subordinate the rights of our common stockholders or discourage a third party from acquiring us in a manner that could otherwise result in a premium price to our stockholders
6. 67Future issuances of debt securities and equity securities may negatively affect the market price of shares of our common stock and, in the case of equity securities, may be dilutive to existing stockholders and could reduce the overall value of your investment
7. 68Our rights and the rights of our stockholders to recover claims against our independent directors are limited, which could reduce your and our recovery against them if they negligently cause us to incur losses
8. 69a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated
9. 70Our charter and bylaws contain provisions that may delay, defer or prevent an acquisition of our common stock or a change in control
10. 71Certain provisions of Maryland law may limit the ability of a third party to acquire control of us
11. 72Additionally, Title 3, Subtitle 8 of the MGCL permits our Board, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain takeover defenses, such as a classified board, some of which are not currently provided for in our charter or bylaws
12. 73Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could materially and adversely affect our business and the market price of our common stock

General Risks

1. 74We are highly dependent on information technology and security breaches or systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our securities and our ability to pay dividends
2. 75Breaches of our data security could materially harm our business and reputation
3. 76Changes in accounting rules and other policy or regulatory changes could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against
4. 77Acts of violence could decrease the value of our assets and could have an adverse effect on our business and results of operations
5. 78The direct and indirect impacts of climate change may adversely affect our business
6. 79As an owner and operator of multifamily apartment communities, we may become involved in various legal proceedings, including, but not limited to, proceedings related to commercial, employment, environmental, securities, shareholder, tenant or tort legal issues, some of which could result in a class action lawsuit
7. 80Our business could be harmed if we are unable to effectively integrate and use artificial intelligence