NexPoint Residential Trust Inc (NXRT) 2015 Q3 法說會逐字稿

Good day and welcome to the NexPoint Residential Trust Inc. third-quarter 2015 conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Ms. Marilynn Meek.

Good day, everyone, and welcome to NexPoint's conference call to review the Company's results for the third quarter ended September 30. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; and Matt McGraner, Executive Vice President and Chief Investment Officer.

As a reminder, this call is also being webcast through the Company's website at www.nexpointliving.com. Additionally, a copy of the Company's third-quarter 2015 supplemental information is available for your review on NexPoint's investor relations section of the Company's website.

Before we begin, I would like to remind everyone that this conference call contains forward-looking statements that are based on management's current expectations, assumptions, and beliefs. Forward-looking statements can often be identified by words such as expect and similar expressions and variations or negatives of these words.

These forward-looking statements include but are not limited to statements regarding NexPoint's guidance for its financial results for 2015 full-year. They are not guarantees of future results and are subject to risks, uncertainties, assumptions that could cause actual results to differ materially from those expressed in any forward-looking statement. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the Company's Form 10-Q for the quarter ended June 30, 2015, final information statement, and NexPoint's Form 10 registration statement filed with the SEC for a more complete discussion of the risks and other factors that could affect any forward-looking statement. Except as required by law, NXRT does not undertake any obligation to publicly update or revise any forward-looking statements.

This conference call includes analysis of adjusted funds from operation or AFFO; funds from operation or FFO; and net operating income or NOI, all of which are non-GAAP financial measures of performance. These non-GAAP measures should be used as a supplement to and not a substitute for net income loss computed in accordance with GAAP. For a more complete discussion of AFFO, FFO, and NOI, see our earnings release and supplemental information available on the website as well as our Form 10-Q for the quarter ended June 30, 2015, filed with the SEC. I would now like to turn the call over to Brian Mitts. Please go ahead, Brian.

Thank you, Marilynn, and I want to welcome everybody to our NXRT conference call for third-quarter 2015. As Marilynn mentioned, I am Brian Mitts, Chief Financial Officer. I'm joined today by Matt McGraner, Executive Vice President and Chief Investment Officer.

I'm going to kick it off by going through our Q3 and year-to-date 2015 results. Then I'll turn it over to Matt. He'll walk through the portfolio and give some details on portfolio acquisitions, rehabs, and the state of some of our markets. And then I will finish up by talking about our full-year guidance and a couple of other closing thoughts before we turn it back over to Leo to take your questions.

So with that, let me start off by saying we're very excited about third quarter. We continue to execute the strategy and believe we're seeing results. So we're looking forward to fourth quarter.

In the third quarter we finished rehab on 697 units, which is an annual pace of close to 2,800 units. So far this year we've rehabbed 1,327 units; and the total since inception, 1,717 units. So clearly we're picking up the pace on the rehabs, which is intentional.

In the second quarter we discussed the fact that we had been a little bit slower on the rehabs than we had initially anticipated due to strong organic rent growth in our markets. And although we continue to see solid rent growth in those markets, we are aggressively pushing the rehabs as we are getting approximate 11.5% increases in rents on units that have been rehabbed, which equates to approximately 24.4% return on our investment in those units. So as we continue to push the rehabs, we believe this will flow through to NOI, FFO, and AFFO in future quarters, which we think will be strong.

Let me read through some of our metrics for the third quarter. We had AFFO for the third-quarter 2015, $7.9 million or $0.37 per share compared to $7.1 million in the second quarter. We reported FFO for Q3 of $7 million or $0.33 per share. This compared to $6.7 million in the second quarter. We are reporting NOI for the third quarter of $15.8 million, which includes partial months for two properties acquired during the quarter -- which Matt's going to discuss in a minute -- and this is compared to $14.8 million for the second quarter.

Rental income for the third quarter increased to $27 million as compared to $25.5 million in the second quarter. Average effective rents per unit across the 41 properties that we held as of 9/30 and consisting of 12,822 units was $796, while physical occupancy was 93.1%.

For the third quarter our same-store rental income increased 6.4%. Same-store NOI increased 11%, and same-store occupancy increased to 183 basis points to 93.3%. The same-store pool grew to 10 properties this quarter, so we're still -- a pretty small amount. That's a little bit less than 25% of the total properties in the same-store pool. But next quarter we'll add quite a few properties, so we'll start to see the same-store pool continue to grow.

Let me talk little bit about our capital structure starting with cash. As of September 30, we had total cash of $74 million on the balance sheet. Of this, $19 million is free cash on hand; $55 million represents restricted cash; and of that $59 million, $39 million has been earmarked towards the capital expenditures for the value-add program. As Matt will discuss, we intend to look for one-off opportunistic-type acquisitions. And since we don't believe we are in a position to do an equity raise at this time, we do think we can still fund those acquisitions through cash on hand or excess operating cash flow.

We do not anticipate at this time utilizing any of the $39 million that we've earmarked for the value-add program. However, if we in the future get into some quarters where we see very strong organic rent growth, we may decide to push off some rehabs. And if that pace slows, we may look at using some of the cash earmarked for rehabs for acquisitions. But we don't feel we're at that place yet.

On the debt side, we had total debt outstanding at September 30 of $697 million. This includes a $29 million bridge facility that we took out in connection with the Phoenix acquisitions. Our full-year rate debt as of September 30 represented 92% of our total debt, and 8% was represented by fixed-rate debt. I'll mention here in a second -- we did a refinancing in the fourth quarter which reduced that fixed-rate debt and increased the floating-rate debt. We continue to believe in this strategy because of the flexibility it offers with the properties and ability to refinance, et cetera -- not to take interest rate bets one way or the other, which we continue to hedge using the interest-rate caps.

Our average weighted interest rate on outstanding mortgage indebtedness as of September 30, which excludes the bridge facility, is 2.5%. By utilizing interest rate caps of the floating-rate debt, our average maximum rate we would pay is 6%.

As mentioned a second ago, this quarter on October 21, we refinanced a fixed-rate HUD loan on the Regatta Bay property in Houston. It was an approximately $13.1 million note; we refinanced it with a $14 million floating-rate note. This freed up cash, as HUD only allows two annual distributions from the property. We decreased our coupon 350 basis points, saving approximately $30,000 a year --

Per month.

-- sorry, per month. And we substantially increased our flexibility with regard to this debt and property. We could pre-pay it within the first 12 months with a 1% penalty and at par thereafter.

So with that, let me turn it over to Matt, so he can run through the portfolio and some of the stats on the portfolio.

Thanks, Brian. I think the only thing to hit on the value-add that Brian didn't mention was the cost. So we've done 1,717 units since inception, which is about 13.4% of the entire portfolio, at an average per unit cost to upgrade of $4,262, achieving a portfolio-wide ROI of 23.8% or about $87 per month of rental increase. And that's -- again, that's since we started the portfolio.

I want to go over same-store recap real quick. Our calculation and methodology is as follows: we include the multifamily communities that are defined as those that are stabilized and comparable for both the current in the prior reporting year. 10 properties or 3,227 units meet this definition for the third quarter. Those properties are Miramar, Arbors on Forest Ridge, Cutter's Point, Eagle Crest, Meridian, Silverbrook, Timberglen, Toscana, The Grove at Alban, and Willowdale Crossing.

For the quarter, the rental revenue and other income increased 8.96%. Expenses increased 6.9%, resulting in again a same-store NOI growth of a healthy 11%. By market, Austin was up 7.3% in NOI. The Dallas properties or Dallas portfolio was 12.5% better in NOI. Texas total was 12%. DC metro/Mid-Atlantic properties were 8.42%; and, again, same-store total was 11.02%.

As Brian stated, we acquired nine deals throughout the first nine months of 2015 for approximately $258.2 million. Again, we'll continue to be opportunistic to acquire one-off accretive deals -- our latest being The Place at Vanderbilt, which is a deal we acquired on October 30 in Fort Worth.

This is a 333 unit, Class B multifamily community. We bought it for $19.25 million, leaving us with a great basis in the asset of just under $58,000 a unit. In connection with the transaction, we assumed a Freddie Mac floating-rate mortgage loan at 2.23% over 30-day LIBOR with an outstanding principal balance of $13.875 million and used available unrestricted cash to fund the balance of the equity.

As of closing, the nominal and economic cap rates were 6.4% and 5.9%, respectively. We think we can easily grow the cap rate to 7.5% by year three.

Looking ahead, we're pleased with what we accomplished in the quarter: 11% same-store NOI growth and, through the first nine months of 2015, by adding smart acquisitions to the portfolio; preserving our basis; and driving NOI growth by investing heavily in the value-add programs.

Our property management partner, BH Management, continues to outperform in controlling expenses and growing the top line, especially as it relates to the other income buckets. Our Dallas assets continue to outperform as well, generating new lease growth, meaning same unit but new tenant, of 9.3%. We are seeing very strong performance in Atlanta and Nashville as well, with new lease growth of 13.7% and 10.4%, respectively. Bucking the trend, perhaps, in the broader REIT space, our loan asset in Houston Regatta Bay continues to surprise to the upside and generate a full 19% in new lease growth.

Finally, both of the recent Phoenix acquisitions, Madera and The Point at Foothills, beat NOI budget by at least 5% in September for the quarter. And then more fundamentals in the market and what we're seeing: we still believe the fundamentals of the apartment business are strong, especially in the B space. We were on calls with every other REIT that owns B product, and all of them consistently commented on how strong their B portfolios are performing. Ours are no exception.

By further example, we are seeing year-over-year organic renewal rental increases across the portfolio of 6.7% through the third quarter. And as all of you are, I'm sure, aware, we are also aware of and continue to see a strong bid out there for B assets in our markets -- exemplified most recently, of course, by Starwood's announced acquisition of Landmark -- what many believe to be a fairly decent comp to NXRT.

As a point of reference on that deal for all of you, we believe in our analysis of the deal and adjusted for NCI, we think the B assets that Starwood is buying -- not the Milestone assets, but the Starwood assets -- works out to be about $89,000 a unit. So given on focus on driving NOI growth and our portfolio's attractive basis, we like where we are and are positioned well to go into the fourth quarter and then 2016.

And with that, I'll turn the floor back over to Brian.

Thank you. That's a good segue into talking about full-year guidance. As Matt pointed out, our markets are continuing to do well. Class B space is continuing to do well. We think the Landmark transaction really kind of highlights the value proposition within this B category within the markets that we are in.

As Matt said, a lot of people consider that a pretty good comp to NXRT, given the -- for the most part, quality of the assets, particularly the ones that Starwood took and given the markets that they are in compared to ours. So with that, in our supplement we provide full-year guidance for 2015. Just quickly to run through it, we have NOI in a range of $59 million to $61 million; funds from operation or FFO of $1.22 a share to $1.29 per share; and adjusted funds from operations or AFFO of $1.38 per share to $1.45 per share.

And just going through that in a little bit of detail, since we first issued guidance in May, our anticipated NOI has increased, as you would expect, since we've acquired two assets in the third quarter and then a third one here recently in the fourth quarter. As many of you know, though, that FFO doesn't necessarily keep pace with NOI in the first year of an acquisition. You have got your acquisition costs as well as other transactional-type costs such as prepayment penalties that we've incurred on the Regatta Bay refinancing. I'm going to talk about that in a second.

However, AFFO for the most part should keep pace as you add back those acquisition costs. So FFO won't grow as strongly as NOI in the next quarter. AFFO will do better. But we did incur a $650,000 prepayment penalty on the Regatta Bay refinance. Again, that was a fixed-rate HUD loan that we refinanced into a floating-rate loan.

And the $650,000 prepayment penalty really highlights why we like the floating-rate debt as compared to the fixed: more flexibility, much cheaper to refinance or get out of if you sell the property. We believe that -- sorry, I'm going to move on to the supplement. As many of you will see, if you haven't seen it already: kept it fairly consistent with last quarter, but we have solicited quite a bit of feedback from various parties. And although obviously not to our benefit to continually change the supplement or the methodologies we use within it, we do think that it makes sense to be reactive in these first few quarters as we continue to put out the supplement and try to cater it more to what people want to see and how they are looking at and viewing our Company and portfolio.

So we did make some small changes to it. I just want to point that out. It is a response to feedback. We got quite a bit of feedback that was both solicited and unsolicited, and we appreciate both. But we tried to incorporate as many of the comments as we could. Hopefully you find what we put out to be useful and transparent.

And then, finally, before I turn it back over to Leo to take your questions, we want to reiterate that as a management team, we continue to be very committed to NXRT and our shareholders. We think this is evidenced by the fact that as a management team and a Board, we own close to 16% of the stock, and that continues to grow. We, in full disclosure, believe the stock is very undervalued. And we express that through continuing purchases individually as management team members. We think that this gives us a very solid alignment between the management team and shareholders. So we hope that that's recognized and appreciated by those of you that have supported us. And we appreciate that support.

So with that, let me turn it over to Leo, and we'll take questions.

(Operator Instructions) Daniel Donlan, Ladenburg.

I just wanted to start off with the same-store NOI, you know, double-digit growth. Was just kind of curious if you could kind of maybe parse that between maybe what was non-rehabbed and what was rehabbed? Just trying to figure out how much is being driven by the rehabbed units.

Yes, we talked about this yesterday, Dan. It's Matt. And I think it came out to about 15% of the units in that pool are rehabbed. So of the 3,200-ish, only 15% of the units were included in rehabs. And I can follow up and send you the exact date or exact deals later. I don't have them right now.

Okay. Yes, no, no -- that's helpful. So it wasn't necessarily a material amount.

No.

Hey, Dan, it's Brian, sorry. Let me also point out that other income increased approximately 31%, and that's part of the value-add strategy. There's multiple components, one of which obviously is the value-add from a rehab perspective in driving rents. But another piece of it is aggressively driving other income, which BH has done a fantastic job. And I think 31% year-over-year growth in same-store highlights that.

And then another part of it is the expenses. And as Matt mentioned, BH has done a very good job of that as well. One area was in insurance. We saw some -- I think about a 12% decrease in insurance costs across the same-store pool. And that's driven largely by BH's pricing power in the market, managing close to 70,000 units. So I think another important component of that NOI growth this quarter.

Okay, that's helpful. I saw that as well. And then just kind of looking at the supplement, page 9 of the NAV detail, you brought down the third-party cap rates 20 basis points on the low end and about 30 basis points on the high end. So I was just kind of curious: are these capped rates, I mean, they're going to bounce around every quarter? And if so, kind of what drove that decline in cap rate?

Both our own management estimates of what we are seeing in the transaction market, including some of the larger portfolio trades that you are aware of. So our own data, plus third-party data that is queuing off those trades. I think there was significant announcements in the quarter, not only in the Landmark transaction, but others in our markets in Atlanta and Dallas that we solicited feedback from -- you know, the JLLs and the CBREs, both in the private market and then got public REIT analyst firms to weigh in as well. So we took that -- those two data points. And I think it's just largely a measure that they came down for the reasons -- for all the private transactions announced recently.

Okay. And then looking also kind of at the estimated fourth-quarter NOI range that you gave of $15.3 million and the $17.3 million on the high end. I was just kind of curious -- it seems to me the low end of that is ultraconservative, because it would imply a sequential decline versus what you reported in the third quarter. So just kind of curious: why such a low end there? Why not -- you know, what's driving that conservatism? Is there something that you're worried about in the fourth quarter, or are you just trying to be conservative?

It's more the latter. There's certainly a conservative element to it, and I wouldn't call this a worry, but there is interest-rate exposure in the portfolio, although capped. Based on some of the data that has come out here recently, if the Fed starts to raise rates, short-term rates, that's almost probably definitely going to impact LIBOR, which is what our floating-rate debt is geared off of.

So we want to have a healthy spread in there in case we see something like that. We don't anticipate it at all. We think whatever the Fed does is going to be somewhat mild and be well recepted (sic) by the market. So it's things like that that we're putting in there.

Yes, I think on NOI, I would expect that we'd be at the mid- to upper end of that range, Dan.

Okay. And then kind of sticking with the -- your floating-rate exposure, when should we start seeing you fix some of this floating-rate, if anytime soon? Are there some properties that you're just still waiting to mature from the updates? Or -- is it more driven by that, or is it more driven potentially by whatever the Fed policy is going to be? Just trying to better understand how that dynamic will work.

I think there's a -- there are, I'd say, a good number of portfolios upcoming in the early 2016 that we consider core that we want to own, you know, for a while that we're looking at actively right now putting to bed. Whether it's a 3% five-year coupon from a lifeco or something longer from an agency.

So we are soliciting those quotes now for some of the deals that we want to own a while. The Texas portfolios, for example, that are outperforming -- we are actively in those discussions with lenders right now.

Okay. And then as far as the acquisitions go, you guys seem to want to continue to acquire. But I'm just kind of curious -- kind of given your leverage, what is your urgency, if you think rates are going to potentially tick up in the next 6 to 8 months? I would expect cap rates might follow that.

What's really driving -- you've got great internal growth. Why not just kind of step back and wait to prove out that growth? And also maybe you might get some cap rate lift, which could get you a better going-in cost basis. Just kind of curious what's driving your desire to continue to acquire here, given your leverage?

Yes, I don't disagree with focusing on the internal piece, but very rarely do you see a deal in Dallas these days or in a good submarket of Dallas that you can buy for $55 a unit and move it a couple hundred basis points. So it was really just the fact that this particular deal, which is probably immaterial from a portfolio perspective, did have the -- you know, it had all the components of a deal we look for to purchase in the value-add.

And so it's almost like we could acquire this deal on 2013 per-unit basis. So that stuck out as attractive. But there is no -- there is not a great, I guess, urge to expand the portfolio at this time.

Dan, it's Brian. Let me add to that a little bit. It's a great question on your part, and let me quantify it further -- that we are looking really only for opportunistic-type deals. Our portfolio is still small enough that if we put a couple of deals like that in, it could have a major impact.

And to your point of having great basis in the portfolio now and having a growth strategy that's playing out -- if we can add a couple properties that have those same characteristics, we want to do it; if we can't, we don't. So there's no real urge to grow the portfolio unless it's a very attractive opportunity.

Okay, that definitely makes sense. And then as far as the rehabs go, how do you decide when to continue to press the envelope here in terms of how much you're willing to do? If the market is really strong, are you kind of just saying, you know what? Let's just wait and do this and not maybe disrupt the property? How are you guys making those decisions on when to kind of turn it on and turn it off?

I think seasonality is going to be a factor going into the next two quarters. You'll probably see more of an occupancy build and less rehabs, just because of the time of the year it is. But as long as we can continue to get 23%, 24% ROIs and still maintain an average occupancy of 93% or more, I still think it makes sense to do some.

Obviously, we pushed it a little bit more in the third quarter. But until you see the inflection point, where the new lease growth that I mentioned -- call it 13% in Atlanta -- is reducing to a renewal rate increase that we're getting of 6.75%, I think it still makes sense to allocate capital toward those programs. But then again, I think in the third and the fourth quarter -- or, excuse me, in the fourth-quarter 2015 and then first of 2016, we'll try to build occupancy a little bit more and probably do less.

Okay, thanks. I appreciate it.

(Operator Instructions) At this time I'd like to return the call to our management team.

Great, thank you, Leo. We appreciate everyone's attendance today. As always, we try to be very open and receptive to investor calls and analyst calls. We'll be in Las Vegas next week at the NAREIT conference. I'm sure many of you will be out there. Hope to see you if we don't already have a meeting scheduled. And again, thank you for your time; we appreciate it.

Thank you. This does conclude today's conference. You may now disconnect your lines, and everyone have a great day.