NexPoint Residential Trust Inc (NXRT) 2015 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the NexPoint Residential Trust fourth-quarter 2015 conference call. As a reminder, today's call is being recorded, and at this time, I would like to turn the conference over to Marilynn Meek. Please go ahead, ma'am.

Thank you. Good day, everyone, and welcome to NexPoint's conference call to review the Company's results for the fourth quarter ended December 31. 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 being webcast through the Company's website at www.nexpointliving.com. Additionally, a copy of the Company's fourth-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 financial results for the 2016 full year. They are not guarantees of future results and are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statements.

Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the Company's Form 10-Q for September 30, 2015, as well as the Form 10-K for the year ended December 31, 2015, which will be filed on or before March 30, 2016, final information statement and NexPoint's Form 10 registration statements filed with the SEC for a more complete discussions of risks and other factors that could affect the forward-looking statements.

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 operations, or AFFO; funds from operations, 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 our website, as well as our Form 10-Q for the quarter ended September 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 thank you for everybody joining the call today. We welcome all of your support and hopefully you find this to be informative today.

I am going to go through and read our Q4 results, our 2015 full-year results, give some guidance for 2016, and then Matt is going to jump in and talk through our portfolio and give some more detail.

Just as a quick overview for those that may be new to NXRT, our strategy is to acquire Class B multi-family properties primarily in the southeast and southwest United States, including Texas. We provide a value-add program where we go in and do upgrades to both the property in general, exteriors, common areas, et cetera, as well as the interiors of some of the units, with a goal to grow our NOI same-store year over year.

Just a quick business overview, first let me say before we get into the results, we are really happy about how the first year went. We finished strong in the fourth quarter and continued to execute on our plan, continued to upgrade units and see strong NOI growth. We believe that the multi-family fundamentals remain very strong, particularly in our core markets. I think the capital markets are a little dislocated these days and are not reflective of fundamentals, but we continue to see that trend as far as the fundamentals in our markets to move up in 2016. Our value-add program continues to add NOI growth and we are still seeing some pretty strong organic rent growths in our markets.

Just to reiterate that our acquisition program will be accretive. We don't look to overpay for deals. We want things that are accretive to FFO, AFFO, et cetera, and Matt will get into some more detail on that. Primarily we're going to be funding that from excess cash flow because the -- based on where our stock is trading versus where we think value is, which we, I think, give a pretty good detail of in our supplement. So that's our immediate plans for 2016 in the way of funding acquisitions.

Then from a disposition perspective, we made no dispositions in 2015. That may change in 2016. In general, our strategy is to hold investments long term as we add value to the properties, grow rents, and extract as much value as we can out of the properties. Various economic and market conditions may influence us to hold properties for different periods of time. From time to time, we may sell an asset before the end of an expected holding period, particularly if we receive a bona fide unsolicited offer, which is not atypical, and we believe those terms to be attractive.

If we have an upcoming liquidity need, such as debt maturing or if the sale would otherwise be in the best interest of shareholders, clearly we review all the impacts of a potential sale, including any tax impacts. We review market conditions continually in all of our submarkets and monitor any changes there that would suggest a sale of properties or exiting a market as a whole would be in order.

So with that, let me get into, first, our fourth-quarter results for 2015. Our AFFO at the fourth quarter was $7.4 million, or $0.35 per share. Our FFO was $6.9 million, or $0.33 per share. NOI was $16.6 million. The loss for Q4, net loss, was $1.9 million, which is a loss of $0.10 per share and includes depreciation and amortization of $10 million.

For the full year, our AFFO was $29.5 million, or $1.38 per share. FFO was $25.6 million, or $1.20 per share. Our NOI was $60.4 million and our net loss was $11 million, or minus $0.52 per share, and that included $40.8 million of depreciation.

High-level same-store results for Q4, this is Q4 2015 versus Q4 2014 same store. Same-store revenue growth was 9.4%. Our same-store operating expenses were a 11.5% increase, which was driven largely by a 26% increase on real estate taxes. As we acquired a vast majority of this portfolio in 2014, we experienced the reassessments in 2015. We can get into more detail on that here in the detail part of the call. Our same-store NOI was a 7.3% increase, and again, that was impacted by the real estate tax increase in the fourth quarter.

Our portfolio metrics, just a quick overview, we own 42 properties as of the end of the year and have made no acquisitions thus far in the first quarter. That's 13,155 units. Our average rent across the portfolio is $803. Our occupancy is 93.9%.

On the rehab front, we rehabbed 552 units in the fourth quarter. For 2015, we rehabbed a total of 2,313 units, bringing our total from inception to 2,643 units. On average, we are experiencing 11.4% increase in rents on renovated units, which equates to approximately 21.5% ROI.

So all of this information could be found in our earnings release and/or supplement. As Marilynn mentioned, that's posted on our website.

Let me go into our 2016 guidance before I turn it over to Matt to talk about some of the details. For revenue, we are projecting on the low end $134.5 million; on the high end, $136.5 million. NOI is $69.1 million on the low end; $71.1 million on the high end. FFO per share, we are estimating $1.49 per share on the low end and $1.57 per share on the high end. AFFO per share, $1.54 on the low end and $1.62 on the high end.

So that's an increase in NOI from 2015. We are projecting a 16% increase; FFO, a 27.5% increase; AFFO, a 14.5% increase. If you take the midpoint of our FFO and AFFO guidance and assume that we have the same dividend each quarter that we had previously and what the Board just declared yesterday of $0.206 per share per quarter, that's FFO coverage of 1.86 times and AFFO coverage of 1.92 times.

Obviously, we have a requirement as a REIT to pay out at least 90% of our taxable earnings and 100% to avoid any sort of tax at all at the REIT level. So, there may be some conversations around increasing the dividend throughout the year as we monitor that situation. But we think that's a pretty healthy position to be in.

Some of the assumptions around the guidance that we have issued is we have assumed no acquisitions during the year. We have assumed no dispositions during the year. We have assumed no refinancings during the year.

We do assume that we repay the Key facility in full in August when it comes due, and as far as LIBOR, as many of you know we have predominantly floating-rate debt, so we have estimated a 25 basis-point increase in LIBOR per quarter beginning in the second quarter of 2016, which we think is very realistic and conservative, given where we are.

So, with that, let me turn it over to Matt to go through some of the detail and give you an update on the portfolio and some of the markets.

Yes, thanks, Brian.

Brian mentioned most of the value-add results. I just want to hit a couple other things to mention. All 42 properties that we own have some type of rehab going on in progress right now. Approximately 75% of all budgeted exterior and common-area dollars have been spent and approximately 37% of all budgeted interior money has been spent.

I'll recap the same-store portfolio real quickly. Our calculation methodology, as you know, is our same-store multi-family communities, defined as those that are stabilized and comparable for both the current and the prior reporting year. 25 properties meet this definition for the fourth quarter at 7,532 units. As Brian mentioned, same-store NOI grew a healthy 7.3%, but more specifically on the topline I want to go through the markets and what we saw in each market.

In Austin, we saw income increase 5.89%. In Dallas, we saw income increase 9.37%. In DC metro area, we saw income increase 11.92%. In Atlanta, we saw income increase 9.37%. In Nashville, we saw income increase 10.67%. In Charlotte, we saw income increase 8.69%. In Tampa, we saw income increase 8.44%, and finally, in Jacksonville we saw income increase 7.02%, which averages out to be a 9.4% total.

To recap the acquisitions, for the year ending December 31, 2015, we acquired 10 properties for a combined purchase price of $277 million. As we have stated, we will continue to be opportunistic to acquire one-off accretive deals as we did in the fourth quarter with The Place at Vanderbilt. Already in 2016 at that property, we have seen income grow in January by 4.25% and 6.8% in February.

And so as we find these opportunities, we will continue to pursue them and fund them with free cash flow and/or via 1031 exchanges from strategic dispositions in 2016.

Speaking of which, the private market bid for B assets, as we have stated, remains very strong, particularly in our markets, evidenced by us receiving unsolicited offers on a number of our assets recently, several of which have caused us to pursue some strategic disposition activity in the near term. This week, today, in fact, we expect to be under contract to sell two assets in Jacksonville, Mandarin Reserve and The Park at Regency, and our lone asset in Austin, Meridian.

With these sales, we expect to generate gross proceeds of approximately $64.25 million, which equates to approximately an average 6 cap on T3 over T12 NOI, which is much lower on T12 NOI, generating levered IRRs north of 40% and a combined gross equity multiple of 1.92 times equity.

In each case for each property, we and BH have been able to execute on our underwritten business plan and do not consider these markets core or growth markets for us over the near term.

And finally, if all goes as planned, we expect to close these sales in June, and as Brian mentioned, we would use the net proceeds to retire and potentially recast the Key bridge facility that matures in the third quarter of 2016. Obviously, any remaining proceeds would be used for 1031 exchanges, operating capital, or other shareholder-friendly uses.

Finally, looking ahead on the portfolio, we are pleased with what we accomplished in the quarter and obviously for the fiscal year of 2015 by adding smart acquisitions to the portfolio, preserving our basis, and driving NOI growth by investing heavily in value-add programs.

BH, our property management partner, continues to outperform in controlling expenses, increasing occupancy, and growing the topline, especially in the other income buckets.

We saw strong, effective rent growth across our portfolio, as we mentioned. And Houston actually led the way for our one asset in Houston for the full year with 8% rent growth on an annual basis. Tampa property saw 7.5% annual rent growth, followed by Atlanta at 6.4%, Nashville at 6%, and Dallas at 5.4%.

Our portfolio today sits at [94.4]% physically occupied with an average of $809 effective (multiple speakers) as of close of business yesterday, up 50 basis points and $6 from the end of the fourth quarter, respectively.

As we have mentioned previously, we believe the fundamentals of the apartment business are strong, especially in the B space where the rent delta between Class A and B units remains significant and vast and given our focus on driving NOI growth in our portfolio's attractive basis, highlighted in particular by the aforementioned dispositions. We feel pretty good about where we are positioned.

So with that, I will turn it back over to Brian.

Great, thanks, Matt.

Let me run through real quick our balance sheet and capital structure. I think there is some important stats in here. As of the end of the year, we had $63.1 million of cash on the balance sheet. Of that, $16.2 million was free cash that we used to fund operations, dividends, any sort of acquisitions, repayments of debt, et cetera.

Restricted cash was $46.9 million. Of that, we have $24.5 million that is earmarked for continuing rehabs on the properties. Our total debt outstanding, and this includes the Key bridge facility of $29 million, was a total of $711 million. That debt is broken out between 93.6% floating-rate debt and 6.4% fixed debt.

Those of you who have been on the call before or who we have met with in the past, you know that our preference is to do floating-rate debt not necessarily because we think the rates will remain low, which we do, but more importantly because of the flexibility that it provides. As Matt mentioned, on a couple of these potential dispositions, it makes it a lot easier to sell a property if you can unwind out of the debt for very little money. So that's one of the reasons we did. It just gives us a lot of flexibility and optionality.

Our weighted average interest rate as of the end of the year was 2.67%. We did see in 2015 an increase in LIBOR towards the end of the year as the Fed raised short-term rates for the first time in many, many years. But we haven't really seen them move since then. As mentioned in our guidance update, we did model in over the course of the year a 75 basis-point increase in LIBOR, which we think is conservative.

We continue to utilize caps on most of the floating-rate debt. With the caps in place, we have a maximum rate of 5.4% on our floating-rate debt. In 2016, we have $4.6 million of amortizations on our various debt facilities -- sorry, mortgage facilities. And then, as mentioned earlier, the bridge facility of $29 million is maturing in early August and, as Matt mentioned, the potential sales that we are looking at doing, we would use the proceeds to pay down that Key facility or other uses if we are able to find another avenue for extending that or turning it into a revolver or whatever.

So, that is the update on the balance sheet. We believe this puts us in a very strong position vis-a-vis having to access the capital markets, which is not really an option for us right now. So, having the $24.5 million of cash on the balance sheet to continue to do the rehabs that have shown considerable return on investment is a key part of our execution over the next two years.

Just some closing thoughts before we turn it over to questions. Our number one focus continues to be maximizing return for shareholders. Although the fundamentals of multi-family are very strong, there are still some challenges, given where the stock is traded, which we are acutely aware of, and we continue to look at ways of closing that discount.

We are also very aware of and continue to monitor the private market transactions and the bids out there. We get unsolicited bids on our properties and we see what is transacting either as large portfolio sales or just in processes that we are in where we are trying to acquire something, and it just gets bid up beyond what we are willing to pay. So, that continues to give us comfort that we are vastly undervalued in the public market.

We continue to avoid even discussing dilutive equity raises. As a 16% shareholder, we just don't view that as the best use of anybody's capital. We continue to assess the leverage situation and we think it is still very healthy to have a large piece of our mortgages in floating rate.

So with that, I guess we'll turn it over to Marilynn and the operator for any questions.

(Operator Instructions). Dan Donlan, Ladenburg Thalmann.

You guys answered a lot of my questions already, but it looks like the rehab cost per unit went up a decent clip relative to the third quarter, which is curious. Were the budgets on a per-unit basis just more costly? What was driving that and where do you see that shaking out going forward in 2016?

Dan, it is Matt. It is primarily -- you are right, but it is primarily driven by labor expense, which ticked up a little bit, and we see that moderating and not getting any -- rising anymore in a material way. But it did tick up for that reason.

Okay, so you think the current run rate, is probably that or slightly lower probably a good way to think about it on a per-unit basis?

Yes, I think that at least on an ROI basis that 20%, 25% range is still our great ROI range.

Okay. And then if I was to look at the entire portfolio, just not the same store, where was your NOI growth, do you think, year over year for the fourth quarter?

So meaning the properties outside of the 7,500 in the same store?

Yes, if you have -- I don't know if you have a pro forma number on you after you acquired a bunch of stuff in 2015, but was curious if you had owned those properties in 2014, what that fourth-quarter pro forma growth rate or pro forma NOI growth rate would have been?

Yes, Dan, there is -- within -- it is Brian, by the way. Within the supplement on page 11, there is a pro forma same-store analysis, which takes into account the full-year financials of the entire portfolio. So we didn't own it. It is the seller's financials. Revenue was up 6.1% for the year over 2014 and NOI was up 9.3% on a pro forma (multiple speakers)

Okay. Yes, I think I just read that wrong, even though it is just right there.

And then, just talk a little bit about the facility and why you are selling assets to pay that down? Why not just recast that? Do you have the ability to recast that if you wanted it or wanted to do it or is this a move to reduce your leverage down a little bit? Just talk about your thought process there and why you're doing it the way you're doing it.

Yes, so I think the first and foremost is that we didn't want that hanging out there in August with a gun to our head.

Key had always been willing to recast and extend it when all was well, but as capital market volatility increases, we just wanted to take that off the table, but they will agree to recast it and provide better terms now that the net debt to EBITDA is going down pretty dramatically on a portfolio basis with these sales. That, coupled with the fact that these are pretty great return numbers in markets that we don't consider to be core.

I think going ahead and making those prints, particularly because we haven't done -- haven't had a sale yet, we thought that might further highlight the disconnect between an implied cap rate of 7.5% or north of 7.5% versus a private market bid of 6% or lower.

So all those things together, it made sense to us in the near term to sell these three properties.

Dan, it's Brian. Just higher-level thinking about dispositions in general and in 2016 specifically, we continue to look at the markets we are in. Some of them are not core markets, some of them are markets we would like to be larger in, and then there are some markets that, particularly maybe in south Florida, we would like to get into.

And Jacksonville in particular is a market that we don't really consider to be a core market, and as that market continues to catch a bit and get hot, it is something that we look at as to how can we redeploy some of that capital into either paying down debt and delevering the REIT overall or -- and/or putting some of those proceeds into a new acquisition in Dallas, Atlanta, Phoenix, et cetera, some of those markets that we consider more core or entering into some new markets where we are not yet positioned.

Okay. Yes, it looks like you are selling the properties on the -- in terms of your cap rates in which you have set in the NAV tab, it looks like you are selling them at the low end. Do you feel like you are low end on the cap rates there? Do you feel like that is defensible or do you think you can maybe bring that down a little bit more, just given what you have sold these assets for, or how do you feel like cap rates are now versus maybe where they were six months ago?

Obviously, the CMBS markets have fallen out of bed somewhat. I know you guys don't necessarily use CMBS, but do you feel like the cap rates have ticked up a bit in the last six months or how do you feel about that?

Yes, we are not seeing cap rates ticking up necessarily in our market. Transaction activity in the first quarter felt a little off. Obviously with the capital market volatility, deals fell out and there just weren't as many deals out on the market or as robust as in quarters past.

That being said, today we are seeing another healthy bid. It is almost a month-to-month deal, but cap rates for the most part, I think, are remaining flat in the B space because of the Fannie/Freddie bid and also the plentiful debt, the Lifecos, the banks, everyone is willing to finance multi-family, particularly in the B space.

With respect to Jacksonville, yes, I think there is an opportunity to lower the cap rates a little bit. We bought that portfolio really well, and as Jacksonville starts hitting the front pages of papers on job growth, we think that selling into that strength, given it is a more tertiary market, probably makes some sense for us on a strategic basis long term, so that's where the thinking is. But we could potentially see lower cap rates in Jacksonville on the rest of the portfolio.

Okay, and then just lastly on redeploying the proceeds, Jacksonville, as well as Austin, that is going to tick up your exposure in Atlanta and Dallas. I would imagine probably over 55% or so. So, do you worry about being overconcentrated in either one of those two markets? I know that you feel very strong about the job growth there and you are located in Dallas, but just trying to think about from a diversity standpoint how you're going to reallocate capital.

Yes, I think the focus is -- it is still going to be those core markets, but we are looking to do more in Nashville, looking to do more in Phoenix, looking to do more in south Florida in particular. I think those are the three focus areas right now, and then if we see something in Atlanta or Dallas that we can't pass up, obviously we will look at it because we love the markets.

But I would say for growth opportunities, we still are focused on south Florida, doing more there, but Phoenix and Nashville are also very, very good markets for us.

Okay, thanks. That's it for me.

Ladies and gentlemen, that does conclude the Q&A portion of today's call. At this time, I would like to turn it back over to management for any comments and closing remarks.

Yes, thank you. We appreciate everyone's support. We hope that it has been informative. I think Matt and myself have made ourselves very accessible to anyone who has questions. Now that earnings are out, we can obviously reengage and get more specific with investors and potential investors. We continue to get out on the road. We did a few non-deal roadshows at the beginning of this year before we got heavy into the earnings season.

So, we continue to tell the story, and if anyone has any questions, Marilynn's information is on the press release. Please feel free to reach out to her and she will set up a call. We will answer additional questions.

So with that, thank you very much for your time and we look forward to a strong 2016. Thank you.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.