NexPoint Residential Trust Inc (NXRT) 2016 Q1 法說會逐字稿

Good day, everyone, and welcome to the NexPoint Residential Trust, Inc.

first-quarter 2016 conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Marilynn Meeks. Please go ahead.

Thank you. Good day, everyone, and welcome to NexPoint's conference call to review the Company's results for the first quarter, ended March 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 2016 supplemental information is available for 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 within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions and belief. Forward-looking statements can be identified by words such as expect, anticipate and intend 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 from financial results for the 2016 full year and anticipated sales of properties. 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-K for the year ended December 31, 2015, for a more complete discussion of risks and other factors that could affect 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 AFFO, 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 Form 10-K for the year ended December 31, 2015, and our earnings release furnished with the SEC today.

I would now like to turn the call over to Brian Mitts. Please go ahead, Brian.

Thanks, Marilynn. And we appreciate everyone who has joined today. We are excited to announce what we are some pretty good results. So let's get right into it.

Let me give you a couple of headline numbers. First, our Q1 2016 same-store NOI decreased 13.9%. Our rental income increased 8.4%. Occupancy increased 95 basis points to 94.6% and total revenue increased 9.5%, all compared to the first quarter of 2015. And we exceeded guidance, the guidance that we issued for NOI, AFFO and FFO.

So let me tick through a couple of the stats here for the first quarter. Our Q1 AFFO is $8.9 million or $0.42 per share. Our Q1 FFO was $8.6 million or $0.41 per share. Q1 NOI was $17.7 million. Our rental revenue increased to $29.4 million for the first quarter 2016 compared to $28.6 million for the fourth quarter of 2015. And our total revenue was $33.5 million, which is up from $25.5 million from the fourth quarter of 2015.

Q1 2016 net income was $300,000 or $0.01 per share, which includes depreciation and amortization of $9.6 million for the quarter. Average effective rent per unit across all 42 properties was $811 with occupancy of 94.5% across the portfolio.

We would also like to, at this time, reaffirm full-year guidance for 2016, which is as follows. For revenue on the low end, $134.5 million and $136.5 million on the high end. NOI, $69.1 million on the low end and $71.1 million on the high end. FFO per share, $1.49 on the low end, $1.57 on the high end. AFFO per share, $1.54 on the low end and $1.62 on the high end.

That is contingent upon the same assumptions we made at the end of last year for our full-year guidance we issued, which is no new acquisitions, no dispositions, no refinancings, assuming we repay the key facility in full in August per the terms of that agreement and we see LIBOR increases of 25 bps per quarter beginning in the second quarter.

So we know that the dispositions part is not going to be accurate going forward. We do have some properties under contract, as we mentioned on the last call. And Matt will get into details of those. And once we do close some of those deals will update our guidance accordingly.

Let me talk a little bit about the capital structure. And all this is as of March 31, 2016; it's the end of the first quarter. Total cash at the end of the quarter was $[54].9 million, free cash was $17.4 million. Restricted cash was $37.6 million, which includes escrows, security deposits as well as cash that we reserved for value-added improvements. That amount was $20.1 million.

Total debt outstanding as of the end of the quarter was $711 million. Of that, 93.4% is floating and 6.6% was fixed, which is consistent with prior quarters. Our average weighted interest rate is 2.67% as of the end of the quarter. Average max with the cap we have put in place would be 5.4%. And for the remainder of 2016 we have $4 million of amortizations coming up on the mortgages.

And then, of course, we've got the bridge maturing in August for $29 million.

So, we are pretty proud of the quarter. I'm going to turn it over to Matt, let him give some details on the portfolio, some of the markets, etc. And then we will do some closing thoughts before we turn it back to the operator and take questions.

Thanks, Brian. Indeed, very pleased with the strong results in the first quarter, continue to see strong demand for our more affordable and value-oriented housing products, particularly as a significant rent delta exist or continues to exist, rather, between Class A and product in our market. At a time when other multifamily REITs are reporting relative softness in their Class A markets, we are generating strong effective rent growth across our entire portfolio on a year-over-year and quarter-over-quarter basis.

For example, our Atlanta portfolio generated 8.05% effective rent growth year-over-year. Nashville was 7.99% loan property and Houston was 7.71%. Tampa was 7.25%. Boston was 7%. West Palm Beach was 7%.

On 1,600 new leases signed during the quarter we saw 7.85% growth. Nine markets out of our 11 saw 7%-plus growth on new leases. Nashville was up 16.2% in Q1, Atlanta 10.9% in Q1, Houston 9.8%, Tampa 8.9% and Charlotte, rounding out the top five, with 8.25%. Even our largest market, Dallas, exhibited 7% in new lease growth.

Renewals were also very strong, with at least 3.25% overall and 775 renewals during the quarter. Charlotte had the highest growth on renewals, same-unit and tenant new lease, of 8.82% during Q1, Houston in the top three yet again with 8.36% growth on renewals, Austin came in third with 7.8% on renewals. And Orlando and Nashville rounded out the top five, each with getting new renewals above 5%.

Same-store recap real quickly -- we had 32 properties in full for this quarter, about 9,428 units in total. Same-store pull has reached 76.2% of the properties or 71.2% of total units. Rental revenue increased 8.4% year over year. In fact, topline same-store revenue eclipsed more than 6.5% in eight of our 10 same-store markets. Expenses increased 4.8% year over year, driven primarily by payroll and real estate tax increases, particularly in Texas.

Average rent increased to $823 a unit from $778 a unit year over year. That's a 5.8% increase. Other income increased 18.2%, year over year, continuing a trend that we've seen in the past quarters. Again, all resulting in same-store NOI growth of a healthy 13.9%.

A quick update on the disposition front -- we're continuing to see a strong bid for value-added assets in our market as previously discussed, on our calls, we are under contract to sell two assets in Jacksonville, Mandarin Reserve, and the Park at Regency in our loan asset in Austin, Meridian.

Meridian is expected to close today, actually, and is a good example of our execution on our business strategy.

Quickly to go over it, we paid $12.3 million for the asset in January of 2014. We invested approximately $1.5 million on interior and exterior value-add programs over the two-year period, drove NOI over $300,000 for that period or about 35% and will generate a 2.25 -- 2X multiple on the equity and unlevered IRR of approximately 45%. On all three assets we expect to generate gross proceeds from the sales of approximately $64.5 million, which equates to approximately, on average, a six cap on T3 over T12 NOI, unlevered IRRs north of 45% and a gross combined equity multiple of 1.92%.

We expect to close, as we said, Meridian today and then the Jacksonville deals the first week of June and as Brian mentioned previously, use the net proceeds to retire and recast the Key Bridge facility that matures in the third order and use any remaining proceeds for the 1031 exchanges, operating capital or the shareholder-friendly uses of capital.

So looking ahead, we are pleased that what we accomplished in the quarter, first quarter of 2016, continue to preserve our basis, obviously drove NOI growth and invested heavily in value-add programs. All 42 of our properties have some type of rehab going on in progress right now, approximately 75% of all the budget exterior and common-area dollars have been spent, and yet we have only spent approximately 40% of the budget interior, which is, again, fully funded on our balance sheet so that we have more room to grow there.

Portfolio-wise and since inception we have now upgraded [3,030] interiors or about 25% of the entire portfolio for an average cost per unit of $4,736, achieving an average approximate ROI of 21.1%. Our portfolio today sits at 94.75% physically occupied with an $819 average effective rent as of the close of business yesterday, up 27 basis points and $7 from the end of the first quarter, respectively.

And again, while we don't have a crystal ball on a relative basis in real estate and apartments in general, we do think the class B space, particularly with our basis and our assets, coupled with our redevelopment activity and the rent delta we continually talk about between A and B assets, we think that NXRT is still a good place to be.

Obviously, with 17% insider ownership, which is up about 82 basis points from last quarter, we continue to believe in our strategy. With that, I'd like to thank [Highland], our internal team and the BH teams for their continued execution, and turn the call back over to Brian.

Thanks, Matt. So, to recap the quarter and a little bit of what Matt talked about, we are getting very good rent growth on renewals. We are still seeing strength in the markets that we are in. And overall, this marks our -- at the end of the quarter marks one year in the public markets. And we've tried to keep a very consistent message throughout, whether it's on these calls or presentations to investors, etc. And we think that these results are proof of what we have been saying in the execution of the strategy and the wisdom of the strategy, both in the same-store results we are seeing as well as the prices that we are getting on the assets that we are selling.

So hopefully everybody is pleased with that that has invested.

Our same-store pool continues to grow, so I think that makes our same-store numbers more meaningful. We will continue to see that in the future, of course.

As Matt mentioned, we have a large majority coming up in August, but we are using proceeds from the sales to pay that down and working with our bankers to try to recap those lines to give us flexibility going forward.

Our focus still continues to be maximizing shareholder returns, both by implementing our strategy, which we think is a very sound strategy, as well as good management of the balance sheet, making sure that we are not buying assets at a high basis or doing things that are not accretive overall to the bottom line. We continue to avoid the allure of dilutive equity raises.

The markets certainly haven't been very friendly, but we did see a nice run up in the stock from the lows around the mid-February point where we hit a closing low of $10.81 a share.

So, hopefully, everybody got in at that level because we've seen nice increase since then. We continue to review different ways to close the discount. As we continue to report these results, obviously, and as we have put in our supplement again as an NAV page, at least our view of NAV. So that continues to move up, which puts a lot more distance between the stock price and the NAV, but at least we got some nice run-up in this quarter on the stock price.

And we continue to be very active in monitoring the private markets. We said it on I think pretty much every call that there is a big, big differential between where the private market values these assets and where the public market does, where we continue to trade at an implied cap rate of 7%, which we think is way too high. And as Matt mentioned, our high end increasing insider ownership aligns us with shareholders, we feel, and puts us in a position to be very motivated to deliver value to shareholders. So we continue to be very focused on that.

So with that, that's all of our remarks. So we will turn it over for any questions.

(Operator Instructions) Daniel Donlan, Ladenburg Thalman.

Just curious on the guidance here -- when you guys originally set this, and I'm sorry if I missed this in the prepared remarks, did you anticipate selling those three assets?

The assumptions we make in the guidance does not assume any dispositions. As Matt mentioned, the Meridian asset, which is the Austin property, is scheduled to close today. So once we do start closing these sales, we will update guidance accordingly. But we want to lay out a baseline with the current assets and then we can share with the sale does. Obviously, as we sell it, we paid out key over time. We use the remainder of the proceeds to either pay down additional debt or by new assets, etc. So it's kind of a work in progress over time. But yes, the guidance that we issued originally and then reaffirm here does not assume any dispositions.

Okay. If I multiply the $0.42 you did in the quarter times 4, you are clearly above the high end of guidance. So it seems like you -- I thought you might have be something in there, but maybe just your Q1 expectations were much better than you anticipated.

And then, so going with that as well, if I look at page 9, you are estimating $17 million of NOI for the second quarter. And that's down from $17.7 million in the first quarter. So, I'm just curious why you are NOI with clients sequentially if it's not including any asset sales.

Yes, so when we put out guidance we did it for the full year and we didn't break it out by quarter. And we did have, obviously, a very good quarter. And we chose to just maintain the full-year guidance, which, when you back out the first quarter lowers each quarter going forward.

But we hope that that's not the case. But clearly, when we do sell an asset or do some other things which we anticipate will happen in this quarter, it will move those numbers around. But we wanted to maintain the baseline that we had put out for the full year, back in March, on the March call.

Okay. I just was making sure it wasn't because you were forecasting some type of disruption from renovations or something like that.

No, no.

It sounds like you are just being overly conservative with the range. Okay, so also on the same page it looks like you guys brought up your cap rate assumption for Washington, D.C., from like a 5.8% midpoint to 6.25%. If everything else stayed static in terms of the market, are you just seeing a little bit of upward pressure on cap rates in your pockets within the D.C. market, or what went on there?

Yes, that's exactly the case, Dan. As we've said and talked about a lot, we value these assets every quarter and sometimes even more than that. So what we are doing is going out, getting BOVs from the JOLs, the CDs and all those guys.

And at least with respect to this market, we thought it was prudent to give everyone a realistic view on what the value is on these assets, so it did tick up 20-25 basis points.

I'd also note there is a page or a slide in here where you can see that we have noted some things as held for sale. And then when we release the Q later this week you will see that we have designated certain properties as held for sale, which -- under GAAP we have to break those out. And then the two D.C. or Maryland properties are listed as held for sale.

So we've got some data there. We have been actively marketing them to the point that we had to designate them as held for sale. So we've got some pretty good data points around where we think value is on those.

Okay. Well, you know, we value your whole portfolio at a [6, too] so the stock would be significantly higher.

So other income increases -- that was up substantially again. Can you remind us of what exactly is occurring there and how much longer can you continue to drive that? And have you started implementing these other income drivers at all your properties?

Yes, I'll take those sequentially. So in that bucket are your app fees, your late fees and then more value add to the point of we are installing either security alarms or solar screens that we can build back. One big generator, income generator, is Valley Trash with a garden type deal; that's helpful. It keeps your property clean and also provides a service to tenants so they don't have to walk across the property to take out the trash to dumpsters, etc. So that has been a very -- those programs have been very effective in driving other income growth.

Do I see them continuing? Yes, particularly because our occupancy is increasing. So obviously, the more heads in beds, the more you can charge these fees or employ the services across the portfolio.

We are rolled out -- I think the last question, we are rolled out in I would say virtually 80% of the properties right now with Phoenix being the laggard, just given that we just acquired those late last year. The place at Vanderbilt is already rolled out because we just have a larger presence in Dallas. But I think hopefully by next -- end of Q2 we will be fully out and going on all these programs.

That makes sense. And then in terms of rehab units in the remaining three quarters, what is your expectation there? And has that changed at all since last quarter or earlier this year? Is there any instances where you are saying, you know what, we just not going to -- we are getting really good increases on the existing product. Let's just go ahead and put it off another year.

And how is your rehab going, relative to your expectation, and what do you expect, how many units to get back to do in the remaining three quarters?

I think that -- let's say this. I think the redevelopment activity continues to be the highest return on our capital that we've done. So, that's still going to be a major focus. It's bearing fruit, obviously, in the top line increases in some of our markets being double-digit topline year over year.

How many more units we are going to do -- I would like to think that we can do at least 300 a quarter throughout the year. I think that will probably more done in Q2 and Q3 than we got in Q1, because of seasonality.

But I would say probably 900 to 1,200 for the remainder of the year.

Okay. So you're going to have, then, a headwind from these rehabs for well beyond 2017 into 2018? Is that fair to assume in your -- ?

Yes, a tailwind, I think, more than a headwind.

Yes, I think I said it wrong. Yes.

Yes, I think that's right. And again, some of these renewal numbers are just eye-popping, having same-unit new tenant and 8% or 9% there's no reason for us to turn that unit and spent the money if we don't have to.

Okay, that's it for me. I appreciate it.

(Operator Instructions) I'd like to turn the call back to management for any closing remarks today.

Yes. Thank you, again, for everyone's support. We will continue to press forward with implementation of our strategy and execution of the business plan and hope to see continued good results.

So thank you, everyone. We will talk again in August, if not sooner. Thank you.

This does conclude today's call. Thank you for your participation. You may disconnect at any time.