NexPoint Residential Trust Inc (NXRT) 2016 Q4 法說會逐字稿

Good day, and welcome to the NexPoint Residential Trust Inc. fourth-quarter 2016 conference call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Marilynn Meek. Please go ahead.

Thank you. Good day everyone, and welcome to NexPoint Residential Trust 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 2016 supplemental information is available for your review on the investor relations 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 beliefs. Forward-looking statements can often be identified by words such as expect, anticipate, intend, and similar expressions and variations or negatives of these words. These forward-looking statements include, but are not limited to, statements regarding the Company's guidance for financial results for the 2017 full year and expected property dispositions and the use of proceeds therefrom.

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 most recent annual report on Form 10-K and the Company's other filings with the SEC for a more complete discussion of risks and other factors that could affect the forward-looking statements. Except as required by law, NXRT does not undertake obligations to publicly update or revise any forward-looking statements.

This call includes analysis of funds from operations, or FFO, (technical difficulties) funds from operations, or core FFO, adjusted 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 FFO, core FFO, AFFO and NOI see the Company's earnings release that was filed earlier today.

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

Thank you, Marilyn. I want to welcome everybody to the call, thank you for taking time this morning. I am Brian Mitts, Chief Financial Officer. I am joined here with Matt McGraner, Vice President and Chief Investment Officer for NXRT.

I'm going to start by going through a couple of highlights for 2016. I will go through a couple of the relevant metrics for the year and the quarter, and then I'll do a recap of our cash and debt positions. Then I'll turn it over to Matt. He will go through some of the detail of the portfolio, talk about some of the market we're in and what we are seeing. Then we will end with some -- deliver our guidance for 2017 and then turn it over for questions.

We feel 2016 was a very solid year and a very solid quarter for the fourth quarter. Some highlights. The stock returned approximately 80% for the year. We were added to the R&Z index in November.

We reported four quarters of double-digit same-store NOI growth during the year, including this fourth quarter. We delevered the balance sheet during the quarter, raised the dividend, shored up our floating rate debt by entering into some interest rate swaps. We feel we proved out our value-add thesis through some of the dispositions we made in the year that netted high IRRs.

We bought back shares at what we thought was a very inexpensive price relative to our NAV. We continued a strong case of renovations throughout the year.

We ended the year as net sellers. We sold seven properties during the year, acquired four. However, of those four properties one was acquired in the fourth quarter, the early part of the fourth quarter and two were acquired basically the last day of the year. So those added no results to our income or NOI, and the third acquisition added very little; so those will be things that will propel us into 2017.

We grew NOI year over year by 15.2%, we grew FFO by 21% and core FFO by 5.7% and AFFO by 11.3%. Same-store NOI growth for the year was 12.1%, and for the fourth quarter it was 15.4%.

We reduced our leverage ratio, which we define as net debt to enterprise value, from 69% to 60% during the year. We entered into $400 million of interest rate swaps that locked our one-month LIBOR rate in at 1%, and effectively fixed 60% of our debt versus 92% of our debt which is floating rate, gives us all the flexibility that a floating rate instrument does but now we have that fixed rate protection.

In 2016 we renovated 1,725 units at an average cost of $5,031. For the year -- since inception we have renovated 4,030 units at an average cost of $4,807 per unit, achieving average rent growth of 10.9% and an average return on investment of 21.1% with those renovations. In the fourth quarter we increased our dividend by 6.8%.

Finally before I go through some of the metrics, we introduced a new metric, core FFO, which is pretty standard in our peer group. After consultation with the analysts and some of our investors, we think it is a more stable metric than FFO or AFFO. So that is now in our reporting.

For the full year and fourth quarter, revenue was $132.8 million for the year, net income was $25.9 million, or $1.03 per diluted share for the year. That included a gain on sale of assets of $25.9 million, depreciation of $35.6 million and interest expense of $21.9 million. For the fourth quarter our net income was $180,000, which is $0.01 per diluted share.

We reported NOI for the year of $69.6 million as compared to $60.4 million for 2015. For Q4 of 2016 we reported NOI of $17.4 million as compared to NOI for Q4 of 2015 of $16.5 million. In 2016 -- for the full year of 2016 report FFO of $31 million, or $1.46 per diluted share, as compared to $25.6 million, or $1.20 per diluted share for 2015.

Core FFO for 2016 was $30.6 million, or $1.44 per diluted share, as compared to $28.9 million, or $1.36 per diluted share for 2015. AFFO for 2016 was $33.3 million, or $1.56 per diluted share, versus $29.9 million, or $1.41 per diluted share for 2015.

Same-store properties continued to outperform our peer group. We classified 34 properties, or approximately [88.9%] of our units same-store. Matt will go through some of the details on same-store, both kind of the re-lease percentages on the of second turn after an upgrade.

On November 7 our Board approved a quarterly dividend of $0.22 per share per quarter, which was a 6.8% increase. As previously mentioned, we entered into $400 million of interest rate swaps, and that effectively sets our interest rate at 3.27% across our portfolio as of December 31, 2016.

We finished the year with a total of $55.3 million of cash on the balance sheet. $22.7 million of that is free cash, $13.4 million is cash that is earmarked for the renovations on units, with the remainder reserved for real estate taxes, insurance and lender required escrows.

As of December 31 our total debt was $770 million. Of that 92% is floating rate, but with the swaps we effectively fixed 60% of that. So our total debt is 60% fixed essentially at the aforementioned 3.27%.

During the year our Board approved a share repurchase plan of up to $30 million of shares. We purchased during the fourth quarter 168,942 shares for approximately $3 million at $18.13 per share. Through today -- yesterday we purchased 250,156 shares total for a price of $4.6 million, or $18.34 per share.

The Board last week approved a dividend of $0.22 per share for shareholders of record on March 20 payable on the 31st of this month. Our coverage numbers for FFO, core FFO and AFFO for a dividend are 1.74 times our FFO -- or FFO is 1.7 times our dividend, core FFO is 1.71 times, and AFFO is 1.87 times.

I will turn it over to Matt to go through the portfolio and some of the market details, and then we will [flip] through our guidance for 2017.

Thanks Brian. I'm going to hit same-store results, then talk a little bit about our leasing conditions and then beyond that, talk about capital recycling dispositions and acquisitions. On the same-store front, the same store pool included 34 properties, or 11,076 units for the quarter. On a same-store basis rental revenue increased 6.4%,average rent increased to $857 from $807 per unit, which is a 6.2% increase, other income increased 19.2% and expenses increased by just 0.4% driven by favorable real estate tax settlements. That gives us a total same-store NOI, as Brian mentioned previously, of 15.4%.

By some market -- or by markets, eight markets saw at least 5.4% of same-store revenue growth for the fourth quarter. Dallas was 8.5%, Atlanta was 9.4%, Nashville was 9.5%, Charlotte was 10.3%, Phoenix was 5.4%, West Palm Beach was 6%, Orlando is 8.9%, Tampa was 7.1%.

On the leasing condition front, our portfolio is still experiencing healthy conditions. We experienced strong effective same-store rent growth across the portfolio year over year. Nashville lead with 9.32% growth, Charlotte rose 9.17%, Atlanta was third at 8.79%, Tampa fourth at 8.21%.

Quarter-over-quarter effective rent growth was also good. Nashville lead with 2.01% growth quarter over quarter, and each of Atlanta, Charlotte, Dallas-Fort Worth and West Palm Beach all saw effective rent growth above 1% quarter over quarter.

Four markets saw 8% growth on new leases, which is the same unit/new tenant. South Florida saw -- experienced new lease growth of 10.4% during the quarter, Atlanta experienced new lease growth of 10%, Nashville 8.6%, Tampa 8.1%.

Finally, growth of renewals was also strong. Charlotte saw the highest growth on renewals, same unit and tenant new lease of 5.5% during the quarter, Nashville was second with 4.6%, South Florida was third at 3.6%, Tampa rounded out the top four at 3.5%.

On the capital recycling front, we continue to look for opportunities to improve the quality and location of our Class B portfolio by selling assets where we maximize value, rotating into well-located covered land assets with value. As potential examples of this for the fourth quarter include the previously reported acquisition of The Colonnade, a 415-unit deal in Phoenix, Arizona that we purchased for $44.6 million through a forward 1031 exchange in early fourth quarter of last year. And as Brian previously mentioned, the two-property portfolio in Houston acquired on December 29 consisting of 924 units for $108 million using a reverse 1031 exchange.

We will continue to look for these opportunities and recently have, subsequent to the quarter end in early February, we acquired Hollister Place, a 260-unit property in Northwest Houston for approximately $24.5 million, also via a reverse 1031 exchange. This asset was built in 1999 by Trammell Crow and is essentially untouched -- and has been essentially untouched since construction, leaving a great opportunity to employ our modern interior and exterior value-add programs. The trailing twelve-month nominal cap rate on the asset was 7.1% and we expect our tax adjusted economic cap rate in our first full year of ownership to be 6.25%, which is at least 100 basis points wide for similar assets of this vintage in Dallas and Atlanta.

On the disposition front we currently have five properties that are held for sale, four of which are under contract with hard earnest money deposits that we expect to close in the next three to four weeks. These assets are The Grove at Alban, Miramar, Toscana, and 12610 at the Park.

We have also marketed and received nearly 20 offers on Regatta Bay in Houston. We expect to sell this asset in the first half of 2017 for an estimated sales price between $27 million and $29 million.

Together we expect these five assets to generate approximately $115 million of gross proceeds, an average levered IRR of 35%, and a 2.14 times multiple on our investment. These dispositions will effectively retire the bridge financing we took out to close the $134 million of Houston acquisitions that we made since December 29, as scheduled in a manner non-dilutive to earnings.

In closing, we are pleased with what we accomplished in the fourth quarter. As Brian mentioned, we preserved our basis, we invested heavily in our value-add programs, we efficiently recycled capital, increased our annual dividend, bought back stock at discounts to NAV, and were included in the R&Z.

As we mentioned previously and still believe, the fundamentals of the Class B space are strong, especially relative to the Class A assets, in evidence today by our double-digit growth and guidance for NOI, FFO and AFFO on a year-over basis. We continue the be active in the investment sales marketplace, but the competition for Class B assets with value-add upside in strong suburban job markets remains incredibly strong from both a single-asset perspective and on a portfolio basis. Fully auctioned well located B deals are trading at 5% economic cap rates and as most investors already know, it appears that Milestone will be taken private by Starwood at a 5.8% nominal mid-5% economic cap rate.

In closing, I would like to thank our teams at NexPoint BH for their continued execution and performance, and look forward to another solid year in 2017. Brian?

Thanks, Matt. All right, so let's go through the 2017 guidance. We will give the ranges and then the midpoint.

Starting with revenue. On the low end we are estimating $142 million to $144 million on the high end, midpoint $143 million, that's a 7.6% increase over 2016. Net income, we estimate $26.3 million on the low end, $28.3 million on the high end with a midpoint of $27.3 million, that is a 24.5% increase, and driven largely by the sales that Matt mentioned.

NOI on the low end we are estimating $75 million, on the high and $77 million, midpoint $76 million, that is a 9.2% increase over reported 2016. For FFO per share, this is on a fully diluted share basis, on the low and we are estimating $1.55 per share, $1.64 on the high end, and roughly $1.60 midpoint, that is a 9.6% increase over reported 2016 FFO.

For core FFO we are estimating $1.58 on the low end, $1.67 per share on the high end, and $1.62 per share midpoint, that is a 12.5% increase over 2016 core FFO. For AFFO we are estimating $1.80 per share on the low end, $1.89 per share on the high end for a midpoint of approximately $1.85 per share, which is an 18.6% increase over 2016.

Some of the assumptions that we used for putting together our forecast for 2017 is we all know there is likely to be at least one rate hike this year, probably tomorrow, but we have estimated three rate hikes at 25 basis points each beginning at the beginning of Q2, Q3, and Q4. That is accounted for in our FFO, core FFO and AFFO numbers. We also take into account any share dilution that we've estimated from stock grants, buybacks, et cetera.

We assume the five dispositions and the one acquisition that we have already done in 2017, as Matt mentioned, we've got four of the planned five dispositions under contract with hard earnest money, and expect the fifth one to close in the second quarter at some point. So we've accounted for all of those in our guidance, but no other disposition or acquisitions.

With that, let me give a couple of closing thoughts before we turn it over to the operator for questions. Management continues to align itself with shareholders our insider ownership is slightly over 19%, which is up about 1% since last quarter. Of the 214,000 shares purchased, we are estimating, as we mentioned, pretty significant increases in NOI, FFO, core FFO and AFFO this year despite selling five properties and only acquiring one.

We see strong growth in our value-add program, and we continue to look at the markets and also the potential pipeline of acquisitions but maintain our stance on not issuing new equity unless we have two facts that are true. We have a small to no discount to what we consider to be our NAV, and we have an identifiable use of proceeds that is accretive to earnings and now.

With that, we will turn it over to the operator for your questions.

(Operator Instructions)

Michael Kodesch, Canaccord Genuity.

Thanks, guys. Thanks for taking my question. A couple from me here. Starting out with Houston, so I guess the portfolio is now around 11% on a unit exposure basis. That will go down a little bit with the sale of Regatta Bay, but just wondering what kind of -- what you guys are looking at in the market that is making you maybe a little bit more bullish, and maybe where do you see your target Houston exposure going? Thanks.

Thanks for the question, Michael. It's Matt. I would say that we were really bullish in the fourth quarter, and then having gotten both Hollister Place and the two-property portfolio in the fourth quarter, early first quarter of this year at really good prices. But coming out of NMHC, I think everyone heard that there may be discounts in Houston, and honestly since we've seen that, pricing has tightened.

We chased a recent deal that we were thinking was going to trade at $33 million and it ended up trading at $38 million at about a 75 basis points tighter cap rate than what we purchased in a better location in December. So we may have stolen those deals in December.

I think to answer your question on what our net exposure at the end of the day on a statewide basis in the portfolio, I think we would like to see it be a little bit higher than where it is today, maybe 15% of the portfolio. But we're really happy with what we have today and the buys that we've made over the last three or four months.

Great. That is really helpful. Then looking at your portfolio, noticed Phoenix was down a little bit in the quarter on rental revenue. Was that just a factor of The Colonnade being tossed in there, or was that -- is there anything else going on there?

That is mainly the factor, you take over transition when we take over an asset for better or for worse, there's a lot of turnover in the first quarter of operations. That, and our focus in the region has been to put a lot of heads in beds to stabilize the occupancy there and to get that right before we start turning the units in earnest. Most of that was attributable to Colonnade.

Great. That makes a lot of sense. Then looking at expenses, property taxes were down fairly significantly from prior quarters. Anything driving that, and what is your expectation for the upcoming year?

Part of the ones in the fourth quarter of 2015, we had some adjustments to property taxes. I think Matt said this many times on the calls, we protest all of the appraisals and the cities and counties, et cetera, are pretty aggressive. And we had to make some adjustments in the fourth quarter of 2015, which meant a higher than normal. In comparison to 2016 fourth quarter, it was much lower but that's part of it. Matt, I don't know if you want to -- .

Yes, I would answer that, that from full year 2016 to what we have budgeted for 2017, at least on a same-store basis, we are underwriting and estimating about a 9% increase year over year, so pretty healthy increase that's baked into the guidance, that hopefully we expect to beat by continuing to protest and settle the assessments.

Got you. That is also helpful. Then just one last one for me and I will hop back into the queue with anything else.

Are you guys doing any portfolios in the market at all? Anything large that you might be interested in taking down, or is it more -- should we expect more of one-off acquisitions on a trade basis?

There are some kind of three- and five-asset portfolios out there, nothing that we have seen that are larger than that, say, a couple of hundred million bucks or so, nothing larger than that that we would than we would be interested in looking at. But even on the three to five portfolios, pricing is still competitive and we continue to maintain that we think our best niche in acquisitions is to focus on that $20 million to $50 million equity check.

I think you'll see us focus on that on that size of the deal over the next 3, 6, 9 months. But at present there is nothing out there of substantial size that I would say that we are chasing.

Thanks. That makes a lot of sense. That is all for me. Appreciate you taking the questions.

Thanks, Mike.

(Operator Instructions)

John Massocca, Ladenburg Thalmann.

Good morning, everyone. On a same-store basis you had pretty significant growth and that other, I can't [remember] that term, other revenue line item, is that something that's -- I know your same-store portfolio will change as you go through the capital recycling process here within your dispositions and obviously the Houston acquisitions, but is that kind of growth rate sustainable or are you going to lap that, what you can -- what kind of services you can provide tenants that generate that revenue?

I think it's going to be strong in 2017. It may moderate in 2018. But a lot of that number is made up in valley, trash, waste and then other security system initiatives that we've put in place as well as cable internet systems. Those are continuously being rolled out, they are not rolled out portfolio-wide. I'd say we are probably halfway there, but for the year we will be -- this year will be strong and next year it will moderate a little bit, but it will probably still be low double digit.

Okay. Then last asset that is held for sale but not really under contract, Southpoint Reserve at Stony Creek, what interest are you seeing for that property? Is there a timeline for a sale there, or is it something where you are comfortable holding the asset until you get an offer you really like for it?

We have taken a different approach on that one. We are still taking tours. We considered portfolio offers on both that asset and the Grove, and we maximize pricing but just going with one buyer on the Grove, and again that deal will close in a few weeks here.

Nonetheless, we are still moving forward as we speak on Southpoint, so that could trade depending on where we get offers are. But were not doing a full-blown auction, we're just taking, like I said, rolling tours. So it is kind of 50/50 today, our guidance does not assume that it trades, but if under the right conditions and the right price we would sell it.

Okay. With the dispositions that are under contract, to the extent that you can, do you have any color on cap rates for those dispositions?

All of them are in the range on our NAV table on a nominal basis. The Dallas deals are low 6%s to high 5%s. The Grove is under contract at around 5.6% and this is all sort of a TI-3 over T-12 tax adjusted cap rate.

Then the offers at Regatta Bay are at a 5.6% today cap rate, which if you understand what we're doing with the proceeds by swapping into Hollister Place, selling at a 5.5% moving into a 7.1%, 6.25% economic feels pretty good and those are the types of things that we will continue to do if we have the opportunity. One thing, I think, it is about a 6% cap.

Okay, that make sense. Then with regards to the corporate G&A came up a touch in the quarter to about $1.35 million. Is that a good run rate going forward as you guys -- or is that maybe tied to all of the acquisitions and disposition activity that has been going on recently?

A couple things in there. There's the stock comp from the grants that were made last August started to hit G&A in earnest in the fourth quarter.

As far as like the Houston deals that we use, because as Matt mentioned, we are [hitting] reverse 1031s. Day one there's a lot of debt on those deals, so we are waiving fees on those initially. You may see advisory fee expense pick up slightly as we get into Q3, Q4 and get those 1031 reverses done and then start taking fees on those, which we will make a determination on as we get in.

What we are focused on is keeping G&A low and providing scale from the Highland platform, and as the external manager we think that if you're going to be externally managed then you need to provide a lot of scale, the ability to control G&A, you keep it reasonable levels. As part of our guidance for 2017, and the way were thinking about it going forward even past that, is trying to target a G&A level that is more in line with some of our larger peers, assuming we can grow the business overall. I would say that that's a pretty decent run rate, but it may fluctuate a little bit.

Matt, you want to add something?

Yes, I think, too, if you look at where we were on a gross asset basis in 2016 was about 1.15%. Our 2017 is about 10 basis points better at 1.05%. Then what we can tell for 2018, we think we will be under 1%. We're moving the right direction on a percentage basis.

Okay. Makes sense. That is it for me. Thanks, guys.

(Operator Instructions)

It appears there are no further questions at this time. I will turn the call back to management for any additional or closing remarks.

That's it for us. We appreciate everybody's time, appreciate the good questions, and look forward to a great year, great quarter. We'll be back shortly. Q1 is upon us, and another Q, another call. Thank you very much.

That concludes our conference for today. Thank you for your participation.