NexPoint Residential Trust Inc (NXRT) 2017 Q4 法說會逐字稿

Good day, and welcome to the NexPoint Residential Trust Fourth Quarter 2017 Conference Call. Today's conference is being recorded.

At this time, I'd 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 2017 supplemental information is available for your review on the 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 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 NexPoint's strategy and guidance for financial results for full year 2018. 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, NexPoint does not undertake any obligations to publicly update or revise any forward-looking statement.

This conference call also includes analysis of funds from operations, or FFO, core 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, Marilynn. I'd like to welcome everyone to the NXRT 2017 fourth quarter conference call. Today, we're going to discuss our Q4 2017 and full year 2017 results as well as issue 2018 guidance. I'm Brian Mitts, Chief Financial Officer, and I'm joined by Matt McGraner, our Chief Investment Officer.

I'll begin our prepared remarks by reviewing the highlights of 2017 and reviewing the Q4 and full year results. Then, I'll present our 2018 guidance before turning over to Matt, who will go through a detailed discussion of the portfolio, some of the details of our activity for the year and then what we see ahead in 2018.

To start, I'll just say that we're extremely pleased with the quarter and the year, again. We believe our results continue to show the power of the value-add strategy that we have in the portfolio, as we've achieved the highest same-store metrics in the mutual fund peer group again, which we'll discuss as part of our results.

We'll move into the highlights for this year, starting with the acquisitions. We acquired 3 properties for a total of 1,348 units at a price of $197.2 million. As far as dispositions, we disposed of 9 properties during the year for a total of 2,538 units, garnering gross proceeds of $224.4 million. We realized 46% IRRs and a 2.7x multiple on these sales. To put these into context and to discuss them in relation to the overall year, these were done with purpose and were strategic. We felt like the properties we sold were some of our lower-quality properties. We'd already done the bulk of rehab in those. And we upgraded to properties that we feel really good about from a location perspective and replenishes our pipeline for rehabs.

One of the more impactful transactions we did during the year is that in Q2, we bought out our JV partner, BH Management, who is also our property manager, for $51.7 million. This represented approximately 8.4% of our portfolio, and will add on an ongoing basis $6.4 million of NOI approximately or more as we grow NOI. So we feel that's a really strong transaction we did this year. It'll keep paying benefits and already has in the third and fourth quarter. We did $501 million of refinancing. That was a major refinancing at the end of the second quarter. We refinanced some other debt throughout the year as well, but this one in particular, we lowered our borrowing costs on these mortgages by 57 basis points. We used some of the proceeds to fund the acquisition of the BH buyout. And we thought that was a really good thing for the company long term.

As far as debt overall, by the end of '17, we paid off the majority of the bridge facility that we had taken out to fund the buyout of BH and part of the Rockledge purchase that we did in June. We paid the remainder of that bridge just this week as we closed out a reverse 1031 sale of Timberglen. And through the end of the year, our effective borrowing cost with the swaps is 3.24%. So we think that puts us in a very strong position for the next few years.

On the rehab front, in 2017, we completed 1,408 units, partial and full upgrades. And subsequent to date, we have completed 4,374 units on properties we still owned at the end of December at a cost per unit of $4,962. We achieved average rent growth of 10.8% or $90 per unit for a return on our investment of 21% on the interior upgrades.

We've been active on the share buyback front. Through December '17, we purchased 300 -- repurchased 354,517 shares of our stock at a price of -- average price of $19.81, approximately $7 million worth of repurchases. Subsequent to 12/31, we've taken advantage of some of the volatility that we've seen in REIT names, particularly ours. We repurchased 118,927 shares at an average price of $25.23 per share, or approximately $3 million. In total, through yesterday, we've repurchased 473,444 shares of our stock at an average price of $21.17 per share for a total of $10 million. In June of '15, the board -- '15 and '16, the board authorized a repurchase for $30 million. So we've gone through about 1/3 of that so far. We have $20 million left. To put this into context, as you can see in supplement release this morning, as usual, we printed our NAV slide. The midpoint of that NAV is $29.67. So the average repurchase price of our shares that we've repurchased is approximately 29% discount for that. So we think that's a powerful use of capital.

For dividends, we paid $19.5 million in dividends in 2017. As mentioned previously, in the fourth quarter, we raised the dividend by 13.6% to $0.25 per share per quarter. And yesterday, the board declared a dividend for the first quarter of '18 for $0.25 per share. The NAV per share that we released in the supplement this morning, on the low end is $26.28 per share; on the high end $33.05 per share; for midpoint, as mentioned, $29.67.

Let me now kind of run through our -- the details of our results for the full year and Q4. For total revenue, in 2017, we had $144.2 million as compared to 2016 of $132.8 million or an 8.6% increase. Net income was $56.4 million or $2.49 per diluted share as compared to 2016 of $25.9 million or $1.03 per diluted share. NOI for 2017 was $76.6 million versus $69.7 million in 2016 or 9.9% increase. FFO for full year 2017 is $25.1 million or $1.17 per diluted share. 2016 was $31 million or $1.46 per diluted share. Core FFO for '17 was $30.4 million or $1.42 per diluted share as compared to $31.3 million or $1.47 per diluted share for 2016. AFFO for '17 was $35.1 million or $1.64 per diluted share as compared to 2016 of $33.5 million or $1.57 per diluted share.

For same-store results on a full year basis, the full year pool consisted of 26 properties or 8,871 units. Our rent increase was 4.4%. Occupancy increased from 93.6% to 94%, an increase of 40 basis points. Same-store revenue for 2017 was $101.5 million versus $94.9 million for 2016 or 7% increase. Same-store expenses for 2017 were $46.5 million as compared to $44.2 million for 2016 or a 5.1% increase. Same-store NOI for 2017 was $55 million as compared to $50.7 million for 2016, which represents an 8.6% increase. For Q4, our same-store results are as follows: The same-store pool consisted of 27 properties in 9,088 units. Our occupancy increased from 93.6% to 94% or 40 basis point increase. Effective rents increased 4.5%. Same-store revenue increased from 26.6 -- excuse me, from $24.9 million to $26.6 million or 6.7% increase. Same-store expenses were $11.7 million in 2017 versus $11.5 million in 2018 -- or 2016 for 2.3% increase. The same-store NOI increased from $13.4 million to $14.9 million or a 10.5% increase.

We've also disclosed in our supplement as well as our 10-K that we'll file and in our earnings release a new metric where we compare properties that we own for 2015, '16 and '17. This pool consists of 17 properties for 5,546 units. Same-store revenues increased from '16 to '17 by 6.7% and '15 to '16 by 9.6%. Same-store expenses from '16 to '17 increased 5.8%, from '15 to '16 increased 5.5%. And same-store NOI for '16 to '17 increased 7.5%, '15 to '16 increased 13.4%. We presented this metric as it shows the longevity of what we've done with the value-add program and the superior same-store results that it's produced. As a comparison with some of the multifamily peers, we reported revenues increase of 7% versus our peers of 3%. This is for 2017 full year. Expenses for us were increase of 5.1% versus our peers of 2.9%. The same-store NOI for us was 8.6% versus our peers on average of 3% or 5.6% variance.

So with that, let me move to full year guidance for 2018, starting with net income. On the low end, minus $0.03 per diluted share; on the high end $0.07 positive per diluted share, for midpoint of $0.02 per diluted share. NOI for full year of $77.5 million on the low end, $79.2 million on the high end, for midpoint of $78.4 million. Core FFO per share diluted $1.60 on the low-end, $1.70 on the high end, for midpoint of $1.65.

For same-store, we're estimating an increase of rental income 4.8% on the low end, 5.8% on the high end, for a midpoint of 5.3% increase. Same-store revenue overall we're estimating a 5% increase in the low end, 6% on the high end, for midpoint of 5.5%. For same-store expenses, we estimate a increase of 3.5% on the low end, 4.5% on the high end, for midpoint of 4%. For same-store NOI, we estimate a increase of 5.5% on the low end, 7.5% on the high end, for midpoint of 6.5%. This compares to our peers that have reported so far and issued guidance of our revenue increase of 5.5% versus their estimates of 2.4%, for our expense increase of 4% versus an expense increase of 3.7% for our peers. And then on same-store NOI basis, we estimate 6.5% at the midpoint versus an average of 2.2% for the peers, which is approximately 430% -- sorry, 430 basis point differential.

So with that, let me turn it over to Matt to discuss the portfolio and the markets and what we see ahead in 2018.

Thank you, Brian. I'm going to talk about our value-add results, our same-store pool and recap the fourth quarter, the full year 2017, go over some leasing activity, talk about a couple of transactions and then bring it back to a high-level through our NAV calc.

First on our value-add front. For the 2017 calendar year, we completed full and partial renovations, as Brian mentioned, of 1,408 units at an average cost of just under $5,000 per renovated unit. That renovation achieved an $89 monthly rent premium, consistent with what we've done in the past, and it has resulted in 22% ROI, which is a better metric than we reported in 2016. For 2018, we plan on continuing this pace. We're planning on upgrading approximately 1,600 units, which get us in line with what we've done over the past several years.

Going to our same-store recap. As Brian mentioned, for the fourth quarter, same-store NOI was up a healthy 10.5%, average rent increased to $908 per unit up from $868 as the year before, so 4.7% increase. Revenue has accelerated 6.7%, while expenses grew just 2.3%, which benefited from the results of somewhat material and favorable tax appeals in 2 of our markets, Dallas and Nashville. So another last top line growth for the quarter was incredibly strong with 8 out of our 9 markets growing total income by 5% or more. Same-store results by market for full year 2017 are as follows: Dallas, we achieved 9.8% NOI -- same-store NOI growth. Our 1 property in D.C. metro did 21.7%; Atlanta achieved 6.9% NOI growth; Nashville achieved 9.3% NOI growth; Charlotte 7.1% NOI growth; Phoenix 6.9%; West Palm Beach 10.2%; Orlando 6.5%; Tampa Bay 8.4%.

Our leasing activity for the fourth quarter was also very strong despite the typical seasonality pressures. We achieved strong effective new lease growth during the quarter. Each of Tampa, Orlando, West Palm, Nashville and Dallas had new lease growth of 3.6% or better. Tampa led the way at 8.1%; Orlando achieved 7.6% rental growth; West Palm Beach at 5.5%; Atlanta at 4.5%; and both Dallas and Nashville achieved 3.6%.

On the renewal front, it was also very strong. We achieved 3.9% overall for the portfolio. That is with 6 of the 9 markets seeing at least 3.5% renewal growth and West Palm Beach leading the way at 6.8%. We continue to focus on retention -- renewal retention and that also kept pace with the third quarter, averaging 49% for the fourth quarter.

We're having a strong and healthy start to 2018 as well on the top line. As of yesterday, new executed rent has improved year-over-year for January and February at 4.1% and 6.4%, respectively. Our rent rolls continue to climb as well, with growth of 2.5% and 2.6% year-over-year in January and February, respectively as well.

On the capital recycling front, Brian hit most of this, I'll just reiterate that we acquired 3 well-located properties for approximately $200 million, totaling 1,348 units in Atlanta, Dallas and Houston. We also sold 9 deals, monetizing attractive gains, improving the company's portfolio composition, all through tax efficient, capital recycling via 1031 exchanges. Gross proceeds from the sales totaled $228 million, and we generated a levered IRR of 42% and 2.67x multiple on invested capital. Subsequent to the quarter, as Brian mentioned, we completed our reverse 1031 exchange at the Atera Apartment Community in Dallas for $59.2 million by completing the sale of Timberglen in North Dallas. As previously mentioned and to the testament of the market for value-add asset, after conducting a full marketing process for Timberglen, receiving 20 offers on the asset, we closed on January 31, and the sale yielded approximate returns to NXRT investors over 48% levered IRR and a 2.75x multiple on invested capital.

This Timberglen transaction, in our mind, demonstrates that it is a good time to own value-add multifamily assets. We continue to see strong demand for quality and affordable housing in our markets as well as robust liquidity in the market for Class B value-add assets. By way of example, in November, some of you might remember that affiliates of Blackstone recapitalized various portfolios of the Steadfast communities, which are similar in size, vintage and geography to ours, which further demonstrates the liquidity in the market. This transaction was reportedly struck at a 5.3%, nominal 5% and a 5% economic cap rate implying an NAV of $33 per share for NXRT utilizing the midpoint of our 2018 NOI guidance. Recent private market transactions like the Blackstone and Steadfast deal, highlights the value disconnect between the public and private markets that exist today and further support our decision to continue to repurchase shares. As Brian mentioned, we repurchased approximately $3 million of our own stock this year already, and we'll continue to exercise the program at diligent levels.

As always, we remain focused on continuing to provide quality affordable housing to our tenants while delivering relatively outsized returns to our investors. And we believe this is the strong investment thesis in any market cycle, and we'll continue to pursue it in this operating environment.

I want to thank, again, as always, our team members at NexPoint and BH for the hard work and delivering very solid results in 2017 and looking forward to carrying that momentum in 2018.

Brian, that's all I have.

Great. Thanks, Matt. That's it for our prepared remarks. We'll turn it over for questions.

(Operator Instructions) And we'll take our first question from Jim Lykins with D.A. Davidson.

First, are there any additional planned dispositions? And then, also, any color you can give us on how you're thinking about acquisitions in 2018?

Yes, we have no planned dispositions at this moment. We're evaluating constantly the activity in the market. And the same thing on the acquisition side. I think a lot of -- we -- I mean, as we just mentioned, we did a tremendous amount of capital recycling in 2017, selling and buying almost dollar for dollar north of $200 million of assets. So we think a lot of that positioning has run its course. What we're going to do this year is keep our nose down and execute and operate the assets well and produce that outside same-store NOI growth.

Okay. And if I missed this, I apologize, but did you disclose the cap rate for Timberglen?

Yes, so 5.4% nominal.

5.4% nominal. Okay. And also could you just talk about what you're seeing right now with construction costs and labor. I'm wondering how much the hurricane still may be affecting labor, and just how you see that trending right now and through the year.

Yes. So labor, in general, I think, which is good and bad, but it's definitely increasing. Our payroll numbers are up year-over-year by 3% for our budgets, and then we're seeing from just a qualitative aspect, it's very difficult to keep and maintain contract workers, subs to execute the value-add program. And then, as far as material costs, those are another aspect that's increasing. Lumber, we don't build. Thankfully, we don't develop anything, just redevelop so we aren't doing ground up construction, but we have heard that lumber prices, for example, are up 20% since the hurricane. And that's nationwide, it's not just in Houston. So materials, we're seeing inflation in the market. I guess, that's the bottom line.

And we'll move to our next question from John Massocca with Ladenburg Thalmann.

So given the rise in the interest rates, have you guys seen any cap rate expansion recently in the Class B apartment space? And would you expect that to be kind of -- given the lack of supply of good workforce apartments, would you expect the cap rates to be sticky even if interest rates rise?

Yes, interest rates have risen dramatically on the 10-year. That's a fact. But they're still near historic lows. What has also happened is basically, the agencies for value-add assets that provide financing for value-add assets have basically for point for point brought spreads in. Freddie Mac, for example, yesterday, brought spreads in another 10 basis points. And the reason is because there's just so much capital chasing multifamily securitizations in debt right now, BP's buyers for agencies, used to demand 14%, 15% type of returns. Today, it's closer to 10% to 11%. So as long as that capital is still out there, which there is a wall of it, we think the financing environment will continue to be constructive for value-add assets. And I'll echo what Camden's management team said on their call, which is, there is still so much demand out there for housing, and especially given the short-term duration of the assets that should adjust for -- with inflation -- the shorter-term duration of leases that should adjust upward if we see inflation. Those 2 things should create a continued positive environment for transaction activity. And we still -- as the Timberglen sale demonstrated, we received 20-plus offers on that deal, conducted 48 tours and that was when the 10-year was at [260]. So I guess, put simply, we're still on a very constructive transaction environment.

Makes sense. And then kind of moving onto the buyback. I mean, how do you guys view utilizing -- it doesn't sound like you're using more dispositions to fund the buyback at least planned in 2018. How do you guys view using retained capital to fund the buyback versus maybe pay down debt, sorry, retained cash flow, I should say?

Yes. I mean, I think that largely most of our debt is now fixed until 2022 or 2021 at 3.25%. So we don't see very much virtue in paying down 3.25% debt. So our portfolio, as you know, then generates a tremendous amount of free cash flow, sufficient enough to fund buyback activity. Just through February 13, we've been able to put $3 million to work. Brian, if you have anything to add to that?

Yes, I'd say, at current prices, we're still 20% below what we feel true NAV is. So we think that's a pretty easy capital allocation decision. We can buy our stock at 20% discount.

Makes sense. And I know it's not really a factor yet, but I mean, longer-term, do you ever worry about the effect that the buyback might have on liquidity? Or is that something where -- it's something you're willing to risk essentially?

Yes, I'd say, we're definitely willing to risk it. We think the liquidity in the stock will improve as demand improves, and I think as demand for our stock continues to outpace the supply, that's a good thing for everyone that owns it. So...

We certainly understand the supply/demand dynamics in the market, but we have what we think is the most unique strategy in the space, it's the only one. And we think the virtue of it is shown not only in our results today, but the results we put out last few years. And the people find their way into the stock one way or the other. The fact that we are willing to rebuy or repurchase our stock at deep discounts when it trades down, I think should give investors and potential investors a lot of comfort that we're going to allocate capital properly and not do anything to destroy value.

And we'll take our next question from Rob Stevenson with Janney.

How are you guys looking at 2018 in terms of occupancy versus rental rate? I mean, you guys are operating at about 94%. Some of the peers are up at 96%. Is that a conscious effort to push rental rate harder? Or is that a byproduct of having units down for periods of time for renovation? You guys looking to consciously drive occupancy meaningfully higher in '18. And if so, what does that sort of suggest for the rental rate growth as you move forward?

Yes, I think we're budgeting 94%, but I'd say our aspiration is to get to 95% across the portfolio. Obviously, there'll be some -- with the rehab strategy, there'll be some lag in that, that we will just never achieve the 97s for guys that aren't conducting our strategy. We don't see really any trade-off, fortunately, for us on the income side, given when we pushed the occupancy up, I mean, we're still budgeting total income growth near 5.5%, 6% and then being able to push occupancy. What we saw in the third quarter, when we took our occupancy up during that quarter when we still conducted rehabs, we didn't lose that much rate. We probably lost 50 basis points or so in rate, but that was it. So we think that this year will continue to be constructive on that front. In a way -- or one of the things to speak to that is that our recurring resident burden, which is basically the effective rent plus the fee is only $1,000.61 for 2018 -- or excuse me, $1,061 for 2018. That's still in our mind extremely affordable. So we feel that can be pushed as well as keeping the deals pretty full and pushing up to 95%.

Okay. And then lastly for me. What is your 3.5% to 4.5% same-store expense guidance assumed for property tax increases and labor and insurance?

4.6% in real estate taxes. Insurance is about 5%, and we renew in April, but we have a pretty good idea what that's going to be, and we've worked hard on that. And there was a third one?

Related with personnel.

Personnel. Yes, how aggressive is personnel moving up in your core market?

Yes, it's 3% across the portfolio, is our payroll number. The contract labor, which is more of the subs and the paying and stuff that can push up to 5% to 7% in some markets.

Okay. So that's not -- so you are not feeling from your property manager any type of material sort of wage stuff where it's starting to move the other way rather than sort of have moved down over the years to sort of 3-percentish?

Yes, it's about 3% on site.

(Operator Instructions) And we'll take our next question from Tayo Okusanya with Jefferies.

Just following up on Rob's question about operating expenses. I think most of your peers are also putting out similar numbers, but they're talking about lower same-store OpEx, because they're planning to control other costs, like utilities, repairs and maintenance and that kind of stuff. Could you talk a little bit about your outlook for controllable expenses? And why yours seems to be a little bit higher than theirs?

Yes, sure. I think on the same-store basis, ours is going to be a little bit higher because we're spending more in really, I'd say, 3 out of the 4 categories. Other than payroll, in R&M, we're just seeing more inflation, as I mentioned, as a response to Jim's question, for contract labor, materials, resurfacing (inaudible) on turns and yes, doing those types of things, the costs have just gone up as well as contract labor, for example, painting contracts and landscaping, those costs have also gone up, which I would say more -- it is probably more drastic for our deals being garden styles and like a high-rise. And then for marketing, we're just spending more this year to attract -- and upgrade our demographic profile. So that's gone up about 5% to 7% as well. So just across the board, other than payroll for on-site staff, we're seeing inflation out there in the market, which it's tough on your expense line, but we think we'll probably see some results -- some better results and positive results on the top line as well as the results of inflation.

Okay. That's helpful. Second question, I mean, relative to many of the other apartment REITs that are kind of more in the Class A area, could you talk a little bit about just what you are seeing in regards to, one, job growth prospects for kind of mainstream workforce? And also what you're seeing in regards to apartment supply that's focused on this particular group of workers?

Yes. So the job market, at least, in our -- for our tenant base is really tight. I think that across most of our markets, we're -- I think, 8 out of our 9 markets are in the top 25 in job growth, and they're all growing 1% to 3% this year, expected to grow jobs at 1.3%. That's a number across the board, but it's representative of our tenant demographic. And then as far as supply, there just isn't any. There is not any new affordable housing being built in America, certainly in our markets. And there is, I guess, if you want to consider single-family rental or shadow supply, but that market is tight, as you know, from the public read-through reporting in that space, they're full too. So there is, again, as I mentioned to Rob, our recurring resident burden is just north of $1,000 and that is just hard to make work given where construction costs are to build a new garden deal today, which is about $140,000 to $170,000 a unit. Can't make the returns work unless they're subsidized. And then if they're subsidized housing, then you're probably in a less favorable part of the town than where our assets are located.

And we'll take our next question from John Massocca with Ladenburg Thalmann.

Just a quick follow-up. I know you mentioned there were no plans for any near-term dispositions. But how do you look at your 1 D.C. area asset from kind of a strategic standpoint? It's been a good performer over the last couple of quarters, but it's kind of your sole asset in that market. Is that something where you just hold on to it as a kind of one-off? Or if you ever had some proceeds to put to work you might expand in that market? Just any color would be helpful.

Yes, I don't see us expanding in the market. Given the relationship with BH, they're already -- there is already scale in that market, and they operate a number of our assets in the mid-Atlantic, so I'm not worried about stretching resources there. But to your point earlier, it keeps going up, the NOI keeps going up. It was up 21% last year, and then it's budgeted to do almost double-digit this year. So can't complain about that.

(Operator Instructions) And at this time, it appears there are no further questions. I'd like to turn it back for any additional or closing remarks.

Yes, we appreciate everybody's time today and the thoughtful questions. Nothing further from us. We'll be back in May with first quarter results. Thank you.