NexPoint Residential Trust Inc (NXRT) 2019 Q1 法說會逐字稿

Good day, and welcome to the NexPoint Residential Trust, Inc. First Quarter 2019 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jackie Graham. Please go ahead, ma'am.

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust conference call to review the company's results for the first quarter of 2019. 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. 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 NXRT's business and industry in general, NXRT's guidance for financial results for the full year 2019 and the related assumptions, net asset value and the related components and assumptions, guidance for the second quarter of 2019 and the related assumptions, expected acquisitions and dispositions, the expected redevelopment of units and the projected average rent, rent change and ROI after redevelopment. 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 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 any obligation to publicly update or revise any forward-looking statements. This conference call should also include 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, Jackie. Thank you to everyone joining us today for the NXRT 2019 First Quarter Conference Call where we will discuss highlights for the quarter, reaffirm our guidance and discuss the portfolio and markets in some detail.

I'm Brian Mitts, Chief Financial Officer. I'm joined by Matt McGraner, Executive Vice President and Chief Investment Officer. Let me first start with some notes about the quarter. We are reporting another solid quarter with same-store NOI increase of 7% and 18.8% increase in Core FFO per share as compared to the same period in 2018.

We consider these to be some of our more important metrics, and we think these are really good results. We also saw total revenues increase for the first quarter of '19 by 18.4%, and total NOI increased by 23.3% compared to the same period in 2018. We see strong tenant retention. And our NOI margins have increased to approximately 56.8%. We think that's a very positive sign. We're also seeing strong rent growth in 2019 in both renewals and new leases at 4.5% and 5.1%, respectively, across the portfolio, which has continued into Q2 and the important spring leasing season. Matt will give some details around those numbers in his comments.

We continued to execute our value-add business plan by renovating 245 units during the quarter, achieving a, we think, impressive 27.4% ROI during the quarter on the dollars spent for the interior renovations. As mentioned on our last call, we acquired 3 properties in Phoenix during the quarter for $132.1 million and believe we'll be a net acquirer in 2019. We also put an ATM in place during the quarter. This will allow us more efficient access to capital, but I would note we did not utilize that in the first quarter.

We also put in place a $75 million corporate revolver, which gives us some flexibility in timing between dispositions or equity raises versus acquisitions. When we put it in place, we drew down $52.5 million to fund a portion of the Phoenix acquisitions, the 3 properties, and we have the ability to upsize that to $140 million. In short, we continued to have a very positive outlook for '19, particularly after the strong first quarter that we saw.

So with that, let me take you through some of the details of our activity and then discuss our results. As mentioned, we acquired the 3 properties, which added 656 units to the portfolio and approximately 365 units to our renovation pipeline. Also as mentioned, we completed 245 units rehab units in first quarter, bringing our inception-to-date total rehabs within the current portfolio to 5,906 units, which we completed at an average cost of $4,995 per unit. On those, we've achieved average rent growth of 11% or $97 per unit. And we've achieved an ROI across all those units of 23.3%, which is an important part of what drives our strong NOI and Core FFO growth.

NAV per share, which is something we publish every quarter in our supplement. We're updating our NOI range based on increases in cap rates and/or changes in cap rates and NOI growth, that falls on the low end, $32.95 per share; on the high-end, $39.98 per share, which gives us a midpoint of $36.41 per share. That's compared to the midpoint last quarter of $35.09, which is a 3.8% increase.

For dividends, we paid a $0.27 -- $0.275 dividend per share on March 31. The Board recently declared a $0.275 per share dividend for shareholders of record on June 14 payable on June 28. Both of these will maintain our target payout ratio of approximately 60% of Core FFO.

For our results, let me go into those. Our total revenues for the first quarter of 2019 were $41.5 million as compared to first quarter 2018, $35.1 million, which is an 18.4% increase. Our net loss as determined under GAAP was $4.4 million in the first quarter of 2019 which is $0.19 per share as compared to net income in first quarter 2018 of $10.1 million or $0.47 per share.

The differential is largely driven by a gain on sale in the first quarter, which we did not have in 2018 -- which we did not have in 2019. Our net operating income across portfolio for the first quarter of 2019 was $23.6 million as compared to $19.1 million in the first quarter of 2018. That's a 23.3% increase.

Core FFO increased to $11 million for the first quarter of '19 or $0.46 per share as compared to $8.3 million for first quarter of 2018, which is $0.39 per share, and that's an 18.8% increase over the periods. On a same-store portfolio front, which includes 32 properties comprising 11,471 units, our same-store rent increased 4%. Occupancy dropped slightly by 40 basis points to 93.6%.

First quarter of 2019, same-store revenue in first quarter of '19 was $36.5 million as compared to $34.8 million in the same period in '18, which is an increase of 4.7%. Expenses remained under control at $16.1 million for the first quarter of '19 as compared to $15.8 million for the first quarter of '18, which is a 2% increase. Those lead to same-store NOI of $20 million -- $20.4 million as compared to $19.1 million in '18, which is a 7% increase.

For guidance. In 2019, we're assuming acquisitions of $150 million to $250 million. That's in addition to what we've done in first quarter. We're also assuming a disposition range of $75 million to $250 million.

So with these assumptions, we're reaffirming 2019 guidance as follows: net income per share -- actually, net loss per share on the low end at $0.76, high end of -- a loss of $0.66 per share, at the midpoint of $0.71 per share net income loss, as determined under GAAP; core FFO per share $1.82 per share in the low end, $1.91 per share on the high end, at the midpoint of $1.87 per share; same-store revenue, on the low end, we are guiding to the 4.5% increase over the prior year, high end of 5.5% and a midpoint of 5% increase in same-store revenues for 2019.

For same-store expenses, we're guiding to 3.3% increase on the low end, 4.3% increase on the high end with a midpoint of 3.8%.

Same-store NOI guiding to a 5% increase on the low end, 7% increase on the high end with a midpoint of 6% increase over 2018 for same-store NOI. So that wraps up our results.

Let me turn it over to Matt to give some of his comments on the portfolio.

Thanks, Brian. We are pleased to report a strong start to the year as Brian mentioned with the first quarter of 7% same-store NOI growth. Our Q1 same-store NOI margin improved year-over-year by 119 basis points to 56%. Average rents increased 4% and total revenues, as Brian mentioned, were at 4.7%. Importantly, we saw strength across the entirety of the portfolio with 6 out of our 10 markets growing NOI by 7%. That includes Atlanta, Phoenix, West Palm Beach, Washington D.C., Houston and Orlando.

Leasing activity and revenue performance were equally as strong during the first quarter. As Brian mentioned, we achieved healthy new lease growth of 5.1% on average. 8 out of our 10 markets delivered new lease growth of 4.4% or better during the quarter, and that was led by Phoenix at 13.2%, Charlotte at 8.3%, D.C. Metro at 7.9%, Orlando at 7.7% and Atlanta at 6.7%. Renewal growth also remained healthy at an average of 4.5%, with every single market achieving growth of 3% or more. Our top 5 renewal markets were Phoenix, again, at 8.9%, Charlotte at 5.9%, Orlando at 5.3%, Tampa at 5.2% and D.C. Metro at 4.9%. Renewal retention for the quarter was also healthy, 51.3%. And moving on to the transaction front. As Brian mentioned, as most of you know, on January 28 we acquired Bella Vista, The Enclave and Heritage in the Phoenix MSA totaling 656 units for $132 million. The early results for these assets have been impressive versus our initial underwriting.

Bella Vista's NOI, for example, has exceeded our underwriting budget by 14.1%. The Enclave is beating NOI budget by 18.4% and The Heritage NOI is beating budget by 17.5%.

Given the operational health in our increase in sale in the Phoenix area, we'll continue to aggressively pursue acquisitions in its market, especially when potentially recycling capital later in the year.

Moving on to the NAV table. As Brian mentioned and as we do quarterly, as a result of recent acquisitions, transaction activity, NOI growth, third-party surveys from Green Street, Axiometrics and CBRE, we've updated the NAV table to approximately a $36.41 share -- price per share at the midpoint.

The drivers of the NAV increases were outside NOI growth and modest cap rate compression in Phoenix and Florida. Florida, in particular, being extremely competitive right now.

I wanted to comment briefly on rehabs and taxes. Brian already recapped the rehab numbers, but I do want to point out that we started our washer and dryer installation program and achieved great success so far.

We've only completed 75 washer and dryer installs during the quarter, but we did achieve a $93 per unit premium on average, resulting in approximately 90% ROI. Recall, we plan to hit 1,100 units over the next 12 to 18 months and expect to achieve similar results.

I also want to provide a brief update on our real estate taxes feeds in Texas. We settled The Ashlar and Heatherstone 2018 tax litigation in the first quarter for a net benefit or refund of $55,000. We remained -- we still remain at litigation on 4 properties, Atera, Silverbrook, Venue at 18 -- 8651 and Hollister Place.

We are still projecting the potential net benefit from selling these proceeds to be anywhere between $250,000 to $400,000 while locking in favorable taxable values through 2019.

Let me end with the strong leasing activity we've experienced in April. Our portfolio today is at 94.2% physically occupied and 94% leased. Our renewal retention ratio is 54.77% in April. We've signed 625 new leases at an average of 5%. We've also secured 424 renewals at an average increase of 6%.

Given the quarter and the strong results, that's all I have for prepared remarks. As always, a great thanks to our team here at NexPoint and VH for continuing to execute.

Thanks, Matt. So let's use the remainder of the time for questions. We'll turn it over to you to -- for the questions.

(Operator Instructions) We'll take our first question from Buck Horne with Raymond James.

I just want to start with maybe the property taxes that you highlighted there. In going back to the accrual rates you're setting for 2019 so far, I just want to be clear if the rates you're using and you're setting and absorbing through the income statement, does that include any of these net benefits, the $250,000 to $400,000, that you highlighted or is that exclusive of that? And just kind of -- how are you setting these accrual rates so far in terms of -- are these -- based on your best guesses on the tax bills? Or have you gotten any sort of hard data to go on for 2019 yet?

Yes. On the -- the $250,000 to $400,000 that we anticipate, that is not built into our accruals until we solidify those. We don't include them. As far as the way we set the accruals at the beginning, we use a third party that has a lot of experience in data. They help us kind of come up with what we think we can end up getting as far as valuations, and thus, ultimately, our tax expense on a property-by-property basis. And then we use that internally and perhaps move it up to be conservative based on our information. That's how we do it. And then we reassess it continuously throughout the year as we get new information.

Okay. That's great. And then just turning quickly to your pricing strategies given the strength of the leasing season so far. Just how do you characterize your strategy around price versus occupancy? You did -- looks like the occupancy ran a little bit hot or maybe a little looser in the first quarter and it seems to have tightened a little bit in April. But how do you balance the price versus occupancy equation? Is the traffic strong enough to maybe let your net exposure run a little hotter than usual?

I think that's a good characterization, Buck. We experienced very healthy numbers particularly for the seasonality issues that we normally face in Q1. We did place more emphasis on rent growth across most of the markets than occupancy during the first quarter because of the strength that we saw. We are expecting to have both strength in occupancy and in rent growth in the second quarter. As I mentioned, the April numbers are extremely positive. The May numbers we pulled this morning, it's only -- or it's not even May, but it's equally promising given the trends. So while occupancy is continually an area for us to improve, I think that for us to continue to be value add, to continue to try to drive rate, I think we'll likely stay around 94%.

We'll take our next question from Tayo Okusanya from Jeffries.

Congrats on a really strong quarter. Just a couple from us. The rent growth for the quarter for new leases, could you just let us know what that number was x redev? Just let us know what is that number.

I think it was around 4.2%, 4.3%.

Without the redevs, okay. And what are new -- what's rent growth for new leases trending like in 2Q '19?

In the second quarter, 5%.

Okay. Is that -- the 5% is that the asking rate or is that what you actually achieved in April?

That's what we achieved in April. What I can tell you is renewals or the renewal ask is north of 6% and also the new lease ask is north of 5%. So we're -- we expect to beat those numbers.

Okay. That's helpful. And then could you just talk a little bit just again about the overall acquisition environment, what you're seeing, acquisition outlook and just whether you're feeling more confident or less confident about the ability to do more deals?

Yes. So generally, very, very competitive, a lot of new capital, continual new entrants into the brief space. There is not much on the market in terms of brokered activity. There's a few portfolios, but if there is a one-off deal, it's extremely competitive. What we've been focused on in particular over the last, what I would characterize as 3 to 5 months, is mining either repeat sellers and/or VH's portfolio for opportunities. And we're hopeful and likely to hit on a few of those, I would characterize, in the second or third quarter. But trying to focus more often on in terms of aggregating through VH's portfolio, which is plentiful, north of 80,000 units rather than competing on the acquisition market. That being said, there are still some opportunities coming up that we're excited about that are characterized for the bigger check size that we normally participate in -- that equity check with $30 million to $50 million, where there's not a lot of focus under the tent. While still competitive, I guess to sum up, we're pretty hopeful on some off-market opportunities in the second and third quarter.

Okay. That's helpful. And last one if you'd indulge me. Again, NexPoint Real Estate Advisors, a new REIT has been started up in Canada, the hotel REIT, just kind of curious how much time you are spending on that relative to NXRT?

Yes. Sure. So I guess, as you know, we've hired a dedicated team to focus on that effort, includes 5 individuals, newly hired, led by a man named Jesse Blair who head up that effort. So we expect nothing to change in terms of the management -- the current management dedication or focus here.

Congrats on the quarter.

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

So what maybe drove the increased kind of this quarter versus your historical numbers in terms of the ROIs on the rehab program? Is that maybe result of some of these smaller dollar partial upgrades/ amenity packages?

Yes, I think that's right, that's exactly right. And then we've also, in terms of the whole dollar rent increase, have seen a -- or did see, rather, in the first quarter a slight tick-up on average. I think we recorded $119 on the spin versus historical average of $90. So we are getting a little bit more rate on the rehabs. The demand for the newer interior products has been met with great activity, I guess.

And maybe outside of the kind of the appliance side, I mean are you seeing kind of pressure in terms of the cost of doing rehabs? I mean I know your kind of repair and the maintenance in the same-store portfolio has kind of had some outsized growth. Is that maybe weighing a little bit against potential outsized returns in the future for this rehab program?

I feel like we've -- I mean we've actually added to our average increase in ROI over the last couple of quarters, so we're underwriting. I can tell you what we're underwriting, too. We're underwriting seemingly a more expensive rehab process but we're still able to achieve a commensurate benefit on the rate increase. So I think the ROIs are pretty steady. There's nothing that I can see in the future that's going to be -- derail that story any time soon.

Understood. With the green initiatives, obviously, a positive on the same-store operating expense side, is there any point at which you would potentially lap the benefits from those or is that kind of an ongoing process here?

In terms of like is there a diminishing return in terms of same-store results? Is that...

Once you have these kind of initiatives put in place, so I'm imagining some of them are just stuff you're installing in the units, right? So is there a point at which it will kind of lap that and your utility cost will stay relatively the same, and therefore, not have the benefit to same-store expense growth year-over-year?

Yes. I think once we -- I mean, once we complete the green initiatives on the current portfolio, there will be a time where we've gone in and installed the low-flow toilets or the other water-saving initiatives in each of the units. That being said, that'll help us continue to keep water expense and utility expense low, thereby creating opportunity to drive either rents or other income growth elsewhere through tech packages or just organically.

And how far along are you -- how much more kind of runway is there for the green initiatives in the portfolio?

I think we've got 25% or so of the portfolio left, say, there's 10 or 11 deals ongoing right now. So there's still quite a bit of runway, I think.

Okay. And then one last detailed question. On Page 5 of the sub, do those Phoenix rent growth numbers, do those include the new acquisitions that were made in the quarter?

Yes.

(Operator Instructions) We'll take our next question from Ron -- Rob Stevenson with Janney.

In terms of the washer/dryer installs, are you guys doing those as part of larger redevelopments? Or are you doing those as standalone sort of separate upgrades?

The latter. I mean, we'll -- if there's an opportunity to do it at the time of a rehab, we will. But last year, late last year, we surveyed the portfolio and asked folks and looked at our laundry contracts to see what's the universal units that we could do sort of a bespoke washer/dryer install throughout the year. And so those are the ones kind of one-off that we're hitting right now.

And how much is that costing you per install?

Depends on the market, but it's anywhere between $700 and $900 per machine.

And you're getting a $90 boost in rents?

Yes.

And so I mean is it -- I mean I can't imagine if there's anything higher and better use of your capital. I mean is that how big -- when you guys have looked at this, how big is that sort of opportunity set for you guys moving forward here?

We think it's currently 1,100 units, which could easily be doubled if we get through the 1,100 units.

Okay. And then the Arizona portfolio, how extensive -- I think you guys have close to $9 million earmarked for rehab there. How extensive are -- is the redevelopment sort of needed on a unit basis there? Are you doing sort of kitchens and baths and washer/dryers and things like that? Is it more exterior? Can you just talk about the scope of those 3 assets?

Yes. We're doing that. We're doing everything we possibly can at those 3 units because the demographics will allow for the rental increases. So we're -- in the larger units, slightly newer, so we're doing the kitchens, we're doing the baths, we're doing the backsplashes, the appliances, the washer/dryers, the plank floors, 2-inch blinds, the brushed nickel, the gooseneck sinks. In some assets, we're creating the enclosure -- enclosed yards, providing a yard for the tenant base. So it's really a higher-end upgrade. You can see that with the larger spend of $9,000 or $10,000 a unit.

Okay. And then just lastly for me. What's -- other than just conservatism kept you guys from increasing guidance off of the first quarter results, I mean, you're essentially at or north of the midpoint, probably, at this point annualizing for the Phoenix acquisition, is there anything that -- other than dispositions that's going to wind up being a drag on earnings in the rest of the year?

To the latter half, no, I don't think so at this point if we look through our crystal ball. I think we feel pretty good about the year. Demand's still there. So it's a possibility later in the year for sure.

Okay. And then I guess one last one. Brian, did you say that the Phoenix acquisition was included in the $150 million of acquisitions guidance or is that in addition to?

It's included in the guidance. If I said in addition, that was an error. It's inclusive of what we've already acquired.

We'll take our next question from Buck Horne with Raymond James.

Just a quick follow-up. So any idea or how do you expect the disposition timing to maybe play out the rest of the year? And what kind of pricing do you think is achievable given the capital that's out there in the market on your potential dispositions?

Yes. I think we're most likely looking at a 5% disposition cap rate. And that -- when I quote that, that's tax-adjusted, 85% to the buyer and after CapEx. So I think that's something that we'll likely achieve. And then on some of these off-market deals, we'll try to create an ARV of 25 to 40 basis points in cap rate. So I think we'll be able to achieve both of those.

And then as far as filings, Buck, we've kind of modeled in into the third quarter dispositions or late third quarter.

Okay. Great. And so how would you characterize the pipeline of potential acquisitions that are out there and what kind of deals are you seeing to underwrite? You mentioned the Florida where seller expectations may still be pretty high. Are there any other areas where deals are more achievable at more reasonable prices?

Yes. I would say that we have through, again, VH's portfolio, some opportunities. 1 of Florida, 1 in Nashville and then 1 locally. That universe is -- kind of gets us to the full $250 million on the year. And we feel pretty confident about those. And so I think that we'll try to execute on those in the second or third quarter.

Okay. And one last one for me. On the same-store repairs and maintenance costs, those were up about 10% year-on-year. Is that -- was there something in the first quarter you were doing on R&M side? Or is that a trend you'd expect to continue through the year?

Yes. So largely, that was attributable to us installing security systems at certain deals as really an amenity that we've rolled out historically in the past. It's an increase in current R&M expense, but there is an offset or a residual increase in other income lines. So for example, if you look at West Palm or even Atlanta or Orlando, those are markets where you've seen other income for us jump kind of 18% to 20-plus percent. And you have a corresponding increase in R&M. But so it's kind of -- it looks high from an R&M standpoint, but there is a residual benefit on the income statement.

Speakers, there are no more questions in the queue at this time.

All right. Well, thank you, everybody, for joining our call and look forward to the second quarter. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.