NexPoint Residential Trust Inc (NXRT) 2021 Q2 法說會逐字稿

Good day, and welcome to the NexPoint Residential Trust Second Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jackie Graham. Director of Investor Relations and Capital Markets. Please go ahead.

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust's conference call to review the company's results for the second quarter ended June 30, 2021. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; Matt McGraner, Executive Vice President and Chief Investment Officer; and Bonner McDermett, Vice President, Asset Management.

As a reminder, this call is being webcast through the company's website at nxrp.nextpoint.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. 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 any forward-looking statements. The statements made during this conference call speak only as of today's date and except as required by law, NXRT does not undertake any obligation to publicly update or revise any forward-looking statements.

This conference call also includes an analysis of

non-GAAP financial measures. For a more complete discussion of these non-GAAP financial measures to the company's earnings report that was filed earlier today. I would now like to turn the call over to Brian Mitts. Please go ahead, Brian.

Thank you, Jackie, and welcome to everyone joining us this morning. Appreciate your time. I'm Brian Mitts. I'm joined by Matt McGraner. I will kick off the call with some highlights in the quarter then cover our numbers for the quarter and year and wrap up with guidance, which we are revising upward. Then I'll turn it over to Matt, who will discuss our portfolio and some of the metrics driving our performance and leading us to revise the -- our guidance upward.

As Matt will discuss in his prepared remarks, the acquisition environment is challenging. I think, as everyone knows, although we've been able to find some opportunities. We closed on the acquisition of 2 properties in the quarter and Matt will provide some details on that during his remarks. But regardless of acquisitions or the environment, as we have said many times, our growth and value creation strategies are not predicated on new acquisitions. We have the ability to significantly increase value through our organic rehab program, which has continued in earnest during the second quarter and for all of 2021.

So we got -- just a couple of highlights here real quick for the second quarter and year-to-date. Net loss in the second quarter was negative $3.4 million or negative $0.14 per diluted share as compared to a loss of $9.3 million or a loss of $0.38 per diluted share in 2020. Same-store NOI increased by $179,000 or 0.6% as compared to the second quarter 2020. Reported second quarter's core FFO of $14.2 million or $0.56 per diluted share, which compares to $0.59 per diluted share in the second quarter 2020.

We continued to execute our value-add business plan this quarter by completing 336 full and partial renovations during the quarter, of which 408 were renovated units, achieving an average monthly rent premium of $170 and 20.5% return on investment during the quarter. Inception to date in the current portfolio as of June 30, we've completed 5,784 full and partial upgrades, 4,459 kitchen upgrades and washer dryer installments and 9,782 technology package installs, achieving an average monthly rent premium of $132, $48 and $43, respectively, and an ROI of 21.4%, 74% and 33.8%, respectively.

For the 6 months ended June 30, net loss was $10.3 million or a $0.41 loss per diluted share as compared to an $18.7 million gain or $0.74 gain per diluted share in 2020. Same-store NOI for the year through June increased by $86,000 or increased 0.2% as compared to 2020 over the same period. And we reported year-to-date core FFO of $28.3 million, which is $1.13 per diluted share, which compares to $1.11 per diluted share over the same period in 2020.

For our NAV, based on the current cap rates and NOI, we are reporting NAV per share range as follows: $55.66 in the low end, $66.62 in the high end with a midpoint of $61.14. These are based on cap rates ranging from 4% on the low end to 4.3% on the high end. For the second quarter, we paid a dividend of $0.34125 per share on June 30 to shareholders if record of June -- as of June 15. The Board has declared a dividend per share of $0.34125 payable on September 30 to shareholders of record on September 15.

Year-to-date, our dividend is covered 1.65x by core FFO, which is a payout ratio of approximately 61% of core FFO. Just a couple of big picture items before we get to the numbers and the guidance, with net migration continuing into our core Sunbelt markets with our affordable high-quality product, we believe NXRT is still well positioned to continue delivering high returns to investors.

The net migration into markets continues unabated, the asset cap rates, historical lows in our markets is reflected in our revised NAV calculation. The increases in population and jobs in these markets, competition for desirable product has increased. Since going public, we built the cost of capital advantage over many of our competitors in these markets, allows us to bid aggressively for the best assets.

I think you'll see that, as Matt talks about the 2 properties we closed in Q2, and we believe we could find more good quality assets in our core markets. As mentioned, our growth prospects are not dependent on acquisitions. We continue to achieve significant returns from our value-add strategy where we committed cap rate, 75 to 150 basis points over 3 to 5 years from acquisition, which makes us less sensitive to absolute cap rate levels.

The ongoing and widening shortage of affordable houses in the U.S., which is more acute in our Sunbelt markets and getting worse as new household formation outpaces new housing deliveries gives us plenty of runway to continue implementing our value-add strategy across our existing portfolio and new acquisitions. The increased net migration, coupled with the shortage of housing has led our portfolio to achieve all-time high occupancy and sets us up to aggressively push rates for the remainder of the year as we did in Q2, which Matt will cover in some detail.

The current environment also allows to sell assets that we had fully renovated at premium and recycle that capital into new value-add products where we can achieve higher rates of return. Let me quickly get through just the high-level numbers for the second quarter of the first half of 2021. Total revenues were $52.6 million compared to $50.7 million for 2020 second quarter, it's a 3.7% increase

Net income was -- or sorry, net loss was $3.4 million for the second quarter versus $9.3 million loss in the second quarter of 2020. Core FFO was $14.2 million for the second quarter, which is $0.56 per diluted share as compared to $14.5 million in the second quarter of 2020, which was a $0.03 decrease.

Our same-store pool consists of 35 properties with 13,544 units. Our same-store rent has increased 3.6% on average. Same-store occupancy was 96% in the second quarter of 2021 versus 95.3% in 2020 or a 70 basis point increase. Same-store NOI is $28.7 million versus $28.5 million versus Q2 last year, which is a 0.6% increase.

For the year ended June 30, revenues were $104.4 million in 2021 versus $103.3 million in 2020 for a 1.1% increase. We had a net loss in 2021 and -- for the first 6 months of $10.3 million versus a net gain in 2020 to $18.7 million. Core FFO for second quarter 2021 is $28.3 million or $1.13 per share as compared to $28.1 million for 2020, which is up $0.02 per share. Our same-store pool for the year is also 35 properties consisting of 13,544 units.

Same-store rent increased 3.6%. Our occupancy is up 70 basis points to 96% and our same-store NOI was up 0.2% to $56.9 million for the first 6 months. For the remainder of 2021, we are revising guidance as follows: core FFO on a diluted share basis, $2.30 on the low end, $2.41 on the high end and $2.35 at the midpoint as compared to $2.29 previously or a 2.6% increase.

Same-store revenue: 4.2% increase in the low end, 5% on the high end, for a midpoint of 4.6% increase in revenue. Our same-store expenses: 6.4% on the low end, 4.8% on the high end with an increase of 5.6% in the midpoint. Same-store NOI, we are projecting to be 2.7% in the low end, 5.2% in the high end with 4% at the midpoint, which is an increase of 40 basis points over our prior guidance of 3.6% same-store NOI growth. So with that, let me turn it over to Matt.

Yes. Thanks, Brian. Let me start by reviewing our Q2 operational results. Our cash collections remain favorable to NMHC comps with 99.2% of Q2 rents collected. And while federal stimulus and local rental assistance programs have helped, overall demand for upgraded affordable housing in the Sunbelt continues to register at historical highs. The population inflows into our Sunbelt communities also continue to make new highs. We are witnessing increased trends in our markets as we exit the pandemic with a 35% increase in out-of-state applications quarter-over-quarter and a 29% increase year-to-date. Net migration from California and New York continues to dominate our leasing applications year-to-date, increasing 52% and 19% year-over-year, respectively.

Low migration outflows from our markets and consistent resident retention also explain the strong operational performance during the quarter and the first half of the year. Our communities are still experiencing all-time highs in occupancy. Our Q2 same-store occupancy ended up at 96.1%. That's up 80 basis points quarter-over-quarter. And as of July 26, the portfolio is 95.8% occupied, 98.3% leased with a 94.2% trend.

These historically strong occupancies and trends are allowing us to materially increase rents in most of our markets. Same-store revenue growth, for example, exceeded 2.2% in 7 out of our 10 markets in Q2 and every market experienced positive rental growth. On the leasing front, we really started to see a pickup in June, but every month exceeded our expectations. New leases ended the quarter at a robust 14%, renewals finished at a positive 6% for Q2 blended rental growth rate of 9.9%.

Here are the numbers by month, which demonstrate an acceleration through the quarter and into July. April new leases were up 10.8% with renewals being 5.1% and for a blended increase of 7.85%. May new leases were up 13.4%, renewals, 5.8% for a blended increase of 9.3%.

June new leases were up 18.4% with renewals being 6.7% for a blended increase of almost 12%. Q2 new lease growth continues to be strongest in Atlanta and Tampa, South Florida, Phoenix and Vegas with each market clearing at least 15% growth. So far in July, new leases are up a robust 24.4% with renewals being 8.2% for a blended increase of 15.8% on over 1,000 leases signed so far in July.

These results are particularly meaningful when taking into account that our total revenues didn't go negative in 2020 and troughed at a positive 2.6% in Q4 of last year. We expect this leasing performance to translate into meaningful revenue growth in the second half of the year.

On the transaction front, a broad public marketing campaign of Beachwood and Cedar Point launched on July 7. And to date, the offering has received significant attention with more than 125 interested parties signing CAs and over 20-plus property tours have been conducted. We expect the call for offers for the first week of August with strong Q2 and early Q3 financing results in tow. And the early indication is that pricing will trend toward, if not surpass the 4% nominal cap rate threshold.

These dispositions will fund and complete our reverse 1031 into our 2 new Charlotte acquisitions, the Creekside at Matthews and the Verandas at Lake Norman while reducing the drawn balance on our revolver by $30 million to $35 million.

Let me spend a few minutes on Creekside and Matthews and Verandas. As Brian mentioned, we purchased Creekside for $58 million for a year 1 economic cap rate of 4.5%. We plan to upgrade 193 units here at an average cost of $12,000 a unit, generating premiums of $151 a unit and ROIs of approximately 15%. We also plan to install washer and dryers and Smart Tech packages in every unit and expect to generate monthly premiums of $45 a unit on both amenities. As a result, our underwritten 3-year average same-store NOI growth for this asset is 7.7%.

Today, Creekside is 97.1% occupied, 100% leased and has a trend of 95%. We purchased the Verandas at Lake Norman for $63.5 million for a year 1 economic cap rate of 4%. The upgraded programs here are particularly exciting, given that interiors are 100% classic units in a strong demographic area.

We plan to upgrade 212 units at an average cost of $10,600 a unit, generating premiums of 177 a unit and ROIs of approximately 20%. We also plan to install washer and dryers and Smart Tech packages here and expect to generate monthly premiums of $45 a unit on both amenities. As a result, our underwritten 3-year average same-store NOI growth for this asset is a robust 9.6%.

Today, Verandas is 98.5% occupied 99.6% leased and has a trend of 98%. As Brian mentioned, on July 12, 2021, as we disclosed in the sup, we entered into a PSA to acquire Six Forks in the Research Triangle area for roughly $75 million and for a year 1 economic cap rate of 4.25%.

Research Triangle assets have and will continue to be on our radar given that strong and growing tech-based and life science presence. At Six Forks, we plan to fully upgrade 111 units at an average cost of $13,200 a unit, generating premiums of $198 a unit and ROIs of approximately 18% and partially upgrade 148 units at an average cost of $5,500 a unit, generating premiums of $82 a unit and ROIs of approximately 18%. We also plan to install 113 washer and dryers and generate monthly premiums of $45 a unit.

As a result, our underwritten 3-year average same-store NOI growth for this asset is 5.1%. More broadly, the heavy investor appetite, as Brian mentioned, the cheap financing and capital inflows into our sectors continue to push asset values higher. We see this continuing as robust positive net migration and job growth into the Sunbelt accelerate.

One interesting data point that informs our NAV table is that a large $1.2 billion portfolio is expected to trade in Q3. It's over 4,000 units, has comparable property types and has an average vintage of 1993. Reports are that this portfolio will trade at a 3.5% cap rate on in-place numbers and roughly $275,000 a unit.

Turning to a full year 2020 guidance increase and give a little bit more commentary on this. As Brian mentioned, we are pleased to announce another meaningful increase in core FFO to a midpoint of $2.35 a share. The guidance improvement is largely driven by the acquisitions and expense savings, leaving room for additional upside as these new leases and renewals make their way through the income statements. On the expense side, we see modest decreases in both controllable and noncontrollable expenses, while still carrying a healthy property tax budget.

Regarding property taxes, we still have not received values on 12 of 39 assets, which are all 8 Florida assets and 4 North Carolina assets, including the 2 new acquisitions. We are presently appealing our filing suit on 21 of the 27 property values that we have, and we're optimistic that we'll see some favorable downward movement. But we have not made any revisions to our conservative initial tax projections for these assets.

Thus, with these adjustments, acquisitions and most importantly, the strong portfolio operational performance trends, we're raising the low end and midpoint of our same-store NOI guidance 2.8%, 4%, respectively. That's all I have for prepared remarks. Thanks to the teams here at NexPoint BH for continuing to execute. Back to you, Brian.

All right. Thank you. Let's turn it over for questions.

(Operator Instructions) We'll take our first question from Amanda Sweitzer with Baird.

I want to start on your same-store rental income guidance. It's coming down marginally, and it certainly doesn't seem to have been driven by lease rates. Is that being predominantly caused by some of the casualty events that you mentioned? Or any changes in your assumptions on bad debt for the rest of the year?

Yes, I'll start, Amanda. It's Matt. We have booked -- as the moratorium is ended here in the coming months, we've decided to take a write-off of bad debt that's backward looking, so to speak. So the change isn't really forward-looking. It's just revisions to the annual number, which we could expect to recapture some of that income later on in the second half of the year. So it's not really forward-looking. It's just a revision. And then I think that's primarily it. But Mitts, if you have anything else.

Yes. So I think we've been in a weird spot here because typically, what we do is move to evict a tenant that would either kind of force a payment or they would leave, in which case, we'd just basically write the balance off. And maybe we could recover a little bit down the road. Here, we've been carrying balances for tenants that we obviously can't evict. And so they've been in place but instead of writing a lot of it off because people have been making payments over time or they don't yet pay or whatever, we've been trying to be conservative and prudent with what we're writing off.

Now, as Matt mentioned, we get to the end of the moratorium and start to formulate a plan around evictions and trying to collect some of that. We think it makes sense to start writing off those balances as they -- it looks like that a tenant may be a candidate for and eviction. So we think that's a pretty conservative number. I don't think the casualty losses -- well, they do impact. Because where any business interruption we're getting insurance proceeds are going to other income. So obviously, doesn't hit that rental revenue line, but we're starting to bring those units back online now and that should clear things up and part of what's driving our additional increases throughout the year.

That's helpful. It makes sense. And then as you think about blended lease rates going forward, do you think there's still room here to increase renewal rates and further narrow that gap to new lease rates? Or are you getting to the point where you think turnover will increase your push renewal rates further?

Yes. I think there's definitely room to see them kind of converge, right? So obviously, we can't sign 25% in new leases every quarter probably going forward. But we do expect to see those 2 numbers converge. I mean, if you look back in 2016 and 2017, the portfolio regularly had double-digit renewal increases during peak leasing season. So, so far, we're optimistic. As I said in July, we're 24.4% new leases, 8.18% renewals on almost 1,100 leases. So every single market is in double digits on the new lease front, and then high single digits on the renewal. So I think -- I mean, as -- the markets are as healthy as they've ever been on the leasing front. So I mean, we expect this to continue through the second half of the year.

(Operator Instructions) We'll take our next question from John Massocca with Ladenburg Thalmann.

Maybe just following up on that last point again. I mean, I guess, given the health of the leasing market, is the expectation as you think about guidance going into the end of the year, that you can kind of hold occupancy at that 96% level even as we see kind of the eviction moratorium role?

Yes. I mean, we think so. There's really -- we've kind of tiered this out. This is one of our projects that we're working on now, and we're tiering out the folks that we think are candidates for eviction like immediately. And our plan is to take those units and largely rehab them and/or hit them like easy standard terms. That number is only 123 units. So that would be really the large pool of disrupted units that we would see in Q3 or Q4. So that small number gives us optimism that we should be able to hold these numbers and our trends are still as healthy as they've ever been. So I think so.

Okay. And then the other kind of component of the change to guidance was a decrease in kind of the total expense expectations. You kind of touched on the fact that it seemed like your tax expectations are kind of remaining the same and -- maybe on a kind of conservative basis there. I guess, what's kind of driving that 100 basis point decline in kind of total same-store expense, if it doesn't seem like it's a change in tax expectations?

Yes. I mean, I think it's savings on the other kind of R&M categories in payroll, R&M increased in the second quarter primarily because it was against a comp that was low basically in Q2 of last year. Obviously, we didn't really touch, the units played a lot of defense, put off work orders on the maintenance side. And so we worked a lot of that through in Q2, and we're not going to see that -- ore we expect not to see that -- those elevated numbers in the second half of the year.

And I guess -- sorry if I missed it, but the change in expectations kind of now versus maybe at 1Q. I mean, I thought some of that 2020 roll off would have been sort of -- would have been known. I guess is it just you're not seeing cost inflation like you were expecting or...

Yes. I mean, it's cost inflation. It's the fact that we just haven't turned -- we don't think we'll turn as many units and have the turn costs. Our resident retention is higher. People are accepting new renewals. So based on our trends and what we think the leasing performance will be in the second half of the year, there's not -- there's just lower CapEx. Yes, recurring CapEx.

Okay. And then just -- maybe just what are you seeing in the kind of broader cap rate environment today -- apologies if I missed it, but the assets under contract, what was the cap rate on those?

Yes, the Charlotte deals are a blended 4.25% cap rates. We expect to dispo the Nashville deals at a 4 so as to pick up an ARB there and do it in a nondilutive way to earnings by reverse 1031. More broadly, I mentioned the portfolio. That's an institutional seller that has -- those units are in largely Texas and Florida. And we think those are -- you kind of know they're under contract to a 3.5% cap rate. So it's pretty competitive out there.

But again, with the cheap financing and the lack of growth elsewhere and other commercial real estate asset classes, this is pretty popular place to be. But as Mitch said at the call, at the opening of the call, we have found 3 acquisitions here in target markets that we have a good dispo ARB, capital recycling ARB and look forward to growing more, particularly in the Research Triangle.

We'll take our next question from Michael Lewis with Truist Securities.

Great. You answered most of the mine, but I wanted to circle back to the issue of the eviction moratorium getting lifted. I think, you said you have about 123 units where you'd want to evict pretty quickly. So maybe a 2-parter on this. Could you talk a little bit maybe about that process, how quickly you get them out, if you think maybe there's higher CapEx on those units.

And then as the second part of that question, do you anticipate any impact on market fundamentals as you -- as kind of not just you but others kind of release this all of a sudden available inventory into the market? Do you think that slows things down a little bit in your markets?

Yes. Those are really good questions, Michael. So as we turn, there's 123 that are kind of our Tier 1 and those folks have either gone dark on us, so to speak or haven't been making any payments. And largely, I think most of them have been on notice and evictions' been filed. So those are ones -- these are units that we think we can get a hold of pretty quickly. And I'd say about half of those, we plan to renovate. And we know like down to the unit, obviously, like what floor type or floor plan it is.

So we're going to have teams ready to renovate those units and release them into the strong environment almost immediately. So that's good. As far as your market fundamentals and like a flooding of new tenants out there as the moratorium is. I think that most institutional owners will not rent to a tenant that's been evicted for whatever reason. I think that they still have to qualify income, credit checks, background checks. And we're certainly -- we appreciate and understand the hard circumstances of the pandemic.

But at the same time, people paid rent or making payment plans to pay rent. We worked with our tenants, and I think most institutional owners are of the same mindset. So if your tenants are trying to pay and make payment plans, then you'll work with them. Those that haven't or that go dark on you, I think, are pretty -- aren't going to get the benefit of the doubt on a new lease. So those folks that are evicted are probably going to a C unit or something lower quality would be my expectation.

And then another kind of macro topic. Obviously, a lot of talk about the Delta variant the last couple of weeks. I don't think anybody gets sick and leaves their apartment unless in the worst circumstances, of course. But is there any reason to think that if we get another wave of Coronavirus, if Delta variant becomes a bigger issue, that there's any -- is that a risk, you think, to apartment fundamentals or to your business at all? Or do you think that's -- you're sort of insulated from that a little bit in your business?

Yes. I mean, I think that our geographies are -- and have been sort of the most -- I don't want to say lenient, but the most progressive in terms of letting folks get out and work and go to restaurants, et cetera. So the economic activity in the Sunbelt, in the Southwestern and Southeastern United States are -- has kind of led the nation. So that's kind of a mitigating factor in terms of a new variant.

I think that I'd be hard-pressed to see Governor Abbott or Florida, for example, put the brakes on reopening and go backwards. So I think that that's something in our market's favor that will allow us to continue to hopefully operate as we have been. And even in Las Vegas, where there's temporary mask reissuances or reorders of wearing masks, they're largely not being, I guess, prosecuted or enforced. So I think for our markets, we feel pretty good, but who knows what California and New York will do? Those are wildcard.

(Operator Instructions) We have no further questions in queue. I'll turn the call back to management for closing remarks.

Yes. Thank you. Appreciate everyone's participation this morning. Lots of great questions and we'll talk next quarter.

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