NexPoint Residential Trust Inc (NXRT) 2020 Q2 法說會逐字稿

Good day and welcome to the NexPoint Residential Trust, Inc. Second Quarter 2020 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jackie Graham, Investor Relations. Please go ahead, ma'am.

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. 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, estimate, may, should, intend and similar expressions or 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, the COVID-19 pandemic and its effect on the company, NXRT's 2020 adjusted NOI estimate and the related assumptions, NXRT's strategy for the third quarter and full year 2020, NXRT's net asset value and its related components and assumptions, planned value-add programs, including projected rents -- projected average rent, rent change in return on investment and expected acquisitions and dispositions.

They are not guarantees of future results and forward-looking statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statement, including the ultimate geographic spread, duration and severity of the COVID-19 pandemic and the effectiveness of actions taken or actions that may be taken by governmental authorities to contain the outbreak or treat impact as well as those described in greater detail in our filings with the Securities and Exchange Commission, particularly those described in the company's annual report on Form 10-K and quarterly reports on Form 10-Q.

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 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 or total debt. These non-GAAP measures should be used as a supplement to and not a substitute for net income loss and total debt computed in accordance with GAAP. For a more complete discussion of FFO, Core FFO, AFFO, NOI and net debt, 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.

Thanks, Jackie. I want to welcome everyone to the NXRT 2020 Second Quarter Conference Call. Today, we're going to discuss the highlights for the quarter. We'll spend some time analyzing Q2 results as well as the early part of Q3 through July. This is Brian Mitts. So let me start with the Q2 and year-to-date highlights. First, we announced last week, on July 27, the Board elected to expand the composition of the Board from 5 to 6 members, and we added Catherine Wood as an independent director. We believe Cathie brings significant experience and a unique perspective to the Board. So we're glad to welcome her on.

Net loss for the quarter was $9.3 million or $0.38 -- negative $0.38 per diluted share as compared to a $2 million loss or negative $0.08 per diluted share in Q2 of '19. Same-store NOI increased for the quarter's $1.1 million or an increase of 5.8% as compared to Q2 2019. We're reporting Q2 2020 Core FFO of $14.5 million or $0.59 per diluted share, which is an increase of 31.1% on a per share basis as compared to Q2 2019. Total revenue for Q2 was $50.7 million, and total NOI was $29.2 million, which represents an increase of 17.6% and 18.9% year-over-year, respectively. NOI margins for Q2 were 57.6%, which was a 50 basis point improvement over margins in Q2 of '19 of 57.1%. We continue to execute our value-add business plan by completing 411 full and partial renovations during the quarter with 392 upgraded units leased, achieving an average monthly rent premium of $113 and 23.4% ROI during the quarter. Inception-to-date in the portfolio as of June 30, we've completed 7,325 full and partial upgrades, achieving an average monthly rent premium of $95 and a return on investment of 25%. Through our equity repurchase program, we've repurchased approximately 2.4 million shares of stock through Q2 of 2020 at an average repurchase price of $25.70 per share. We ended the quarter with $85 million of cash. On our NAV per share, given the unprecedented disruption in the economy over what is also an unprecedently short period of time, cap rates become difficult to judge, although we do have more clarity today than we did after Q1.

Nevertheless, we're updating our NAV based on our revised outlook for NOI and cap rates, and Matt will discuss this in some detail in his prepared remarks. Based on our updates and cap rates and NOI, we're revising our NAV per share as follows: $34.37 in the low end, $42.31 on the high end from midpoint of $38.34. That's compared to a midpoint of $38.47 in the prior quarter or 33 basis point quarter-over-quarter decrease and a midpoint of $37.51 at June 30 of last year or a 2.21% year-over-year increase. For dividends. For the first quarter, we paid a dividend of 31 -- sorry, for the second quarter, paid a dividend of $0.3125 per share on June 30 to shareholders of record as of June 15, and last Monday, the Board declared a dividend per share of $0.3125 per share payable on September 30 to shareholders of record on September 15. Year-to-date, our dividend is 1.77x covered by Core FFO for a payout ratio of 56% of Core FFO. Overall, just big picture. Our rent collections were stronger than we anticipated in Q2. And I think maybe better than everybody anticipated across the industry. And that trend continued into July, and Matt will give some details around that.

Our biggest attractor to higher revenue was our inability to charge late fees or process evictions. The moratorium on evictions under the Cares Act ended July 27. However, we're still restricted in certain markets and to the extent we can process evictions we're doing so thoughtfully. Also a number of local governments are offering assistance to residents, and we're encouraging our residents to take advantage of that and also helping them to find information and/or complete applications for that.

The next big event that we're watching closely, the new stimulus package or move out, how that -- the withdrawal of stimulus may impact our results overall and our ability for tenants to make rent collections. However, given the force nature of the situation, unprecedented decline in the economy and increase in unemployment, not to mention the fact that it's a major election year. We continue to believe that some sort of stimulus will be forthcoming. However, we also believe that in new stimulus bill is not passed, the impact may be less than perhaps people expect. Evidence of this is a decline in assistance requested by our residents throughout the quarter and into July and just the general strength of our portfolio and performance since COVID.

And the nonpayment of rents is only impactful to the extent we can't evict nonpaying tenants, which is -- we've been forbidden to do up until just last week. In that regard, any additional stimulus is likely to be a double-edged sword with the carrot of more stimulus, which may help some tenants make payments. But the stick is that we can't. We have a continued extension of moratoriums on eviction. We continue to see strong demand for our product in most markets, which is evidenced by our results as well as the demand that we've seen on our upgraded units where we've been able to drive strong rent increases. And Matt is going to get to that a little more detail as well.

One of the reasons that we see a strong demand for our product is something we've talked about historically, and we're starting to see now is a trade-down effect. We believe this was a factor in '08, '09 and beyond, but essentially a tenant in a product decides to trade down to one of our renovated units, saving money, but sacrificing a little in the way of quality or amenities. And we think this is probably very underappreciated part of our strategy and our story. Net-net, all these factors have resulted in strong NOI growth relatively strong new lease rent growth in most of our markets, strong renewal rent growth and occupancy compared to our public peers and far better than smaller private operators.

So although some of the unknowns remain around COVID, we believe that after 5 months, we have a lot more transparency and understanding of how this is going to impact our business and believe that we are well positioned for the future. Let me go through some of the details on results, then I'll turn it over to Matt. Total revenues for the second quarter of $50.7 million versus $43.1 million for the same period in '19, it's a 17.7 percent increase. NOI was $29.2 million in second quarter 2020 versus $24.6 million last year for 18.9% increase. Core FFO increased to $0.59 per diluted share from $0.45, which is a 31.1% increase on a per share basis. Same-store rent increased 2.1% year-over-year for the quarter. Same-store occupancy increased 120 basis points for the quarter year-over-year, which we're excited about. That's a strong number. Same-store revenue increased 4% for the quarter year-over-year. And that's 5% increase in rental income and a 31% decrease in other income, driven mostly by the inability to charge late fees and other types of fees.

Same-store NOI was $20.2 million versus $19.1 million in the same quarter last year for 5.8% same-store NOI increase. Year-to-date, our total revenues are $103.3 million versus $84.6 million for the same period in '19, which is a 22.1% increase. NOI is $59.2 million year-to-date 2020 versus $48.2 million last year for a year-over-year 22.9% increase. Core FFO was $1.11 per diluted share versus $0.91 per diluted share last year for 21.4% increase. Same-store rent increase year-to-date is 1.9%. Same-store occupancies increased 100 basis points for 2020 versus the same period in 2019. Same story on same-store revenue year-to-date, high increase in rental revenue, 5.4% increase, but a decrease in other income. Same-store NOI is $36 million year-to-date for 2020 versus 34.2% -- or $34.2 million last year for a 5.3% increase in same-store NOI year-to-date.

So with that, let me turn it over to Matt to fill in some of the details for the quarter and year-to-date.

Yes. Thanks, Brian. We are extremely pleased with the operational performance of the portfolio during the quarter, especially given these difficult times. The property and asset management teams at BH and NexPoint are operating at high levels, and the performance this quarter demonstrates their talents and the durability of our company's investment thesis, namely the well-located affordable Class B apartments and the Sunbelt should continue to produce durable cash flows even during the most challenging operating environments.

As Brian mentioned, same-store NOI grew by 5.8% year-over-year and was 20 basis points sequentially better than the first quarter. We saw strength across most of the portfolio during the quarter, with 7 out of our 10 markets growing NOI by 4% or better, including Dallas, Houston, Atlanta, Phoenix, Nashville, West Palm and Tampa. Notably, Tampa, West Palm and Phoenix, all grew NOI by double digits during the quarter. On the operational front, leasing activity and revenue growth were better than expected during the second quarter. New lease rates were slightly negative, down 1% and down 3% excluding rehab units, but renewals were positive and increased by 2.3% across the portfolio for a blended positive rate change during the quarter of 54 basis points. Our top markets for revenue growth during the quarter were Dallas-Fort Worth, Charlotte, Nashville, Phoenix, Tampa and West Palm, posting 4% or better revenue growth. Houston made this list as well during the quarter, surprised the upside for us. Our "weakest markets" for the -- for revenue growth during the quarter were Las Vegas and Orlando, but were only down modestly. Las Vegas revenues were down 73 basis points from the first quarter. Orlando revenue was down 4.8% year-over-year, but only 1.2% quarter-over-quarter. Overall, occupancy for the portfolio improved 90 basis points year-over-year and finished the second quarter for us at a historically strong 95.3%.

Renewal retention for the quarter was an all-time high for the company as well at 57.9%. The collection activity for the quarter ended at 96.5% and ultimately finished 98.1% as of the end of July. Markets below the portfolio average were as follows: Las Vegas at 95.9%; and Atlanta and Orlando both at 97.3%. Importantly, as of July 31, only 5 basis points or 70 units out of 14,104 units were unaccounted for, meaning we had seen no rent payments from such residents during the quarter. For July, our preliminary operating performance metrics are as follows: July occupancy finished the month at 95%; rent collections for the month totaled a strong 99.1%, including payment plans; with Las Vegas being the only market below 97% and 95.6%. July new leases and renewals were positive at 1.5% -- 1.52% and 1.96% with a blended positive rate change of 1.72%. Now on to our Q2 value-add programs. You may recall, our Q2 rehab pipeline base case was previously revised lower to 225 upgrades. We are pleased to report that we completed 411 rehabs, leasing 392 of them for a blended ROI of 23.4%, again, demonstrating consistent demand for our upgraded but still affordable housing product. We completed rehabs in every market but saw particular demand in Dallas-Fort Worth, Atlanta, Phoenix and Nashville. Our largest asset, the Avant at Pembroke Pines, we completed 22 interior upgrades during the quarter, achieving a 17% ROI on leased units. Even our Las Vegas assets demonstrated demand for upgraded products, realizing 14% revenue growth on 34 rehab units.

For the third quarter, we have budgeted 540 interiors, fairly evenly distributed amongst all the markets, with the exceptions that we planned to upgrade over 100 units in Dallas-Fort Worth but almost none in Houston and Orlando. In the fourth quarter, we expect to complete 290 interior upgrades, again, largely evenly distributed across our markets with the exceptions of Houston and Orlando, bringing the annual expectations to 1,900 units or approximately 75% of 2019's pace, not bad given the circumstances. On the transaction front, we are pleased to announce that we have signed a contract to sell Eagle Crest, an asset located in Dallas-Fort Worth that we purchased in 2014 for $55.5 million, generating approximately a 5.2x multiple on invested capital and a levered IRR of 35%. The purchaser currently has a meaningful amount of nonrefundable earnest money in escrow and closing is expected to occur in the third quarter. This purchase price represents a 4.75% nominal cap rate, which is tax adjusted on T3 revenues over T12 expenses.

For the rest of my prepared remarks, I'd like to update our stress test in areas and provide some observations operationally for the rest of the year. First, we expected and worked through a challenging leasing and operating environment during the quarter. We do expect this environment to continue. You may recall, we underwrote bad debt to reach over 4% for the year, increasing to over 8x from our historical average. We hit bad debt particularly hard in Q2, thinking it could reach as high as 8% and then level off in Q3 and Q4. Recall also that we assumed rents would go modestly negative April through September and they remained flat for the year. We underwrote physical occupancy to 92.9% and economic occupancy declined to 89%. Fairly modest savings were expressed on controllable expenses. And then further recall that these draconian assumptions still yielded a $2 per share Core FFO for the year result.

Obviously, Q2 bad debt performance in general have outperformed our expectations for the quarter, given our release today as affordable housing in our suburban Sunbelt markets have continued to demonstrate resiliency. Given this Q2 performance, we have taken a step back and considered what we need to go wrong in order for our portfolio to still produce a $2 share Core FFO performance for the year, which again is modestly up 0.7 from last year and incrementally and relatively positive as compared to our public peers. In sum, even if revenues were down 4% for the second half of the year, and vacancy losses increased from a budget of 5.4% to 7% of GPR and bad debt rose to 4% or tripled from the first half of the year, we still believe we can produce a $2 a share of core earnings for the year.

Finally, on the NAV price, despite the Eagle Crest transaction, as Brian mentioned, the only changes we made this quarter was to plug-in actual Q2 NOI, reflect repurchase activity and reflect the fair value moving on our swap book, which reduced our NAV midpoint by a modest $0.13 per share to $38.34. So that's it from my prepared remarks. But in closing, I just want to thank our teams at BH and NexPoint for all the hard work during these difficult times.

Thanks, Pat. Let's go ahead and turn it over for questions.

(Operator Instructions) Our first question will come from Alex Kubicek with Baird.

Have you guys seen a material performance differential between those units, which you've renovated and just your kind of more core products, I'm just curious if you've seen the trade-down effect is more pronounced on those upgraded units versus something that might be many years removed from a recent rental?

Yes. I'd say it's market dependent. Obviously, markets that are stronger. For example, Phoenix and South Florida, where we can just rehab more. I think that -- I think that we've seen -- again, as I mentioned, demand rise in those markets. I think Dallas-Fort Worth, Charlotte, Phoenix and South Florida, we didn't think we would budget as many during the quarter, but ultimately did increase our revised pipeline numbers because of that demand. So I think that there are trade-down effects in these organically strong markets with $1,000 affordable rent.

Yes, that's helpful. And then just a follow-up there. Have you adjusted your internal hurdle requirements that you guys are underwriting on renovations? Or how do you guys kind of adjust your expectations going forward as you kind of evaluate new opportunities?

Are you talking about in terms of adjusting what ROIs we would need to test an upgrade or...

Correct. Yes. Or kind of both on the current products that you guys own or just in future acquisitions as you were underwriting and then kind of call it, the next 6 -- 12 months in the runway area?

Yes, sure. We haven't adjusted our internal expectations for the current pipeline. The full and partial interior rehabs that we plan to complete, we still think we can get the consistent 20% to 25% ROIs on that stock. And then going forward, in terms of the new acquisitions that we do, if any, it will be interesting to see, but I think that we'll hone in on markets that are showing or demonstrating the growth that we're seeing right now, like Phoenix and South Florida, Charlotte, et cetera.

That's helpful. And then just one more quick one. Just on the accounting side, how do you guys recognize bad debt? Is it certain months of delinquency? Just wondering how you guys judge collectibility going forward here?

Yes. It's a good question, and that's exactly how we do it. Once -- we treated this a little bit given the payment plans that we put in place for COVID. Once you put somebody on a payment plan and they're 60 days or more out, that's when we start to write it off pretty aggressively. And then once we get past, up to 120 days, it's completely written off unless they've been making payments towards it. If they're not on a payment plan, it's just a kind of typical what we've been doing historically. So we write that off much quicker. And as Matt mentioned, there's not many of those that are out there, but that's getting flushed out pretty quickly.

Our next question will come from John Massocca with Ladenburg Thalmann.

So to kind of think about Eagle Crest, I mean, I know it's still kind of early days for the market to kind of -- or the transaction market to kind of get going again. But I mean, is that maybe typical where you think transaction activity could shake out when the market gets a little bit more liquid?

Yes. I mean I think it's not surprising to us that we can still kind of hit pre-COVID pricing given where interest rates are right now and new acquisition buyers can obtain agency financing into the 70% range at 2.75% to 3%, which if you take a 4.75% cap and you layer that on, you can still produce a desirable cash-on-cash yield. The geographical dispersion between markets with evictions or higher bad debt, I think we'll -- you'll see harder hits to pricing expectations. But for Dallas, largely, we think that 4.75% cap or the cap rates expressed in our NAV on a nominal basis are going to be pretty steady for the rest of the year. And plus, for just the market being right now, there's just not a lot of product. So there's a scarcity to it that we thought we would take advantage of and produce a little bit of liquidity, have a nice print, price discovery and really obtain pre-COVID pricing.

Okay. And then as we kind of think about leasing in the existing portfolio, how kind of maybe total shows in applications trended, especially maybe in some of the Sunbelt states that have been kind of hit a little harder here in the last couple of months by pandemic?

Yes. I mean we think that in -- really the renewal retention, the shows were down, obviously, in Q2. We did see a spike in kind of new lease traffic and lower retention in July. And so we think that, that will potentially be a trend when people start getting out more and looking for updated product. Yes, one thing to note is that our leasing -- our revenue on new lease units in July basically went up 3% from where it was in Q2. So we're positively inclined to believe that, that's a healthy sign for our market. And to Brian's point of somewhat of a trade-down effects occurring out there in our markets for affordable product.

And when you say a trade-down effect, I mean, some of that potentially maybe an urban, suburban kind of switch potentially going on? Or is it more economically people just not willing to pay a rent?

I think it's both. I think you're -- the propensity for folks to want both a higher quality upgraded unit for $300 or $400 or $500 less than what they were paying in the same MSA, you're seeing that. And then you add to that, our product is just -- has lower density. You don't have structured parking, you don't have 5 or 20 storeys, you can drive up to your unit. You don't have to see anyone, you don't have to get in an elevator. So I think that, that type of qualitative aspect to our apartments are going to be in the near term, probably in higher demand than otherwise would be the case.

Okay. And then thinking kind of about the other income. Now that some of the moratoriums are expired. I mean is that something that could potentially accelerate a little bit either in the coming quarters, just given the ability to maybe charge some of these fees again?

Yes, I think it absolutely will. It will increase, but it's not in our -- that kind of base case that I went over. We're not assuming that, that's going to be a big driver.

(Operator Instructions) Our next question will come from Barry Oxford with D.A. Davidson.

Great. Kind of getting back to the bad debt expense. And I know it's hard to tell, but are you able to kind of get your hands around what percentage of tenants that you have are paying rents from the government unemployment benefits? Is there a way to kind of look at that or kind of get your arms around that? And then if so, how does that play into your bad debt expense calculations?

Yes. I mean I think the bad debt expense, the last time we did this was at NAREIT in June, and we did a deep dive in our portfolio. And I think that the result that came out of it was that at that time, 2.5% of our total population in our units described themselves as having lost a job due to COVID. So at that point, it was very modest. We plan to do a refresh at the end of August to see where we are based upon the stimulus expiring in July. So it didn't really make sense to do it then. So that's the latest kind of indicator of that metric, if you will. But in terms of underwriting bad debt going forward, as I mentioned, we thought it could reach as high as 8%. It was about 2% or less. And then if we had 4% for the rest of the year, we still think we have positive results.

Barry, on the accounting side, yes, what we're trying to do is do deep dives into all the payment plans, and if people are making payments. We're trying to take that into consideration as we think about who maybe just stops paying and never repays. And that's how we're arriving at the percentages of what we write-off and when. So it's sort of evolving as we get more information. Obviously, we take a backward look also, for example, we took it all the way through July and said if these people paid and maybe hadn't paid as of June 30, and we've got a slide in our supplement that sort of talks to that because there was quite a bit of payment for Q2 outstanding in the month of July. So we're trying to learn as we go and take that into account, obviously, be conservative in our numbers. But that's what we're doing from an accounting perspective.

Okay. That makes sense. Appreciate that. When you guys are -- kind of switching gears, when you guys are looking at acquisitions, as far as the competitors are out there, has that mix changed any? Or is it still, the money is roughly coming from the same group of people?

Yes, there -- it really has -- Barry, it's a good question. There aren't a ton of institutional buyers right now partaking in the current transaction environment despite the fact that there's not a ton of deals out, but they're -- the institutional bid is kind of 10% to 15% discounts to where pricing is. And so they're not actively seeking to purchase right now. They're more of a wait-and-see mode. Most of the buyers that are out there are private syndicators, high net worth, 1031 type of money. So we'll see. There's an interesting survey that CBRE put out across their investment sales national platform that there's more north of $10 billion of multifamily product that's on the sidelines that was going to be launched during the second and third quarters that's now been put on hold in their system. So when that comes out later in the year, perhaps the institutional bid comes back. But for now, it's largely just the private, smaller folks.

Our next question will come from Rob Stevenson with Janney.

When you guys look at your -- when you guys take a look at your new move-ins, where are those people coming from? Is that people trading up or down by price point? Is that people coming in from out of state? How are you characterizing the new leases that you guys are -- have been signing over the last few months?

Yes. I think we were talking about this earlier today. So the actual household income of the portfolio of our portfolio is increasing. So that's -- I think we're now at $65-ish thousand and that's up roughly $7,000 to $8,000 year-over-year, I think. So that's, I guess, quantitatively telling us that there's folks that just earn more, they want to live in our housing. We've tried our best, and it's really difficult, and we're going to continue to do this because I know it's very germane to the industry right now to see what -- where folks are coming from. What we can tell you is that of our applications during the second quarter that we had incrementally more from California and New York, and it's not a huge number, but it is 100 or so. And that's 75%-ish, California, 25% in New York. So that's modestly up, but 100 isn't -- it's not 50% of our traffic. It's more like 10% of our traffic.

Okay. And then given all the rhetoric that's been going on around potential changes to the 1031 structure. Are you guys -- if that winds up driving pricing up. Are you guys prepared or planning on putting additional product on the market for dispositions in the back half of the year to take advantage of people that need to close 1031 by December 31?

Yes. I mean we would -- I think we'd sell a few more, but it probably -- it's just because we like the -- we're not revising incrementally our disposition outlook as a result of the rhetoric Joe Biden's plan. We did have, I think, initially guidance to sell $100-ish million of assets this year or more. We've obviously completed a bunch right before COVID that produced some liquidity. So we could probably sell 1 or 2 more this year, nothing on the block other than Eagle Crest, but the 1031 rhetoric isn't a catalyst for that.

Okay. And then last one for me. What are you and your partners seeing in terms of availability of labor as well as materials cost for redevelopment projects right now? What's going on cost-wise there and availability?

Yes. So the availability of workers is increased. And so the work -- the labor and materials costs have gone down modestly. The problem is getting crews on-site and materials on-site at the same time. So it's really been a timing challenge and logistical challenge versus an availability, so to speak. You might have crews that have gotten, some folks within the crews have COVID. And so there's a 2-week delay and what those crews or what that company and those subs can deliver in terms of on-site performance and rehabs. But nothing material, but there has been a modest decrease in terms of cost on both fronts.

Our next question will come from Gaurav Mehta with National Securities.

Following up on the asset that you currently have under contract for sale. I was wondering if you could provide some more color on how the buyer pool was like and was there an off-market transaction or you fully marketed that deal.

It's a good question. We obtained broker opinion of values from CBRE and JLL late last year and then earlier this year. And we're set to launch it in, call it, March to the market, and this is just Eagle Crest, nothing else. Obviously, we didn't, but as we got further into the second quarter, we had unsolicited folks with capital on hand that went to CBRE and expressed interest in value-add product in Texas. And so we were open to showing it to 4 or 5 groups, and we hit our pre-COVID pricing, and so we decided to transact.

Okay. And I guess for your real estate taxes and insurance, in this markets, are you seeing an uptick? And what are you kind of expecting for the second half as far as taxes?

I think insurance, we renewed in March, and we saw increases and tried to do -- pull the levers we could pull to keep that down. I think did a fairly decent job compared to some of the numbers we heard. I think taxes, we're going to continue to do what we've always done, which is very aggressively protest and try to get those down, go to litigation, if necessary. I don't know that the recent events are going to be helpful for us. I think cities are probably more squeezed now and counties and the various places that we have properties located are probably in more trouble today than were a year ago, and I think are going to be every bit as aggressive on property taxes as they have been. So we're not expecting that. And I think you're not going to see that reflected in any of our estimates or stress tests that we're going to be a lot of relief around the insurance or taxes in the coming years.

Our next question will come from Jon Petersen with Jefferies.

Great. Just one question for me. I'm just curious, I know you guys give the net effective rent, but have you increased incentives for new tenants or had to offer incentives on renewals whether it's free rent or anything else? How should we think about that?

No incentives on renewals other than to say that they've been largely flat. And then on new leases we used from these yield stores. So it's not -- it's algorithmics and there's no like concessions. We're obviously waiving application fees in some aspects. Waiving pet fees and other -- kind of other income line items, which resulted in the down, somewhat of a material down other income line. But we're not giving 2 or 3 or 4 months away, like some of the gateway coastal markets are. We're just not seeing that. And then any sort of modestly down rent for us is $20, $30, not hundreds of dollars. So it's been pretty steady.

Our next question will come from Michael Lewis with Truist Securities.

Great. My first question is just a point of clarification. I think you know I was going to ask, the casualty losses of $1,079 million, it looks like it's exactly offset by -- in the miscellaneous income with insurance collections of $1,079 million. And then in the Core FFO calculation, you add back $1,079 million. Again, I just want to make sure that -- it looks to me like double accounting, but I'm sure there's something I'm missing in there?

Yes. So the background on that is the cutters deal that made the tornado come through last October, is here in Dallas. And so as we rebuild that, we're getting business interruption insurance. And so what we're doing is reclassing it from expense into the income line to reflect that revenue. And then we added back to the Core FFO just reflected in there the fact that it's not really a part of our overall operations. But at the same time, we're getting the income, but we're as -- we would on any casualty loss, we're reversing it out of Core FFO. So it is income that's coming in from the insurance company. So that's a true number, but then you've got this casualty loss that's -- we've already kind of recognized a lot of that, and we wrote it off. It was actually a gain because the proceeds that we're going to get are going to be in excess of the carrying value at the time. So that's -- which I think is why most people, if not everyone takes casualty out of their FFO numbers just because it gets -- it's more of an accounting thing than an economic or cash flow item.

Okay. I think I understand. Maybe the timing is a little odd.

It's exactly -- yes. You summed it up in one word, it's timing.

Okay. My second question, on Page 5 of the supplemental, you've got these high -- relatively high rent collection numbers. And then at the bottom of the page, some of these markets with a lot of units that was delinquent. So for example, the widest gap I saw was, I think at the end of June, it was something like 95% of our land or rent had been collected. But at the same time, about 20% of the units were delinquent. Is that just a function of the lower the rent, the less likely people have been to pay?

Well, it's also -- I'll let Matt go into some detail here. But just high level, it's -- we have tenants that haven't fully paid, but they paid a lot and so they've got balances that they're carrying. And what -- that's what we're trying to highlight here is that most of the balances are spread across a very few number of tenants. In some cases, there's tenants that just have been completely unresponsive to our outreach, and I think are kind of riding this moratorium on addictions to our detriment, probably ultimately their detriment. But Matt, you want to talk to the details?

Yes, Michael, the first time I saw this chart, I didn't like it either. And then it grew on me because I think what it depicts is it's showing the progress that's made from quarter to -- from June to July for the units that are fully collected. And so the way I look at this from a positive perspective is that everyone -- there's only 840 residents at the end of July that were delinquent. And then you show the dispersion across the markets, obviously Vegas and Orlando are the -- some of the larger ones. But over -- most of those -- and most of that 840, which isn't that much across the portfolio has paid and then really no payments only 70, which is 5 basis points of the portfolio, which I mentioned in the prepared remarks. And so I didn't like it at first, but I think it is a helpful depiction on in terms of progress and just breaks out by market.

Yes. I don't think I've seen that chart from anybody else before. I guess I was a little surprised how many people pay partial rent. I always thought of rent as either pay it or you don't. And it looks like there's a lot of people that pay some of it.

Yes. No, you're correct in normal times, but during COVID with the payment plans, there's been I mean -- and we can't evict anybody. So we do the best we can to try to collect as much as we can.

Okay. And then the last question for me. It's obviously too soon to talk about August, but as you saw improvement in July, at the same time, the cases were surging, Florida, Texas and Arizona, especially were all in the news every day. And that's a big chunk of your portfolio, obviously. I mean are there any signs? Or I don't know how cases match up with -- exactly match up with employment or who pays rent. But does that increase in cases, is that -- does that give you any concern as we head into August, and we just had a big ramp up in some of those markets in July?

I think -- I mean I think July has been really strong, both from a -- I mean a relatively really strong from a growth standpoint from the revenue side and collections and occupancy. We expect that to continue into August. Our markets didn't absorb as many job losses as the gateway markets did. So I think that, that kind of makes up for some of it. But by and large, most of -- most of our markets are not correlating in terms of demand is down, if you will, from COVID. I think July is really, hopefully an indicator of future activity in our markets. And short answer is we haven't seen a correlation between the 2.

(Operator Instructions) I am not showing any further questions in the queue. I would like to hand the call back over to the speakers for closing remarks.

Yes. Thank you. Appreciate everyone's participation. We continue to work hard and try to navigate through these times, and appreciate everyone's support. Talk to you next time. Thank you.

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