NexPoint Residential Trust Inc (NXRT) 2022 Q1 法說會逐字稿

Good day, and welcome to the NexPoint Residential Trust Q1 2022 Conference Call. Today's conference is being recorded. And now 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 ended March 31, 2022. 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 broadcast through the company's website at nxrt.nexpoint.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, assumes 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, please 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. I appreciate everyone's time this morning. I'm Brian Mitts, and I'm here with Matt McGraner. I'm going to start the call by going through our Q1 results, talking about our NAV, and then I'll finish off with guidance, which we are revising upward. And then I'll turn it over to Matt to discuss some of the specifics in the portfolio, dig into the leasing numbers and the different metrics driving performance this quarter.

For Q1, net loss was negative $4.7 million or $0.18 loss per diluted share on total revenue of $60.8 million. That compares to a net loss of $6.9 million or a $0.27 loss per diluted share in the same period in 2021. And that was on a total revenue of $51.8 million.

For the quarter, same-store rent increased 11.7%. Same-store occupancy is down 90 basis points to 94.4%, and we'll discuss a little bit about the occupancy and what's driving that. This, coupled with an increase in same-store expenses of 4.7% led to an increase in same-store NOI of 16.4% as compared to Q1 2021. We reported a Q1 core FFO of $20.1 million or $0.78 per diluted share compared to $0.56 per diluted share in Q1 of 2021 or an increase of 39.5%.

For the quarter, we completed 531 full and partial renovations during the quarter, which was an increase of 50% from the prior quarter so increasing our velocity there and leased 489 renovated units during the quarter, achieving an average monthly rent premium of $138 and a 26.3% ROI during the year, which is about 450 basis points higher than our long-term average ROI in rehabs.

Inception to date in the current portfolio, we've completed 6,398 full and partial upgrades, 4,510 kitchen upgrades and washer/dryer installments and 9,624 technology package installations, achieving an average monthly rent premium of $139, $48 and $44, respectively, and an ROI of 21.8%, 70.8% and 33.5%, respectively.

For NAV, based on the current cap rates that we're estimating in our markets and our [foresee], actual NOI as well as our forward NOI for the next 2 quarters, reporting an NAV per share and falling range, $94.58 on the low end, $111.23 in the high end, for a midpoint of $102.90 at the midpoint. These are based on the cap rates that we estimate between 3.5% and 3.8%, which is unchanged from last quarter.

For the first quarter, we paid a dividend of $0.38 per share on March 31, and the Board declared a dividend for Q2 and the same now. Since inception, we've increased our dividend 84.5% and for the first quarter, our dividend was 2.36x covered by core FFO, which is a payout ratio of 48.5% of our core FFO.

Turning to guidance. As I mentioned, we're revising guidance upwards as follows: for core FFO per diluted share, $2.93 in low end, $3.09 on the high end, for a midpoint of $3.01. That compares to the prior guidance of $2.97 or $0.04 increase. For same-store NOI, we're estimating 12.6% in the low end, 16% on the high end, with a midpoint of 14.3%. That compares to our prior guidance of 13% or a 130 basis point increase. At the midpoint of our 2022 core FFO of $3.01, that represented 23.9% increase over our 2021 core FFO of $2.43.

So with that, let me turn it to Matt.

Thanks, Brian. I'll start by going over our first quarter same-store operational results. Our Q1 same-store NOI margin improved this quarter to 59.8%, up 264 basis points over the prior period. Rental revenue showed 6.3% or greater growth in all markets, while same-store average effective rent growth reached 15.6%. And while still strong, Houston lagged at 7.5%, while all other markets achieved year-over-year growth of 15.3% or higher. Tampa led the pack with 22.7% effective rent growth to $1,216 a unit per month.

First quarter same-store NOI growth was pretty special across the board with the portfolio averaging 16.4%, driven by 11.3% growth in total revenues and a well-managed 4.6% growth in total operating expenses. 8 of our 10 same-store markets achieved year-over-year growth of 7.5% or greater. And on the leasing front, the portfolio experienced continued positive revenue growth in Q1 with 7 out of our 10 markets achieving growth of at least 8.7% or better. Our top 5 markets were Orlando at 16.4%, Tampa at 14.7%, Nashville at 14.2%, Phoenix at 14.2%, South Florida at 12.2%.

Renewal conversions were also a healthy 55.2% for the quarter, with 8 out of our 11 markets, executing renewal rate growth of at least 15%, and [new] markets were under 10%. The leaders were Tampa again at 27%, Orlando at 24.6%, South Florida at 21.5%, DFW is 20.7% and Phoenix at 19.2%. As Brian mentioned, we increased our rehab pace in Q1, completed 531 units, which made up about 30% of all available new lease inventories signed during the quarter. Rehabs added roughly 8% additional growth on top of an already organically strong 17%.

We created some additional vacancy during the quarter to add more rehab inventory as demand for rehab unit continues to increase and be extremely well received by our tenant base. On the occupancy front, we're pleased to report that Q1 same-store occupancy remained above 94%, positioning us well as we enter the leasing season for 2022. And as of this morning, the portfolio is 96.5% leased with a healthy 60-day trend of 92%.

Also as of today, new lease and renewal growth continues to keep pace with Q1 in April with new lease growth of 24% and renewal growth north of 18%, as I said, through this morning.

Turning to 2022 acquisitions and dispositions. As Brian mentioned, we acquired 2 assets on April 1, The Adair in Sandy Springs, Georgia and Estates on Maryland in Phoenix. These purchases added 562 units to our portfolio for a total purchase price of $143.4 million. We used cash on hand and proceeds from a $70 million upside to our revolver to acquire them. And expect to recycle capital from successful property dispositions in Houston, we previously discussed last quarter to reduce leverage later in the year. The Adair and Estates purchases should enhance internal growth for the next 3 years and extend our rehab pipeline in two of our best-performing markets.

A little more of the business plans for each of these deals. We purchased The Adair at $65.5 million for a year 1 economic cap rate of 4%. We plan to upgrade 225 units at an average cost of $10,265 a unit and generate premiums of $161 a unit with an ROI of approximately 20%. We also plan to install smart tech packages in every unit and expect to generate monthly premiums of [$45] a unit -- per unit for that amenity. As a result, our underwritten 4-year average same-store NOI growth for this asset is 6.5%.

For states, we purchased it for $77.9 million for a year 1 economic cap rate of 4.3%. We plan to upgrade 165 units at an average cost of $11,700 a unit and generate premiums of $142 a unit and ROIs of approximately 17.5%. We also plan to install smart tech packages in every unit here as well and expect to generate monthly premiums of $45 per unit. As a result, our underwritten 4-year average same-store NOI growth for state is 7.7%.

Turning to guidance. As Brian said, we're excited to announce an upward revision to our prior guide of 11 -- 15% same-store NOI growth for '22 to a range of 12.6% to 16.1%, with a midpoint of 14.3%. As you can see, the upward guidance revision is primarily attributable to stronger-than-expected revenue growth and is widely written and illustrated on the highlight page of our supplemental. Our core markets are continuing to experience strong net migration. This population growth and lack of quality affordable housing should remain elevated this year in our opinion. And as illustrated again by the highlight page, compared to other multifamily options, there's still a significant delta between Class B, Class A and the SFR rents in our markets, with deltas ranging from $300 to $500 a unit for multi, and nearly over $700 for SFR.

In closing, I'll just reiterate that we're excited about the strong start to the year and we're expecting to see continued strength in the middle market rental housing, particularly in our core Sunbelt markets. That's all I had in prepared remarks. Thanks to our teams here at NexPoint BH for continuing to execute. Turn back over to you, Brian.

Yes. So let's go to questions.

(Operator Instructions) And we'll hear first from Michael Lewis with Truist Securities.

Great. I wanted to ask a little bit about how you're controlling interest expense. So I realize you have hedges in place to fix your debt. But I was surprised to see the interest expense go down this quarter, and I think it was below what you had guided to for the quarter. I realized you raised interest expense guidance just a little bit for the full year. Could you maybe talk about -- and especially since you have -- now you have a more sizable balance on your credit facility. Can you just kind of walk through that math in the first quarter and talk about how you're thinking about higher rates?

Michael, it's Brian. You're breaking up a little bit on our end, but I think I caught most of that. Yes, obviously, with the flood rate debt and interest rates moving upwards, that's something that we're very focused on. The portfolio is very hedged, which is meeting a lot of that increase from our perspective. So the math on it is essentially other really -- other than really the corporate facility, which we are paying down with the net proceeds from Houston. So that will decrease. So that's part of the math where rising rates would otherwise affect us but won't because we'll pay that down or not at the same extent and then the rest of it is we just pay less on the swaps as rates increase. And at some point, that flips and we end up getting paid on the swaps. So overall, it really mutes our change in interest rate expense throughout the year. So again, I didn't really get the full question, but hopefully, that addressed it. If not, happy to follow up.

Yes. No, that's helpful. And then kind of a bigger picture question. A lot of people are kind of guessing the next stage of the economic cycle with maybe increasing risk of a recession. I was wondering how you're thinking about the next stage of the multifamily cycle, right? So obviously, rent spreads aren't always going to be 20%, and that's expected, and that's okay. But how do you see this kind of going? I mean do you -- it sounds like your spreads into April are still extremely strong. I mean how do you think about how the multifamily cycle might end?

Yes. Michael, it's Matt. I think we're experiencing sort of a rerating of rents across the core Sunbelt markets. And while they're pretty dramatic on a percentage basis, the whole dollar -- $1,300, $1,400, $1,500 rents still in comparison to gateway markets still kind of favors the cost of living advantage for the Sunbelt.

The multifamily cycle, I think, can continue as long as we see these population trends and then migration job grid, really the only, in my view, existential threats to our business is an uptake in prime. So as long as we can continue to see our submarkets prevent that and provide safe and affordable housing, I like our business, especially, again, on a relative price point. Transactions and interest rates and kind of the volumes that we're seeing hadn't really stopped. There's over $10 billion of product out there in terms of pipelines and the portfolio transactions.

I think that the bidding for those deals will be less wide as they have in the past or at least last year. Stronger groups such as ourselves, other REITs, the larger asset managers will probably get it narrower to just the qualified guys instead of -- or the more qualified groups instead of casting a wider net, but transactions are still getting done. The agencies are still productive. The banks and life cos are getting more aggressive as the agencies are slower to produce or tightened spreads. But just a sheer amount of equity capital, I think, will keep a strong transaction volume this year.

And then as long as you can see elevated growth over inflation, I think that our business continues to be strong. I can't -- other than following the other REITs that own in different areas in the gateway markets, I can't really speak to their view, but this is -- I think our view is pretty constructive this year.

Yes, that's great color. It's interesting to hear you talk about prime. I think a lot of us think of that as like a northern or coastal city problem, but the rates have certainly gone up everywhere.

Just lastly, I wanted to ask about -- you had a lot of your operating expenses up. The one that was down was the big one, which was real estate taxes was down year-over-year. So I just wanted to ask about that. And maybe you were able to find such success fighting some of those? Or maybe talk a little bit about what's happening on real estate taxes.

Yes. You're exactly right, Michael. We've -- I'm knocking on wood while I answered this question, but we've had a little bit success so far and the first quarter from 2021 appeals, most notably in Tarrant County had about $350,000 of savings in settlements that we didn't expect. So that's some attribution for that. But overall, we've had a more muted, I guess, real estate tax paradigm this year than in the last few. And it's not like -- and in the last few years, frankly, we were frustrated by being 3% to 4% to 5% higher than our peers. Hopefully, that will flip in our favor this year. But so far, we've had some success in Texas appeals.

And now we will take a question from Omotayo Okusanya with Credit Suisse.

Yes. Just to follow up on Michael's question around the swap. Brian, could you give us a sense of just like when the swaps start to expire and like are they increased for the next 1 or 2 years? Or what do we kind of start to worry about the swaps coming off and then you having to put on new swaps in horizon environment?

Yes. Yes. So it's not until really 2026 that we start to see these swaps fall off. We had a couple that ended at the end of this quarter, Q1. I think there's another one that expires or matures in July. But the vast majority of them go out to the next 4 years. And that's about $1.2 billion of swaps.

Okay. That's helpful.

Sorry, I was going to refer you to Page 22 of our supplement. We've got the swap table there, if you want to take a look at that but, sorry, go ahead.

And then the second question is on realizing you're in a very unique part of the market with affordable housing, but still curious to kind of starting to see any impact of rising rates around kind of better retention because people suddenly can't buy homes or more (inaudible) because suddenly you can't buy homes. Again, realizing you're kind of in the affordable housing segment, but wondering if you're seeing any of that at all.

Tayo, it's Matt. Good to hear from you. The retention is strong at 55%. As I mentioned, we think that the trend will remain elevated. Often times it's just kind of sort of anecdotally we'll send out renewal notices and you get some pushback from tenants. And we're like, okay, we'll then go check the market, go check before you make your decision or even sometimes post your decision, they come back to us and they realized that there's really no other affordable option that's better when you add on moving costs plus the rent delta that's highlighted in our highlight page in supplemental. We're seeing probably 1/4 of our renewal in those is coming back with that sort of same area. So I mean we ended up renewing them and that's that.

So we're also experiencing still an upward trend in sort of our demographic data. I think the latest as of this quarter, I think the latest data we showed for household income is now up to $71,000 for our units, which is up from $56,000 and $60,000 and so we're continuing to sort of see enhanced wage growth within our tenant cohorts, so that's positive.

And then for the vacancy aspect from us, the courts are opening again largely in our markets. So we've had a chance to move out some of the slower payers or non-payers really at a time when we can benefit from the leasing season. So we're starting to take advantage of that kind of forced turnover, if you will.

Got you. And then one more for me. The demo data you just referenced, is that just what -- are you getting that just from the new applicants? Or you kind of have demo data for your entire pool of residents?

Yes, that's just tested as of Q1. So it will include the newer leases but plus the legacy assets.

(Operator Instructions) We'll now move to Peter Abramowitz with Jefferies.

I just wanted to go back to kind of the interest expense and how it's factoring into the full year guidance. So just kind of looking at the first quarter results and the annualizing them would get you kind of well above to where you are in terms of the new full year guide. So I know you have -- you're dealing with the rising rates, and you talked about that before. Is there anything else kind of within the numbers that's kind of driving that sequential decline in the FFO run rate on a quarterly basis? Or is there just kind of a significant degree of conservatism in the guide?

Yes. Peter, it's Matt. I think there's some conservatism for sure, but maybe what's not flashing out to you is we're also factoring the dispositions of the Houston portfolio as well. So that would sort of meet the runway a tad, if you will, because there's slightly more value to those deals than the ones we just bought.

Got it. Okay. And then, I guess, 2 years into the pandemic, how are you kind of tracking the in-migration? Any signs that there's potentially a slowdown? Or on the other side, that it's remaining just as strong as it was kind of in the early days of the pandemic? And I guess kind of what are your general thoughts about -- is the acceleration in migration that we saw really over the last few years, how sustainable is it? Is it going to sustain to kind of a normal pace of what it was before 2020?

Yes, great question. I think you guys do a pretty fantastic job. I saw your report that you put out to follow the mail, tracking the tenants. I think within that report, I think only our portfolio had positive (inaudible) trends, so in each of our markets. So you guys are all over it. So we track them every quarter year-over-year out of state. This year has increased 11%. It's still double-digit increase. The first year of pandemic, it was like, call it, 18%, 19%, 20%. So I guess you could call that a slowdown, but it's also compounding annually. And so they're still elevated. California is still the #1 kind of new or where people are moving from and then New York and Virginia and Illinois, kind of follow that. But California is still 20% of each of our new leases or new lease outs. Illinois and New York are double digits also.

So in terms of if it's going to slow, I think, sure, naturally, there's some regression to the mean because New York and the other markets are reopening, so to speak. But boy, we like our problems relative to theirs. And so we're still positive on that migration trend again as your data illustrates.

Got it. And one more for me, just to follow up on that. Not sure if this is too detailed to answer off the top of your head, but the residents applying in new markets that are coming from New York, I guess, in Florida is at the top of the list for where they're going. Any others that stand out, markets in your portfolio where movers from New York are going?

Yes, we do track it. So in order, Florida's first, then Atlanta, Charlotte and Nashville, are two, three and four. Out of California, just because I have you, Arizona, Nevada, one and two, and then Tennessee, three.

Ladies and gentlemen, this will conclude your question-and-answer session. I'll turn the call back over to your host for closing remarks.

Yes. I appreciate everyone's time. Great questions. Another great quarter. And as we discussed, we think it's going to keep going forward for this year. So we'll see you in a few months. Thank you.

Ladies and gentlemen, this will conclude your conference for today. And we do thank you for your participation, and you may now disconnect.