NexPoint Residential Trust, Inc.

Good day and welcome to the NextPoint 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 NextPoint Residential Trust's Conference Call to review the company's results for the second quarter ended June 30th. On the call today are Brian Mitz, 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.nextpointliving.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 effects on the company, NXRT's 2020 adjusted NOI estimate and the related assumptions, NXRT's strategy for the third quarter and full year 2020, and NXRC's net asset value and its related components and assumptions, planned value-add programs including projected average rent change and 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 and 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 its 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, NXRP 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 FFOs, 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 NetDebt to the company's earnings relief that was filed earlier today. I would now like to turn the call over to Brian Mitz. 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 Mitz. Let me start with the Q2 and year-to-date highlights. First, we announced last week on July 27th that the board elected to expand the composition of the board from five to six members, and we added Catherine Wood as an independent director. We believe Cathy brings significant experience and a unique perspective to the board, so we're glad to welcome her on. Net loss for the corridor was $9.3 million or $0.38 per diluted share as compared to a $2 million loss or $0.08 per diluted share in Q2 of 2019. Same store NOI increase for the corridor was $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 of 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 30th, 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 unprecedentedly 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 in NOI, we were revising our NAFRA share as follows. $34.37 on the low end, $42.31 on the high end, from midpoint at $38.34. That's compared to midpoint at $38.47 in the prior quarter, or 33 basis point quarter-over-quarter decrease. and a midpoint of $37.51 at June 30th 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 31.25 cents per share on June 30th. The sharehold is a record as of June 15th. And last Monday, the Board declared the dividend per share of 31.25 cents Per Share payable on September 30th to shareholders of record on September 15th. Year-to-date, our dividend is 1.77 times covered by Core FFO for a payout ratio of 56% of Core FFO. Overall, just big picture, our rig collections are 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 detractor to higher revenue was our inability to charge late fees or process evictions. The moratorium on evictions under the CARES Act ended July 27th. 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 is the new stimulus package, or in lieu of that, how the withdrawal of stimulus may impact our results overall and our ability for tenants to make rent collections. However, given the forced 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 a new stimulus bill is not passed. The impact may be less than perhaps people expect. Evidence of this is the 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 we've been forbidden to do up until just the 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 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. Matt's going to go through that in a little more detail as well. One of the reasons that we see a strong demand for our product, and it's something we've talked about historically and we're starting to see now, is the trade-down effect. We believe this was a factor in 2008, 2009, and beyond, but essentially a tenant in an A product decides to trade down to one of our renovated units, saving money but sacrificing little in the way of quality or amenities. and we think this is probably a 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, We believe that after five 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, and I'll turn it over to Matt. Total revenues for the second quarter, $50.7 million versus $43.1 million for the same period in 2019. This is a 17.7% 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 was 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 2019, 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 a 21.4% increase. Same-store rent increase year-to-date is 1.9%. Same-store occupancy has 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 of 5.4% increase, but a decrease in other income. Same-store NOI is $36 million year-to-date for 2020 versus $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.

Yeah, thanks, Brian. We were 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 NextPoint are operating at high levels, and the performance this quarter demonstrates their talents and the durability of our company's investment thesis, namely that well-located, affordable-class VA apartments in the Sunbelt should continue to produce durable cash flows even during the most challenging operating environments. As Ryan 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, a surprise to the upside for us. Our quote-unquote weakest markets 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%. 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 31st, only five basis points or 70 units out of 14,104 units were unaccounted for, meaning we have 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% at 95.6%. July new leases and renewals were positive at 1.52% and 1.96%, with a blended positive rate change of 1.72%. 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 that saw particular demand in Dallas-Fort Worth, Atlanta, Phoenix, and Nashville. Our largest asset, Avon 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 plan 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 5.2 times multiple on invested capital and a levered IRR of 35%. The purchaser currently has a meaningful amount of non-refundable 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 our prepared marks, I'd like to update our stress test scenarios 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 eight times 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 then remain 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 and 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 would 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 7 cents 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 a 7% of GPR and bad debt rose to 4% or tripled from the first half of the year, we still believe we could produce a $2 share of core earnings for the year. Finally, on the NAV front, 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 movement on our swap book, which reduced our NAV midpoint by a modest 13 cents per share to $38.34. So that's it for my prepared remarks, but in closing, I just want to thank our teams at BH and NextPoint for all the hard work during these difficult times.

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

Thank you. At this time, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question will come from Alex Kubink with Bayard.

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

Yeah, 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 we've seen, again, as I mentioned, demand rise in those markets. I think Dallas-Fort Worth, Charlotte, Phoenix, and South Florida, we have 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.

Yeah, that's helpful. And then just to 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?

Correct. Or, yeah, or kind of, you know, both on the current products that you guys own or just in future acquisitions, you know, as you were underwriting them and kind of call it the next 12 months in the runway. Yeah.

Yeah, 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'll 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, you know, certain months of delinquency? Just wondering how you guys judge collectability going forward here.

Yeah, it's a good question, and that's exactly how we do it. We tweak this a little bit given the payment plans we put in place for COVID. Once we 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, you know, It's 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 fleshed out pretty quickly.

Understood. Thanks for taking my questions. Thank you.

Thank you. Our next question will come from John Massico with Ladenburg Thalman.

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

Yeah, I mean, I think it's not – The geographical dispersion between markets with J.D. J.D. Not a lot of product, so there's a scarcity to it that we thought we would take advantage of and, you know, produce a little bit of liquidity, have a nice print price discovery, and really attain pre-COVID pricing.

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

Yeah, I mean, we think that, you know, 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'll potentially be a trend when people start getting out more and looking for updated products. One thing to note is that our revenue on new lease units in July basically went up 3% from where it was in Q2. 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 effect occurring out there in our markets for affordable products.

When you say a trade-down effect, I mean, is some of that potentially maybe an urban-suburban kind of switch potentially going on, or is it more economically people just not wanting to pay A rents?

I think it's both. I think 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 has lower density. You don't have structured parking. You don't have five or 20 stories. 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 here in the coming quarters, just given the ability to maybe charge some of these fees again?

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

Okay. That's it for me. Thank you all very much. Thanks, John. Thank you.

Thank you. If you find your question has been answered, you may remove yourself from the questioning queue by pressing star 2. Again, to ask a question, you can do so by pressing star 1. Our next question will come from Barry Oxford with the DA Davidson.

Great. Thanks, guys. Kind of getting back to the bad debt expenses, 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 rent 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?

Yeah, I mean, I think the bad debt expense, the last time we did this was in Avery 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, two and a half percent of our total population in our units described themselves as having lost a job due to COVID. So, you know, 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.

Hey Barry, on the accounting side, 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 do 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 30th 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 – You know, the money's roughly coming from the same group of people.

Yeah, 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 the institutional bid is kind of 10% to 15% discounts to where pricing is, and so they're not You know, 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, you know, 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. Okay, appreciate it. Thanks guys.

Thank you.

Thank you. Our next question will come from Rob Stevenson with Jamie.

Good morning, guys. Hey, Rob. Hey, how's it going? 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 states? How are you characterizing the new leases that you guys have been signing over the last few months?

Yeah, I think, you know, we were talking about this earlier today. So the actual household income of the portfolio, of our portfolio, is increasing. So, you know, that's, I think we're now at $65,000-ish, and that's, you know, that's up roughly, you know, $7,000, $8,000 year over year, I think. So that's, I guess, you know, quantitatively telling us that there's, you know, and other folks that just earn more that 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 where folks are coming from. What we can tell you is that of our applications during the second quarter that we had, 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 a 1031 by December 31st?

Yeah, I mean, we would. I think we'd sell a few more, but it probably is just because we like the We're not revising incrementally our disposition outlook as a result of the rhetoric out of 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. We could probably sell one or two 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 partner seeing in terms of availability of labor as well as materials cost for redevelopment projects right now? What's going on cost-wise there in availability?

Yeah, so the availability of workers is increased, and so 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 a logistical challenge versus You know, an availability, so to speak. You might have crews that have gotten, you know, some folks within the crews have COVID, and so there's a, you know, two-week delay in what those crews or what that company, those subs can deliver in terms of on-site performance and rehabs. But, you know, nothing material, but there has been a modest decrease in terms of cost on both fronts.

Okay. Thanks, guys. Appreciate it.

Thanks, Rob. Thank you.

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

Thanks. Good morning. Good morning. 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 it an off-market transaction or you fully marketed that deal?

That's a good question. We obtained broker opinion of values from CBRE and JLL late last year and then earlier this year and were set to launch it in call it March to the market. 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 We were open to showing it to four or five 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 which 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 pull the levers we could pull to keep that down. I think we 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 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 they were a year ago and I think are going to be every bit as aggressive on property taxes as they have been. 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 get a lot of relief around insurance or taxes in the coming years.

Okay, thank you. That's all I had.

Thank you. Our next question will come from John Peterson with Jefferies.

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

No incentives on renewals other than to say that, you know, they've been largely flat. And then, you know, on new leases, we use yield stores, so it's not, you know, it's algorithmic and there's no, like, We're obviously waiving application fees in some aspects, waiving pet fees and other income line items, which resulted in somewhat of a material down other income line. But we're not giving two or three or four months away like some of the gateway coastal markets are. We're just not seeing that. And then any sort of You know, modestly down. You know, rent for us is, you know, $20, $30, not, you know, hundreds of dollars. So it's been pretty steady. Got it. Okay. Thank you. That's it.

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

Great. Thank you. My first question is just a point of clarification. I think you knew I was going to ask. The casualty losses of $1,079,000, it looks like it's exactly offset by in the miscellaneous income with insurance collections of $1,079,000. And then in the core FFO calculation, you add back $1,079,000 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.

Yeah, so the background on that is the Cutters deal that We had the tornado come through last October. It's 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 to reflect it 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 as we would on any casualty loss, we're reversing it out of core FFO. 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 when 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. Which I think is why most people, if not everyone, takes casually out their FFO numbers just because 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.

Yes, you summed it up in one word. It's timing.

Okay. My second question, on page five of the supplemental, you've got these 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 Orlando 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?

I'll let Matt go into some detail here, but just high level, we have tenants that haven't fully paid, but they paid a lot. And so they've got balances that they're carrying. And 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 evictions to our detriment, probably ultimately their detriment. But, Matt, do you want to talk about the details?

Yeah, 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 June to July for the units that aren't fully collected. And so the way I look at this from a positive perspective is that there's only 840 residents You know, this is the end of July that we're delinquent. And then you show the dispersion across the markets. Obviously, Vegas and Orlando are some of the larger ones. But over most of those, most of the 840, which isn't that much across the portfolio, has paid. And then really no payments, only 70, which is five basis points of the portfolio, which I mentioned in the prepared remarks. And so, you know, I... I didn't like it at first, but I think it is a helpful depiction in terms of progress and just breaks out by market.

Yeah, you know, 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, you know, either you pay it or you don't. And it looks like there's a lot of people that pay some of it.

Yeah, 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, you know, we do the best we can to try to collect as much as we can.

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

I think, I mean, I think July has been, you know, really strong, both from a I mean, 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 the 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 two. Thanks, guys. Thanks, Michael. Thanks.

Thank you. And once again, if you would like to ask a question, please do so by pressing star 1 on your telephone keypad. 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.

Yeah, thank you. We appreciate everyone's participation. We continue to work hard and try to Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.