NexPoint Residential Trust, Inc.

Q2 2021 Earnings Conference Call

7/27/2021

spk03: Good day and welcome to the NextPoint Residential Trust second quarter conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jackie Graham, Director of Investor Relations and Capital Markets. Please go ahead.
spk05: Thank you. Good day, everyone, and welcome to NextPoint Residential Trust conference call to review the company's results for the second quarter ended June 30th, 2021. On the call today are Brian Mitch, Executive Vice President and Chief Financial Officer, Matt McGrainer, Executive Vice President and Chief Investment Officer, and Bonner McDermott, Vice President, Asset Management. As a reminder, this call is being webcast 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, assumptions, and beliefs. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's most recent annual report on Form 10-K and the company's other filings with the SEC for a more complete discussion of risks and other factors that could affect any forward-looking statements. The statements made during this conference call speak only as of today's date and accept 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, see the company's earnings report that was filed earlier today. I would now like to turn the call over to Brian Mitts. Please go ahead, Brian.
spk04: Thank you, Jackie, and welcome to everyone joining us this morning. Appreciate your time. I'm Brian Mitz, and I'm joined by Matt McGrainer. I will kick off the call with some highlights from the quarter, then cover our numbers for the quarter and year, and wrap up with guidance, which we are revising upward. Then I'll turn it over to Matt, who will discuss our portfolio and some of the metrics driving our performance and leading us to revise our guidance upward. As Matt will discuss in his prepared remarks, the acquisition environment is challenging, I think, as everyone knows. Although we've been able to find some opportunities, we closed on the acquisition of two properties in the quarter. And Matt will provide some details on that during his remarks. But regardless of acquisitions or the environment, as we have said many times, our growth and value creation strategies are not predicated on new acquisitions. We have the ability to significantly increase value through our organic rehab program, which has continued in earnest during the second quarter and for all of 2021. So let me go to just a couple of the highlights here real quick for the second quarter and year to date. Net loss the second quarter was negative 3.4 million or negative 14 cents per diluted share as compared to a loss of 9.3 million or a loss of 38 cents per diluted share in 2020. Same story in OI increased by 107,900 or 0.6% as compared to the second quarter of 2020. We reported second quarter core FFO of $14.2 million or $0.56 per diluted share, which compares to $0.59 per diluted share in the second quarter of 2020. We continue to execute our value-add business plan this quarter by completing 336 full and partial renovations during the quarter, at least 408 renovated units, achieving an average monthly rent premium of $170 and a 20.5% return on investment during the quarter. Inception to date in the current portfolio is June 30th. We've completed 5,784 full and partial upgrades, 4,459 kitchen upgrades and washer-dryer installments, and 9,782 technology package installs, achieving an average monthly rent premium of $132, $48, and $43, respectively. and an ROI of 21.4%, 74%, and 33.8% respectively. Four to six months into June 30th, net loss was 10.3 million or a 41 cent loss per diluted share as compared to an $18.7 million gain or a 74 cent gain per diluted share in 2020. Same store NOI for the year through June increased by 86,000 or increased 0.2% as compared to 2020 over the same period. And we reported year-to-date core FFO of 28.3 million, which is $1.13 per diluted share, which compares to $1.11 per diluted share over the same period of 2020. For our NAV, based on the current cap rates and NOI, We are reporting now per share range as follows, $55.66 on the low end, $66.62 on the high end, with a midpoint of $61.14. These are based on cap rates ranging from 4% on the low end to 4.3% on the high end. For the second quarter, we paid a dividend of $34.125 per share on June 30th to shareholders' record as of June 15th. The Board has declared a dividend per share of 34.125 cents payable on September 30th to shareholders of record on September 15th. Year-to-date, our dividend is covered 1.65 times by Core FFO, which is a payout ratio of approximately 61% of Core FFO. Just a couple of big picture items before we get to the numbers and then guidance. With net migration continuing into our core Sunbelt markets and with our affordable high quality product, we believe NXRT is still well positioned to continue delivering high returns to investors. The net migration markets continues unabated. This has sent cap rates to historic lows in our markets as reflected in our revised NAV calculation. With the increases in population and jobs in these markets, competition for desirable product has increased. Since going public, we built the cost of capital advantage over many of our competitors. These markets allows us to bid aggressively for the best assets. You'll see that as Matt talks about the two properties we closed in Q2. And we believe we could find more good quality assets in our core markets. As mentioned, our growth prospects are not dependent on acquisitions. We continue to achieve significant returns for our value add strategy. where we can move cap rates 75 to 150 basis points over three to five years from acquisition, which makes us less sensitive to absolute cap rate levels. The ongoing and widening shortage of affordable housing in the US, which is more acute in our Sunbelt markets and getting worse as new household formation outpaces new housing deliveries, gives us plenty of runway to continue implementing our value-add strategy across our existing portfolio and new acquisitions. Increased net migration coupled with the shortage of housing has allowed our portfolio to achieve all-time high occupancy and sets us up to aggressively push rates for the remainder of the year, as we did in Q2, which Matt will cover in some detail. The current environment also allows us to sell assets that we have fully renovated at premium and recycle that capital into new value-add products where we can achieve higher rates of return. Let me quickly go through just the high-level numbers for the second quarter of the first half of 2021. Total revenues were $52.6 million compared to $50.7 million for 2020 second quarter. It's a 3.7% increase. Net income was, or sorry, net loss was $3.4 million for the second quarter versus $9.3 million loss in second quarter 2020. Core FFO was $14.2 million for the second quarter. which is 56 cents per diluted share. It's compared to 14.5 million second quarter of 2020, which was a 3 cent decrease. Our same store pool consists of 35 properties with 13,544 units. Our same store rent is increased 3.6% on average. Same store occupancy was 96%. The second quarter of 2021 versus 95.3%. in 2020 or 70 basis point increase. Safe store NOI is 28.7 versus 28.5 million versus Q2 last year, which is a 0.6% increase. For the year ended June 30th, revenues were 104.4 million in 2021 versus 103.3 million in 2020 for a 1.1% increase. We had a net loss in 2021 for the first six months of 10.3 million versus a net gain in 2020 of $18.7 million. Core FFO for second quarter 2021 is $28.3 million, or $1.13 per share, as compared to $28.1 million for 2020, which is up two cents per share. Our same-store pool for the year is also 35 properties, consisting of 13,544 units. Same-store rent increase, 3.6%. Our occupancy is up 70 basis points to 96%. And our same store NOI was up 0.2% to 56.9 million for the first six months. For the remainder of 2021, we're revising guidance as follows. Core FFO on a diluted share basis, $2.30 on the low end, $2.41 on the high end, and $2.35 at the midpoint. as compared to $2.29 previously or 2.6% increase. Same-store revenue, 4.2% increase in the low end, 5% on the high end for a midpoint of 4.6% increase in revenue. Our same-store expenses, 6.4% on the low end, 4.8% on the high end with an increase of 5.6% in the midpoint. Same-store NOI, projecting to be 2.7% on the low end, 5.2% on the high end, with 4% at the midpoint, which is an increase of 40 basis points over our prior guidance of 3.6%, same story on the wide growth. So with that, let me turn it over to Matt.
spk00: Yeah, thanks, Brian. Let me start by reviewing our Q2 operational results. Our cash collections remain favorable to NMHC comps with 99.2% of Q2 rents collected. And while federal stimulus and local rental assistance programs have helped, overall demand for upgraded affordable housing in the Sunbelt continues to register at historical highs. The population inflows into our Sunbelt communities also continue to make new highs. We are witnessing increased trends in our markets as we exit the pandemic, with a 35% increase in out-of-state applications quarter over quarter, and a 29% increase year-to-date. Net migration from California and New York continue to dominate our leasing applications year-to-date, increasing 52% and 19% year-over-year, respectively. Low migration outflows from our markets and consistent resident retention also explain the strong operational performance during the quarter and the first half of the year. Our communities are still experiencing all-time highs in occupancy. Our Q2 same store occupancy ended up at 96.1%. That's up 80 basis points quarter over quarter. And as of July 26th, the portfolio is 95.8% occupied, 98.3% leased with a 94.2% trend. These historically strong occupancies and trends are allowing us to materially increase rents in most of our markets. Same store revenue growth, for example, exceeded 2.2% in seven out of our 10 markets in Q2. and every market experienced positive rental growth. On the leasing front, we really started to see a pickup in June, but every month exceeded our expectations. New leases ended the quarter at a robust 14%. Renewals finished at a positive 6% for Q2 blended rental growth rate of 9.9%. Here are the numbers by month, which demonstrate an acceleration through the quarter and into July. April new leases were up 10.8%, with renewals being 5.1%, for a blended increase of 7.85%. May new leases were up 13.4%, renewals 5.8% for a blended increase of 9.3%. June new leases were up 18.4%, with renewals being 6.7% for a blended increase of almost 12%. Q2 new lease growth continues to be strongest in Atlanta, Tampa, South Florida, Phoenix, and Vegas, with each market clearing at least 15% growth. So far in July, new leases are up a robust 24.4%, with renewals being 8.2% for a blended increase of 15.8% on over 1,000 leases signed so far in July. These results are particularly meaningful when taking into account that our total revenues didn't go negative in 2020 and troughed at a positive 2.6% in Q4 of last year. We expect this leasing performance to translate into meaningful revenue growth in the second half of the year. On the transaction front, a broad public marketing campaign of Beechwood and Cedar Point launched on July 7th and to date the offering has received significant attention with more than 125 interested parties signing CAs and over 20 plus property tours have been conducted. We expect a call for offers the first week of August with strong Q2 and early Q3 financing results in tow. And the early indication is that pricing will trend toward if not surpass the 4% nominal cap rate threshold. These dispositions will fund and complete our reverse 1031 into our two new Charlotte acquisitions, the Creekside at Matthews and the Verandas at Lake Norman, while reducing the drawn balance on our revolver by 30 to 35 million. Let me spend a few minutes on Creekside at Matthews and Verandas. As Brian mentioned, we purchased Creekside for 58 million for a year one economic cap rate of 4.5%. We plan to upgrade 193 units here at an average cost of 12,000 a unit generating premiums of $151 a unit and ROIs of approximately 15%. We also plan to install washer and dryers and smart tech packages in every unit and expect to generate monthly premiums of $45 a unit on both amenities. As a result, our underwritten three-year average same-store ROI growth for this asset is 7.7%. Today, Creekside is 97.1% occupied, 100% leased, and has a trend of 95%. We purchased the verandas at Lake Norman for $63.5 million for a year one economic cap rate of 4%. The upgraded programs here are particularly exciting given that interiors are 100% classic units in a strong demographic area. We plan to upgrade 212 units at an average cost of $10,600 a unit, generating premiums of $177 a unit and ROIs of approximately 20%. We also plan to install washer and dryers and smart tech packages here and expect to generate monthly premiums of $45 a unit on both amenities. As a result, our underwritten three-year average same store and OI growth for this asset is a robust 9.6%. Today, Verandas is 98.5% occupied, 99.6% leased, and has a trend of 98%. As Brian mentioned on July 12th, 2021, as we disclosed in the SUP, we entered into a PSA to acquire six forks in the Research Triangle area for roughly $75 million and for a year one economic cap rate of four and a quarter. Research Triangle assets have and will continue to be on our radar given its strong and growing tech-based and life science presence. At Six Forks, we plan to fully upgrade 111 units at an average cost of $13,200 a unit, generating premiums of $198 a unit and ROIs of approximately 18%, and partially upgrade 148 units at an average cost of $5,500 a unit, generating premiums of $82 a unit and ROIs of approximately 18%. We also plan to install 113 washer and dryers and generate monthly premiums of $45 a unit. As a result, our underwritten three-year average same-store and OI growth for this asset is 5.1%. More broadly, the heavy investor appetite, as Brian mentioned, the cheap financing and capital inflows into our sector has continued to push asset values higher. We see this continuing as robust positive net migration and job growth into the Sunbelt accelerate. One interesting data point that informs our NAV table is that a large $1.2 billion portfolio is expected to trade in Q3, It's over 4,000 units, has comparable property types, and has an average vintage of 1993. Reports are that this portfolio will trade at a 3.5% cap rate on in-place numbers in roughly $275,000 a unit. Turning to a four-year 2020 guidance increase and give a little bit more commentary on this. As Brian mentioned, we are pleased to announce another meaningful increase in core FFO to a midpoint of $2.35 a share. The guidance improvement is largely driven by the acquisitions and expense savings, leaving room for additional upside as these new leases and renewals make their way through the income statements. On the expense side, we see modest decreases in both controllable and non-controllable expenses while still carrying a healthy property tax budget. Regarding property taxes, we still have not received values on 12 of 39 assets. which are all eight Florida assets and four North Carolina assets, including the two new acquisitions. We are presently appealing or filing suit on 21 of the 27 property values that we have, and we're optimistic that we'll see some favorable downward movement, but we have not made any revisions to our conservative initial tax projections for these assets. Thus, with these adjustments, acquisitions, and most importantly, the strong portfolio operational performance trends, We're raising the low end and midpoint of our same-store NOI guidance to 2.8%, 4% respectively. That's all I have for prepared remarks. Thanks to the teams here at NextPoint BH for continuing to execute. Back to you, Brian.
spk04: Great, thank you. Let's turn it over for questions.
spk03: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you were 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. We'll take our first question from Amanda Schweitzer with Baird.
spk06: Thanks. Good morning, all. morning i wanted to start on your same store rental income guidance it's coming down marginally and it certainly doesn't seem to have been driven by lease rates is that being predominantly caused by some of the casualty events that you mentioned or any changes in your assumptions on bad debt for the rest of the year yeah i'll i'll start amanda's bat um we have uh books as the as the moratorium has ended here in the in
spk00: in the coming months, we've decided to take a write-off of bad debt that's backward-looking, so to speak. The change isn't really forward-looking, it's just revisions to the annual number, which we could expect to recapture some of that income later on in the second half of the year. It's not really forward-looking, it's just a revision. I think that's primarily it, but Mitch, if you have anything else.
spk04: Yeah, so I think we've been in a weird spot here because typically what we do is move to evict a tenant. That would either kind of force a payment or they would leave, in which case we just basically write the balance off and maybe we could recover a little bit down the road. Here we've been carrying balances for tenants that we obviously can't evict and so they've been in place. But instead of writing a lot of it off because people have been making payments over time or they don't make payments or whatever, we've been trying to be conservative and prudent with what we're writing off. Now, as Matt mentioned, we get to the end of the moratorium and start to formulate a plan around evictions and trying to collect some of that. We think it makes sense to start writing off those balances as they... It looks like that a tenant may be a candidate for eviction. So we think that's a pretty conservative number. I don't think the casualty losses, well, they do impact because any business interruption, we're getting insurance proceeds or going to other income. So it obviously doesn't hit that rental revenue line. But we're starting to bring those units back online now, and that should you know, clear things up and part of what's driving our additional increases throughout the year.
spk06: That's helpful. It makes sense. And then as you think about blended lease rates going forward, do you think there's still room here to increase renewal rates and further narrow that gap to new lease rates? Or are you getting to the point where you think turnover will increase if you push renewal rates further?
spk00: Yeah, I think there's definitely room to see them kind of converge, right? So obviously we can't sign 25% new leases every quarter probably going forward, but we do expect to see those two numbers converge. I mean, if you look back in 2016 and 2017, the portfolio regularly had double-digit renewal increases during peak leasing season. So far, we're optimistic. As I said, in July, we're at 24.4% new leases, 8.18% renewals on almost 1,100 leases. So every single market's in double digits on the new lease front, and then high single digits on the renewals. So I think, I mean, as the markets are as healthy as they've ever been on the leasing front, so I mean, we expect this to continue through the second half of the year.
spk06: That's helpful. Appreciate the time, guys.
spk00: Thanks, Amanda.
spk03: Thank you. As a reminder, to ask a question, please press star one. We'll take our next question from John Masaka with Lattenberg Pullman.
spk01: Good morning. Hear me?
spk00: Morning, John.
spk01: Maybe just following up on that last point, I mean, I guess given the health of the leasing market, is the expectation, as you think about guidance going into the end of the year,
spk00: you can kind of hold occupancy at that 96 percent level even as we see kind of the eviction moratorium role yeah i mean we we think so um you know there's there's really uh we've kind of tiered this out this is one of our um one of our projects that we're working on now and we we're tearing out the the folks that we think are candidates for eviction like immediately And our plan is to take those units and largely rehab them and or hit them like easy standard terms. That number is only 123 units. So that would be really the large pool of disrupted units that we would see in Q3 or Q4. So that small number gives us optimism that we should be able to hold these numbers and our trends are still as healthy as they've ever been. So I think so.
spk01: Okay. And then the other kind of component of the change to guidance was a decrease in kind of the total expense expectations. You kind of touched on the fact that it seemed like your tax expectations are kind of remaining the same and maybe on a kind of conservative basis there. I guess what's kind of driving that 100 basis points decline and kind of total same store expense if it doesn't seem like it's a change in tax expectations?
spk00: Yeah, I mean, I think it's savings on the other kind of R&M categories and payroll. R&M went increased in the second quarter primarily because it was against a comp that was low basically in Q2 of last year. Obviously, we didn't really touch the units, played a lot of defense. put off work orders on the maintenance side, and so we worked a lot of that through in Q2, and we're not going to see that, or we expect not to see that, those elevated numbers in the second half of the year.
spk01: And I guess, sorry if I missed it, but the change in expectations kind of now versus maybe at 1Q, because I thought some of that 2020 roll-off would have been would have been known. I guess is it just you're not seeing cost inflation like you were expecting or?
spk00: Yeah, I mean, it's cost inflation. It's the fact that we just haven't turned, you know, we don't think we'll turn as many units and have the turn costs. Our resident retention is higher. People are accepting new renewals. So based on our trends and what we think, you know, the leasing performance will be in the second half of the year, there's not, there's just lower CapEx, you know, recurring CapEx.
spk01: Okay. And then just maybe just what are you seeing in the kind of broader cap rate environment today? You know, apologies if I missed it, but the assets under contract, what was the cap rate on those?
spk00: Yeah, the Charlotte deals are a blended four and a quarter cap rates. We expect to dispo. The Nashville deal is at a four, so pick up an ARB there and do it in a non-dilutive way to earnings by reverse 1031. More broadly, I mentioned the portfolio. That's an institutional seller that has, those units are in largely Texas and Florida, and we think, you know, those are, we kind of know they're under contract at 3.5% cap rate, so, you know, it's pretty, it's pretty Pretty competitive out there, but again, with the cheap financing and the lack of growth elsewhere and other commercial real estate asset classes, this is a pretty popular place to be. But as Mitt said at the call, at the opening of the call, we have found three acquisitions here in target markets that we have a good DISPO ARB, Capital Recycling ARB, and look forward to growing more, particularly in the research triangle.
spk01: That's it for me. Thank you very much for taking the questions. Thanks, John.
spk03: Thank you. We'll take our next question from Michael Lewis with Truist Securities.
spk02: Great. Thank you. You answered most of mine, but I wanted to circle back to the issue of the eviction moratorium getting lifted. I think you said you have about 123 units where you'd you know, want to evict pretty quickly. So maybe a two-parter on this. Could you talk a little bit maybe about that process, how quickly you get them out, if you think maybe there's higher CapEx on those units? And then as the second part of that question, you know, do you anticipate any impact on market fundamentals, you know, as kind of not just you, but others kind of release this all of a sudden available inventory into the market? Do you think that slows things down a little bit in your markets?
spk00: Yeah, those are really good questions, Michael. So as we turn, there's 123 that are kind of our tier one, and those folks have either gone dark on us, so to speak, or haven't been making any payments. And largely, I think most of them have been on notice and eviction's been filed. So those are ones, these are units that we think we can get a hold of pretty quickly. And I'd say about half of those we plan to renovate. And we know down to the unit, obviously, what floor type or floor plan it is. So we're going to have teams ready to renovate those units and release them into this strong environment almost immediately. So that's good. As far as your market fundamentals and a flooding of of new tenants out there, um, you know, as the moratorium ends, I think that, you know, um, most institutional owners, you know, will, um, will not rent to, uh, you know, a tenant that's been evicted for whatever reason, you know, um, I think that they still have to qualify income credit checks, background checks. And, um, you know, we're, uh, we're certainly, um, you know, we appreciate and understand the hard circumstances of the pandemic, but at the same time, you know, people have paid rent or making payment plans to pay rent. We've worked with our tenants, and I think most institutional owners are of the same mindset. So if your tenants are trying to pay and make payment plans, then you'll work with them. Those that haven't or that go dark on you, I think, are pretty – aren't going to get – the benefit of the doubt on a new lease. So those folks that are evicted are probably going to a C unit or something lower quality would be my expectation.
spk02: Thanks. And then another kind of macro topic, obviously a lot of talk about the Delta variant the last couple of weeks. I don't think anybody gets sick and leaves their apartment unless in the worst circumstances, of course. You know, is there any reason to think that, you know, if we get another wave of coronavirus, if Delta variant becomes a bigger issue, that there's any, you know, is that a risk you think, you know, to apartment fundamentals or to your business at all? Or do you think that's, you know, you're sort of insulated from that a little bit in your business?
spk00: Yeah. I mean, I think that, you know, our geographies are, and have been sort of the most, I don't want to say lenient, but the most progressive in terms of letting folks get out and work and go to restaurants, et cetera. So the economic activity in the Sun Belt in the southwestern, southeastern United States has kind of led the nation. So that's kind of a mitigating factor in terms of a new variant. I think that it'd be hard-pressed to see Governor Abbott or Florida, for example, put the brakes on reopening and go backwards. So I think that that's something in our market's favor that will allow us to continue to hopefully operate as we have been. And even in Las Vegas where there's temporary mask reissuances or reorders of wearing masks, they're largely not being, I guess, prosecuted or or enforce. I think for our markets, we feel pretty good, but who knows what California and New York will do. Those are wild cards. Thank you.
spk03: Thank you, ladies and gentlemen. Once again, to ask a question, please press star 1. We have no further questions. In queue, I'll turn the call back to management for closing remarks.
spk04: Yeah, thank you. I appreciate everyone's participation this morning. Great questions, and we'll see you next quarter.
spk03: This concludes today's call. Thank you for your participation. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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