NexPoint Residential Trust, Inc.

Ladies and gentlemen, please stand by. Good day and welcome to the NextPoint Residential Trust Q1 2022 conference call. This 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 NextPoint 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 McGranner, Executive Vice President and Chief Investment Officer. As a reminder, this call is being broadcast through the company's website at nsrt.nextpoint.com. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions, and beliefs. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's most recent annual report on Form 10-K and the company's other filings of 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. NXRP 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 rates that was filed earlier today. I would now like to turn the call over to Brian Mitz. Please go ahead, Brian.

Thank you, Jackie. I appreciate everyone's time this morning. I'm Brian Mitz, and I'm here with Matt McGrainer. I'm going to start the call by going through our Q1 results, talking about our NAV, And then I'll finish up 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 different metrics driving performance this quarter. For T1, net loss was negative 4.7 million or 18 cent loss per diluted share. Total revenue of 60.8 million. That compares to a net loss of $6.9 million or a 27 cent loss for diluted share in the same period in 2021. And that was on a total revenue of $51.8 million. For the corridor, same store rent increased 11.7%. Same store occupancy was 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 and 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 percent, 70.8 percent, and 33.5 percent, respectively. For NAV, based on the current cap rates that we're estimating in our markets and our partial actual NOI as well as our forward NOI for the next two quarters, we're reporting an NAV per share in the following range. $94.58 on the low end, $111.23 on 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 percent and 3.8 percent, which is unchanged from last quarter. The first quarter, we paid a dividend of 38 cents per share on March 31st, and the board declared a dividend for Q2 in the same amount. Since inception, we've increased our dividend 84.5%, and for the first quarter, our dividend was 2.06 times covered by core FFO, which is a payout ratio of 48.5% of our core FFO. Turning to guidance, as mentioned, we're revising guidance upwards as follows. For core FFO per diluted share, $2.93 on the low end, $3.09 on the high end, for a midpoint of $3.01. That compares to prior guidance of $2.97, or a $0.04 increase. For same-store NOI, we're estimating 12.6% on the low end, 16% on the high end, with a midpoint of 14.3%. That compares to our prior guidance of 13% for 130 basis point increase. At the midpoint of our 2022 core FFO of $3.01, that will represent a 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 rate 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 rate growth to $1,216 a unit per month. First quarter same-store ROI 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. Eight of our ten 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 seven out of our ten markets achieving growth of at least 8.7% or better. Our top five 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 eight out of our 11 markets executing renewal rate growth of at least 15%, and no markets were under 10%. The leaders were Tampa again at 27%, Orlando at 24.6, South Florida at 21.5, DFW at 20.7 and Phoenix at 19.2. As Brian mentioned, we increased our rehab pace in Q1, completing 531 units, which made up about 30% of all available new lease inventory assigned 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 units continues to increase and be extremely well received by our tenant base. On the occupancy front, we're pleased to report the Q1 same-store occupancy remained above 94%, positioning us well as we enter the peak 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 of this morning. Turn to the 2022 acquisitions and dispositions. As Brian mentioned, we acquired two assets on April 1st, either there in Sandy Springs, Georgia, and a state on Maryland, 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 remover to acquire them and expect to recycle capital from successful property dispositions in Houston, as we previously discussed last quarter. to reduce leverage later in the year. The Adair and Estates purchases should enhance internal growth for the next three years and extend our rehab pipeline in two of our best performing markets. A little more on the business plans for each of these deals. We purchased the Adair for $65.5 million for a year one 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 $485 per unit for that amenity. As a result, our underwritten four-year average same-story oil high growth for this asset is 6.5%. For estates, we purchased it for $77.9 billion for a year-one 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 in 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 four-year average same-store NOI growth per stage is 7.7%. Turning to guidance, as Brian said, we're excited to announce an upward revision to our prior guidance. We'll end 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 a 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 SFR rents in our market, 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 are expecting to see continued strength in the middle market, rental housing particularly, in our core Sunbelt market. That's all I have to prepare for remarks. Thanks to our teams here at XPoint VH for continuing to execute. I'll turn it back over to you, Brian.

Yeah, let's go to questions.

Ladies and gentlemen, if you'd like to ask a question, you could signal by pressing star 1 on your telephone keypad. Just keep in mind, if you are using a speakerphone, please make sure your mute function is released so that signal can reach your equipment. Once again, star 1 for questions. We'll pause to allow everyone an opportunity to signal. And we'll hear first from Michael Lewis with Truist Securities.

Great. Thank you. I wanted to ask a little 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 the interest expense guidance just a little bit for the whole year. Could you maybe talk about, especially since 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?

Hey, Michael. It's Brian. You were breaking up a little bit on our end, but I think I caught most of that. Yeah, 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 than really the corporate facility, which we are paying down with the net proceeds from Houston, So that'll 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 to 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 means our change in interest rate expense throughout the year. So again, Didn't really get the full question, but hopefully that addressed it. If not, you know, happy to follow up.

Yeah, no, that's helpful. And then, you know, kind of a bigger picture question. You know, a lot of people are kind of guessing the next stage of the economic cycle with maybe, you know, 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, you know, that's expected and that's okay. But how do you see this, you know, how do you see this kind of going? I mean, do you, you know, it sounds like your spreads into April are still extremely strong. I mean, how do you think about, you know, how the multifamily cycle might end?

Yeah. Hey, Michael, it's Matt. I think we're experiencing sort of a re-rating 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 a 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 and job growth. Really the only, in my view, existential threat to our business is an uptick in crime. So as long as we can continue to see our sub-markets 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 haven't really stopped. There's over $10 billion of product out there in terms of pipelines and portfolio transactions. I think that the bidding for those deals will be less wide as they have been in the past or at least last year. We have stronger groups such as ourselves, other REITs, The larger asset managers will probably get narrower to just 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 codes are getting more aggressive as the agencies are slower to produce or tighten spreads. Just the 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 I think our view is pretty constructive this year.

Yeah, that's great, Collar. It's interesting to hear you talk about crime. 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 know, 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, you know, maybe you were able to find some success fighting some of those or you know, maybe talk a little bit about what's happening on real estate taxes.

Yeah, you're exactly right, Michael. We, you know, I'm knocking on wood while I answer this question, but we've had a little bit of success so far in the first quarter from 2021 appeals, most notably in Tarrant County had about $350,000 of savings and 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 the last few. 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.

Great. Thank you, guys.

You bet.

Thank you. And now we will take a question from Omoteyo Okasanya with Credit Suisse.

Yes. Good morning, everyone. 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 one or two years or when do we kind of start to worry about the swaps coming off and then you having to put on new swaps in a rising green environment?

Yeah. Hello, Kyle. How are you? I'm good.

Yeah.

So it's not until really 2026 that we start to see these swaps 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 for the next four years. And that's about 1.2 billion of swaps.

That's helpful.

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

Thank you. And then the second question is when you're 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 demand because people suddenly can't buy homes. Again, realizing you're kind of in the affordable housing segment, but Wondering if you've seen any of that at all.

Hey, Si, 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. oftentimes, just sort of anecdotally, we'll send out renewal notices and get some pushback from tenants and we're like, okay, well 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 realize 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 patient supplemental, we're seeing, you know, probably a quarter of our renewal notice is coming back with that sort of same narrative. So we ended up, you know, 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 show for household income is now up to $71,000 for our units, which is up from $56,000 and $60,000. We're continuing to see enhanced wage growth within our tenant cohorts. That's positive. For the vacancy aspect from us, the courts are open again, largely in our market. 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.

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

Yeah, that's just tested as of Q1. So it'll include the newer leases plus the legacy assets

Got you. Thank you. Great quarter.

You bet. Thank you.

As a reminder, it is star one to ask a question. We'll now move to Peter Abramowitz with Jeffries.

Hi. Thank you. 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 that 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 know, 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 guidance?

Yeah, hey, 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 mute 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 two 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? Yeah, great question.

I think you guys do a pretty fantastic job. I saw your report that you put out, follow the mail, tracking the zip codes. I think within that report, I think only our portfolio had positive zip code trends 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 a double-digit increase. The first year out of the 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 number one kind of new... or where people are moving from. And then, you know, New York and Virginia and Illinois kind of follow that. But, you know, California is still 20% of each of our new leases, our new lease apps. You know, Illinois and New York are double digits also. So, in terms of But is it going to slow? I think, sure, naturally, there's some regression to the mean because New York and those 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. I'm 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'm guessing Florida's 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?

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

Got it. That's helpful. Thank you.

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

Yeah, I appreciate everyone's time. Great questions. Another great quarter. As we discussed, we think it's 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. We do thank you for your participation, and you may now disconnect.