NXRT (2019 - Q1)

Good day, and welcome to the NexPoint Residential Trust, Incorporated First Quarter 2019 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jackie Graham. Please, go ahead ma'am. Jackie G

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust conference call to review the company's results for the first quarter 2019. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; and Matt McGraner, Executive Vice President and Chief Investment Officer. As a reminder, this call is being webcast through the company's website at www.nexpointliving.com. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions and beliefs. Forward-looking statements can often be identified by words such as expect, anticipate, intend and similar expressions and 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, NXRT’s guidance for financial results for the full year 2019, and the related assumptions, net asset value and the related components and assumptions, guidance for the second quarter of 2019 and the related assumptions, expected acquisitions and dispositions, the expected redevelopment of units and the projected average rent, rent change and ROI after redevelopment. They are not guarantees of future results and are subject to risks uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statements. 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 the forward-looking statements. Except as required by law, NXRT does not undertake any obligation to publicly update or revise any forward-looking statements. This conference call also includes analysis of funds from operations, or FFO; core funds from operations, or core FFO; adjusted funds from operations, or AFFO; and net operating income, or NOI, all of which are non-GAAP financial measures of performance. These non-GAAP measures should be used as a supplement to and not a substitute for net income loss computed in accordance of GAAP. For a more complete discussion of FFO, core FFO, AFFO and NOI, 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. Thank you to everyone join us today for the NXRT 2019 first quarter conference call, where we will discuss highlights for the quarter, reaffirming our guidance and discuss the portfolio and markets and some detail. Brian Mitts, Chief Financial Officer, I'm joined by Matt McGraner, Executive Vice President and Chief Investment Officer. Let me first start with some notes about the quarter. We reported another solid quarter with same store NOI increase of 7% an 18.8% increase in core FFO per share as compared to the same period in 2018. We consider these to be somewhat more important metrics and we think these are really good results. We also saw total revenues increase for the first quarter of 2019 by 18.4% and total NOI increase by 23.3% as compared with the same period of 2018. We've seen strong tenant retention and our own NOI margins have increased to approximately 56.8% and so we think that's a very positive sign. We're also seeing strong rent growth in 2019 in both renewals and new leases 4.5% and 5.1% respectively across portfolio, which has continued into Q2. And the important spring leasing season. Matt will give some details around those numbers in his comments. We continue to execute our value-add business plan by renovating 245 units during the quarter, achieving a -- we think approximately to 27.4%. ROI during the quarter on the dollar spent for the interior renovations. As mentioned on our last call, we acquired three properties in Phoenix during the quarter for $132.1 million and believe we'll be a net acquired in 2019. We also put an ATM in place during the quarter, and so allow us more efficient access to capital. But I would note we did not utilize that in the first quarter. We also put in place a $75 million corporate revolver, which gives us some flexibility in timing between dispositions or equity raises versus acquisitions. When we put in place, we drew down 52.5 million to fund a portion of the Phoenix acquisitions. The three properties and we have the ability to upsize out 240 million. In short, we continue to have a very positive outlook for 2019, particularly after the strong first quarter that we saw. So with that, we’ll take you through some of the details of our activity and then discuss our results. As mentioned, we acquired three properties, which added 656 units of the portfolio and approximately 365 units of our renovation pipeline. Also as mentioned, we completed 245 units, rehab units in the first quarter, bringing our interception to date, total rehabs within the current portfolio to 5,960 units which we completed in average cost of $4,995 per unit. [Indiscernible] have achieved average rent growth of 11% or $97 per unit and we’ve achieved an ROI across all those units of 23.3% which is an important part of what drives our strong NOI and core FFO growth. Our NAV per share which is something we published our recorder on our supplement, we’re updating our NOI range based on increases in cap rates and/or changes in cap rates and NOI growth, that follows on the low end, $32.85 per share. On the high end $39.98 per share which gives us a mid-point of $36.41 per share. That’s compared with the mid-point last quarter of $35.09 which is a 30.8% increase. For dividends we paid a $0.275 dividend per share on March 31. The board recently declared a $0.275 per share dividend for shareholders of record on June 14 payable on June 28. Both of these have maintained our target payout ratio approximately 60% of core FFO. For our results, we go into those our total revenues for the first quarter of 2019 were $41.5 million as compared to first quarter of 2018 $35.1 million which is an 18.4% increase. Our net loss is determinant [ph] to GAAP was $4.4 million in the first quarter of 2019 which is $0.19 per share as compared to net income in the first quarter of 2018 of $10.1 million or $0.47 per share. The difference was largely driven by a gain on sale in the first quarter which we did not have, in 2018 which we did not have in 2019. Our net operating income across the portfolio for the first quarter of 2019 was $23.6 million as compared to $19.1 million in the first quarter of 2018, that’s a 23.3% increase. Core FFO increased to $11 million for the first quarter of 2019 or $0.46 per share as compared to $8.3 million for the first quarter of 2018 which is $0.39 per share and that’s a 18.8% increase over the periods. On the Same Store portfolio front, which includes 32 properties comprising 11,471 units, our Same Store rent increased 4%, occupancy dropped slightly by 40 basis points to 93.6%. First quarter of 2019 Same Store revenue in the first quarter of 2019 was $36.5 million that’s compared to $34.8 million in the same period in 2018, which is an increase of 4.7%. Expenses remained under control at $16.1 million for the first quarter of 2019 as compared to $15.8 million for the first quarter of 2018 which is a 2% increase. Those led to Same Store NOI of $20.4 million as compared to $19.1 million in 2018 which is a 7% increase. Core guidance in 2019 we’re assuming acquisitions of $150 million of $250 million, that’s in addition to what we’ve done in first quarter. We’re also assuming a disposition range of $75 million to $250 million. So with these assumptions we’re re-affirming 2019 guidance as follows; net income and per share actually net loss per share on the low end of $0.36, a high end of a loss of $0.66 per share of the mid-point and $0.71 per share. Net income loss was determined over GAAP. Core FFO per share, $1.80 per share on the low end, $1.91 per share on the high end of the mid-point of $1.87 per share. Same-Store revenue in the low end, we are guiding to the 4.5% increase over the prior year, high end of 5.5% and a mid-point of 5% increase in Same-Store revenues for 2019. Core Same-Store expenses we’re guiding to 3.3% increase on the low end, 4.3% increase and the high end with a mid-point of 3.8%. Same-Store NOI guiding to a 5% on the low end, 7% increase on the high-end with the mid-point of 6% increase over 2018 for Same-Store NOI. So that wraps up our results. Let me turn it over to Matt to give some of his comments on the portfolio.

Thanks Brian. We’re pleased to report a strong start to the year as Brian mentioned, with the first quarter of 7% Same-Store NOI growth. Our Q1 Same-Store NOI margin improved year-over-year by 119 basis points to 56%. Average rents increased 4% in total revenues as Brian mentioned were up 4.7%. Importantly, we saw our strength across the entirety of the portfolio with six out of our ten markets growing NOI by 7% that includes Atlanta, Phoenix, West Palm Beach, Washington DC, Houston and Orlando. Leasing activity and revenue performance were equally strong during the first quarter, as Brian mentioned, we achieved healthy new lease growth of 5.1% on average. Eight out of our 10 markets delivered new lease growth of 4.4% or better during the quarter, and that was led by Phoenix at 13.2%, Charlotte at 8.3%, D.C. Metro at 7.9%. Orlando at 7.7% and Atlanta at 6.7%. Renewal growth also remained healthy at an average of 4.5% with every single market achieving growth of 3% or more. Our top 5 renewal markets were Phoenix again at 8.9%, Charlotte at 5.9%, Orlando at 5.3%, Tampa at 5.2% and D.C. Metro at 4.9%. Renewal retention for the quarter was also a healthy 51.3%. And moving on to the transaction front, as Brian mentioned, as most of you know on January 28, we acquired Bella Vista, The Enclave, and Heritage in the Phoenix MSA, totaling 656 units for $132 million. The earlier results for these assets have been impressive versus our initial underwriting. Bella Vista’s NOI for example has exceeded our underwriting budget by 14.1%. The Enclave is beating NOI’s budget by 18.4% and the Heritage NOI is beating budget by 17.5%. Given the operational health and our increase in [Indiscernible] Phoenix area we'll continue to aggressively pursue acquisitions in this market especially when potentially recycling capital later in the year. Moving on to the NAB table as Brian mentioned, and as we do quarterly as a result of recent acquisitions, transaction activity, NOI growth, third party survey from Green Street Axiom Metrics and CDRE [ph], we've updated the NAB table to approximately a $36 and 41 share -- price per share at the midpoint. The drivers of the NAV increases were outside NOI growth and modest cap rate compression in Phoenix and Florida. Florida in particular being extremely competitive right now. I wanted to comment briefly on rehabs and taxes. Brian already capped the rehab numbers, but I didn’t want to point out that we've started our washer and dryer installation program and achieved great success so far. We've only completed 75 washer and dryer installs during the quarter, but we did achieve a $93 per unit premium on average resulting in approximately 90% ROI. Recall we plan to hit 1100 units over the next 12 to 18 months and expect to achieve similar results. I also want to provide a brief update on our real estate tax receipts in Texas. We settled the ASH law and Heather Stone 2018 tax litigation in the first quarter for a net benefit or refund of $55,000. We remain -- we still remain in litigation on four properties, Atera, Silver Brook venue at 8651 and Hollister Place. We are still projecting the potential net benefit from selling these proceeds to be anywhere between $250,000 to $400,000 while locking in favorable taxable values for 2019. Let me end with a strong leasing activity we've experienced in April. Our portfolio today sits at 94.2% physically occupied and 94% leased. Our renewal retention ratio was 54.77%. In April, we signed 625 new leases at an average of 5%. We’ve also secured 424 renewals at an average of 6%. Given the quarter, and the strong results. That's all I have for prepared remarks. And as always great thanks to our teams here at NexPoint and BH for continuing to execute.

Thanks, Matt. So let’s use the remainder of the time for questions. We’ll turn it over to you to poll for questions.

Thank you [Operator Instructions] We’ll take our first question from Buck Horne with Raymond James.

Good morning, guys. I just want to start with maybe the property taxes that you highlighted there. And going back to the accrual rates you are setting for 2019, I just want to be clear if the rates you are using and you’re setting and absorbing through the income statement, does that include any of the net benefits the $250 to $400 that you highlighted or is that exclusive of that and just kind of – how are you setting these accrual rates so far in terms of – are these based on your best guesses on the tax bills or have you got gotten any sort of calculative to go on for 2019 yet.

Yes. On 250 to 400 that we anticipate that is not built into our accruals, so we solidify those. We don’t include them. As far as the way we set the accruals at the beginning, we use a third-party that has lot of experience and data that help us trying to come up with what we think we think we can end up getting as far valuation in us, ultimately our tax expense on our property-by-property basis. Then we use that internally and perhaps move it up to be conservative based on our information. That’s how we do it. And then we reassess continuously throughout the years as we get new information.

Okay. That’s great. And then just turning quickly to your pricing strategy just given the strengthen of the leasing season so far. Just how would you characterize your strategy around price versus occupancy? You did -- look like the occupancy run a little bit hot or it maybe looser in the first quarter and seems to tighten a little bit in April. But how do you balance the price versus occupancy equation as the traffic strong enough to maybe let your net exposure run a little harder than usual?

I think that's a good characterization, Buck. We experienced very healthy numbers particularly for the seasonality issues that we normally face in Q1. We did place more emphasis on rent growth across most of the markets than occupancy during the first quarter because of the strength that we saw. We are expecting to have both strengths in occupancy and in rent growth in the second quarter, as I mentioned the April numbers are extremely positive. The May numbers we pull this morning. It's only -- it's not even make. It’s equally promising given the trends. So, while occupancy is continually in an area for us to improve. I think that for us that continue to value add, continue to try to drive rate I think will likely stay around 94%.

Okay. Thank you guys.

Thanks Buck.

We’ll take our next question from Tayo Okusanya with Jefferies.

Yes. Good morning. Congrats on the really strong quarter. Just a couple of stuff. The rent growth for the quarter for new leases, could you just let us know what that number was ex redev?

Yes. I think it was around 4.2%, 4.3%.

Without the redev, okay. And what rent growth for new leases trending like in 2Q 2019?

In the second quarter 5%.

Okay. Is that 5% is actually asking rate or is that what you’ve actually achieved in April?

That’s what we achieved in April. What I can tell you is renewals – that the renewal ask is north of six and also the new lease ask is north of five.

Got you.

We expect to be these numbers.

Thank you. That’s helpful. And then could you just talk a little bit just again about the overall acquisition environment, what you’re seeing acquisition outlook and you just – whether you’re feeling more confident or less confident about the ability to do more deals?

Yes. So, generally very, very competitive, a lot of new capital continual new entrants into the brief space. There’s not much on the market in terms of brokered activity. There’s a few portfolios but if there’s one-off deal, it’s extremely competitive. We’ve been focused on in particular over the last, what I would characterize is three to five months is mining either repeat sellers and/or BH's portfolio for opportunities. And we’re hopeful and likely to hit on a few of those, I would characterize in the second or third quarter, but we’re trying to focus more off on in terms of aggregating through BH’s portfolio which is plentiful, north of 80,000 units rather than competing on the acquisition market. That being said, there are still some opportunities coming up that we’re excited about that are characterize for the bigger check size that we normally participate in that equity check of 30 million or 50 million where there’s not lot of folks under the 10th [ph]. So, while it’s still competitive there. I guess to sum up we’re pretty helpful on some market opportunities in the second and third quarter.

Okay. That’s helpful. Last one from me. Again, NexPoint real estate advisors, a new REIT has been started up and in Canada there was hotel REIT. Just kind of curious how much time you’re spending on that relative to NXRT?

Yes. I guess, as you know we’ve hired a dedicated team to focus on that effort includes five individuals newly hired led by a [Indiscernible] to go head up that effort. So we expect nothing to change in terms of the management, the current management dedication or focus.

Got you. Thank you very much. Again, congrats on the quarter.

Thanks Tayo.

Thank you.

We’ll take our next question from John Massocca with Ladenburg Thalmann.

Good morning.

Hi, John.

So, what may be drove the increased kind of this quarter versus your historical numbers in terms of the ROIs on the rehap program. Is that maybe results to some of these smaller dollars partial upgrade plus amenity [ph] packages?

Yes. I think that’s right. That’s exactly right. And then we’ve also in terms of a whole dollar rent increase have seen – we did see rather in the first quarter slight tick up on average. I think we recorded $190 [ph] on the spin versus historical average of 90, so we are getting a little bit rate on the rehaps. There’s demand for the newer into your products has been met with great activity I guess.

And maybe outside of this, there can be appliance there. I mean, are you seeing kind of pressure in terms of the cost of doing rehab. I know you kind of repairs and maintenance in the same-store portfolio is going to had some outsized growth. Is that maybe weighing a little bit against potential outsized returns in the future for this rehab program?

I feel like we've been -- I mean we've actually added to our average increase in ROI over the last couple of quarters. So we're underwriting. I can tell you what we're underwriting to. Our underwriting seemingly a more expensive rehab process, but we're still able to achieve a commensurate benefit on the rate increase. So I think the ROI are pretty steady. There's nothing that I can see in the future that's going to derail that story anytime soon.

Understood. And then with the green initiatives obviously a positive on the same store operating expense side. Is there any point at which you would potentially lap the benefits from those? Or is that kind of an ongoing process here?

In terms of like is there a diminishing return in terms of same store results.

Well, just once you have these kind of initiatives put in place I mean I imagine some of them are just stuff you're installing in the units. Right? So is there a point at which we're kind of lap that and your utility costs will stay relatively the same and therefore not have the benefit to the same store expense growth year over year?

Yes. I think once we, I mean, once we complete the green initiatives on the current portfolio there will be a time where you know we've gone in and installed the low flow toilets or the other water saving initiatives in each of the each of the units. That being said that'll help us continue to keep water expense and utility expense low thereby creating an opportunity to drive either rents or other income growth elsewhere through tech packages or just organically.

And how far along are you. How much more kind of runway is there for the green initiatives in the portfolio?

I think at 25% or so of the portfolio lefts, say there's ten or eleven deals ongoing right now. So there's still quite a bit of runway I think.

Okay. And then one last detail question on page five of the sub, do those Phoenix rent growth numbers, those include the new acquisitions that are made in the quarter?

Yes.

Okay. Well, that's it for me. Thank you very much.

Thanks John.

[Operator Instructions] We'll take our next question from Rob Stevenson with Janney.

Good morning guys. In terms of the washer dryer installers, are you guys doing those as part of larger redevelopments or are you doing those as standalone sort of separate upgrades?

The ladder. I mean, if there’s an opportunity to do it at the time of the rehab, we will. But last year, late last year we surveyed the portfolio and asked folks and looked at our laundry contracts to see what’s the universe of units that we could do sort of a bespoke washer dryer installed throughout the year and so those are the ones kind of one off that we're hitting right now.

And how much is that causing you per install?

Depends on the market. But it's anywhere between $700 to $900 per machines.

And you're getting a $90 dollar boost in rents?

Yep.

And so, I mean, I can’t imagine that there's anything higher and better use of your capital. I mean is that how big when you guys have looked at this. How big is that sort of opportunity set for you guys moving forward here?

We think it's currently 1100 units which could easily be doubled if we get to the 1100 units.

Okay. And then the Arizona portfolio, how extensive. I think you guys have close to $9 million earmarked for rehab there? How extensive are is the redevelopment sort of needed on a unit basis there? Are you doing sort of kitchens and baths and washer dryers and things like that? Is it more exterior? You just talk about the scope of those three assets?

Yes. We're doing that. We're doing everything you possibly can of those three units because the demographics will allow for the rental increases. So we're – and in the larger units slightly newer so we're doing the kitchens, we're getting the baths, we’re doing the back slashes, the appliances, the washer dryers, the plank floors, the two-inch blinds, the brush Nicole, the [Indiscernible] in some in some assets we're creating the enclosure enclosed yards providing a yard for the tenant base. So it's really a higher end upgrade. You can see that with the larger span of 9 or 10,000 unit.

Okay. And then just lastly for me. What other than just conservatism kept you guys from increasing guidance off of the first quarter results. I mean you're essentially you know ad or north of the midpoint probably at this point annualized for the Phoenix acquisition. Is there anything that other than dispositions that's going to wind up being a drag on earnings in the rest of the year?

To the latter half, no, I don't think so at this point. If we look through our crystal ball I think we feel pretty good about the year demand still there. So it's a possibility later in the year for sure.

Okay. And then I guess one last one. Brian, did you say that the Phoenix acquisition was included in the 152 of acquisitions guidance or is that in addition to?

That’s included in the guidance. If I said in addition 6000 it inclusive of what we've already acquired.

Okay. Perfect. Thank you guys.

We’ll take our next question from Buck Horne with Raymond James.

Hey, thanks. Just a quick follow-up. So, any idea or how do you expect disposition timing to maybe play up the rest of the year and what kind of pricing do you think is achievable given the capital that’s out there in the market on your potential disposition?

Yes. I think we’re most likely looking at a 5% disposition cap rate and when I quote that tax adjusted 85% to the buyer and after CapEx, so I think that that's something that will likely achieve. And then on some of these off market deals we'll try to create an off in our 25 to 40 basis points in cap rates. So I think we'll be able to achieve both of those.

And then as far as filing goes, we kind of modeled in into the third quarter dispositions or late third quarter.

Okay, great. And so how would you characterize the pipeline of potential acquisitions there that are out there and what kind of deals are you seeing to underwrite. You mentioned Florida where seller expectations may still be pretty high. Are there any other areas where deals are more achievable at more reasonable prices?

Yes. I would say that we have through -- again through BH’s portfolio some opportunities one in Florida, one in Nashville and then one locally that universe is kind of gets us to the full 250 on the year. And we feel pretty confident about those. And so I think that we'll try to execute on those in the second or third quarter.

Okay. And one last one for me. On the same store repairs and maintenance costs, those were up about 10% year-on-year. Is that -- was there something in the first quarter you were doing on the R&M side? Or is that a trend you'd expect to continue through the year?

Yes. So largely that was attributable to us installing security systems at certain deals as really an amenity that we've rolled out historically in the past. It's an increase in current R&M expense, but there isn’t offset or a residual increase in other income lines. So for example if you look at West Palm or even Atlanta or Orlando those are markets where you've seen other income for us jump kind of 18 to 20 plus percent and you have a corresponding increase in R&M. But so, it's kind of -- it looks high from an R&M standpoint, but there is there is a residual benefit on the income staying right.

Great. Awesome. That's very helpful. Thank you.

Thanks Buck.

Speakers, there no more questions in the queue at this time right.

Well, thank you everybody for joining our call and look forward to the second quarter. Thank you.

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