NXRT (2020 - Q4)

Good day and welcome to the NexPoint Residential Trust Inc. Fourth Quarter Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jackie Graham. Please go ahead. Jackie G

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust Conference Call to review the company's results for the fourth quarter ended December 31, 2020. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; and Matt McGraner, Executive Vice President and Chief Investment Officer.

Thank you, Jackie. Welcome, everyone, for joining us on the NXRT 2020 Fourth Quarter Conference Call. I'm Brian Mitts and joined here with Matt McGraner. Let me start with some highlights from 2020. Net income for the year is $44 million or $1.74 per diluted share, as compared to $99.1 million or $4.03 per diluted share in 2019. Same-store NOI increases $2.1 million, or an increase of 3.2% as compared to 2019. The reported 2020 core FFO of $55.5 million or $2.20 per diluted share, which is an increase of 14% on a per share basis, as compared to 2019. Total revenue for 2020 was $204.8 million and total NOI is $116.1 million, which was an increase over 2019 of 13.1% and 13.2% respectively. NOI margins for 2020 were 56.7%, which is equal to margins of 56.7% during the same period in 2019. We continue to execute our value-add business plan by completing 1,679 full and partial renovations during the year, achieving an average monthly rent premium $131 and a 21.7% ROI. Inceptions to date, the portfolio as of December 31, we've completed 5,355 full partial upgrades, 4,286 kitchen upgrades and washer dryer installs and 8,880 technology package installs, achieving an average monthly rent premium of $126, $48 and $44 respectively, and an ROI of 21.5%, 74.2% and 33.8% respectively. During 2020, we issued 1.3 million shares of stock for approximately $59.5 million gross proceeds. Based on update and cap rates in NOI, we're revising our NAV per share range upwards as follows. On the low end, $42.83, on the high end $52.94, the midpoint of $47.88. These are based on cap rates ranging from 4.4% on the low end and 5% on the high-side. Updated NAV compares the midpoint of $46.31 at December 31, 2019, or 3.2% year-over-year increase. For the fourth quarter we paid a dividend of $0.34125 per share on December 31 to shareholders of record as of December 15. Yesterday the Board declared a dividend per share of $0.34125 table on March 31 to shareholders record on March 15. Since inception has increased our dividend at 66%. Year-to-date, our dividend was 1.72x covered by core FFO for the payout ratio of 58% of core FFO for the year. Overall, although 2020 provided some challenges, we continued our track-record of thoughtful capital allocation and earnings, as pandemic first hit stocks in general, NXRT's specifically drops multi-year lows, aggressively bought back stock by 1.6 million shares of common stock at an average price of $27.07 per share. The stocks have covered including NXRT; we issued 718,000 shares of common stock at an average price of $43.90 per share, creating significant permanent value for shareholders.

Thanks, Brian. I'll start by recapping our fourth quarter Same-store operational results. Strength in the fourth quarter proven six out of our 10 markets in 2020 with Nashville and Orlando being essentially flat and Houston is the only one that's slightly negative, every other market ended the year in the black. Notable markets for same-store NOI growth for the fourth quarter were Phoenix at 11.3% and Dallas at 4.9%. Even during the pandemic, leasing activity and revenue growth continued to improve in the fourth quarter over the second and the third quarters with eight out of our nine markets achieving revenue growth of 1% or better. The top five were Phoenix at 8.4%, South Florida at 3.9%, Dallas Fort Worth at 3.3%, Tampa at 3% and Nashville at 2.9%. Renewal conversions were healthy at 53% for the quarter with five out of our 10 markets delivering renewal growth rates of at least 2% and every market was in the black. The leaders were Tampa at 3.1%, Atlanta at 2.6%, Phoenix at 2.4%, Dallas Fort Worth at 2.3% and Nashville at 2.1%. On the occupancy front, we're pleased to report that Q4 Same-store occupancy remained over 94% and is well-positioned for 2021. As of this morning, the portfolio is 96.5% leased and have the healthy 60-day trend and 91.5%. Turning to full-year 2020 Same-store NOI performance, our Same-store margin improved as Brian mentioned, to 55.8%. Same-store average rents and revenue each increased by 1.3% and 3.6% respectively, in a line held strong across the majority of the portfolio in 2020 with six out of our nine markets growing NOI by at least 3.9%. Notable Same-store NOI growth markets good mortgage for the year were again in Phoenix and South Florida 12.3% and 10% respectively. Operationally overall portfolio generated positive revenue growth for the entire year of 2020 with eight markets achieving growth of at least 2.4% or better -- Orlando being the only outlier. The top five markets were Phoenix at 8%, South Florida at 6.1%, Charlotte at 5.2%, Tampa at 5%, Nashville at 4.8%. On 2020 collections April through December in 2020, the portfolios collected 98.5% of all total charges. Payments plans have continued to decrease month-over-month since we started offering the program in April 2020. 2020 payment plans are 97.2% collective as of Friday and there were 959 payment plans in April of 2020. Those numbers are down to 168 payment plans at the end of the year and as of today just under 198. Turning to 2020 acquisitions, as Brian mentioned, we acquired one asset in 2020, Fairways at San Marcos and Chandler Arizona for $84.5 million, while selling four assets for $143 million and exiting the DC market entirely. We plan to upgrade at Fairways 156 units at an average cost of $11,800 per unit and generate premiums of $152 a unit with an ROI of approximately 15.5%. We also plan to install smart tech packages in every unit as we expect to generate monthly premiums there of $40 a unit. As a result, our underwritten three-year average Same-store NOI growth for this asset is 7.5%. Today, Fairways is $150,000 or 19% ahead of our NOI underwriting budget already.

Thanks, Matt. We will turn it over now for questions.

We'll take the first question at this time. It comes from Buck Horne from Raymond James. Please go ahead.

Hey, thanks. Good morning, guys. I guess let's start with the real estate taxes to begin with and just kind of how that that impacts your outlook for 2021 guidance. It certainly seems like that is the biggest variable. So, I guess I'm curious up to what degree we know that the assessments are going to come in at these elevated ranges? What amount is your best guess work here? I know Tennessee seems to be the most volatile component of coming up with these estimates, but trying to get a sense of to what degree we know the assessments are going to come in this range and to what degree is conservatism on your part relative to the guidance?

Hey, Buck. It's Matt. Good questions. Between outside case in our guidance and the base case, the two significant drivers were basically increase in rental revenue, roughly 90 basis points and that's the market rent and a reduction of roughly $1.3 million in property taxes. And so, you add those two together and you get a 5% ROI growth or plus that. We think that the midpoint represents a fairly conservative range, which includes the uncertainty in Tennessee with the millage rate increases the rent implemented in 2022 to shore up municipality budgets. So, we don't expect property taxes to exceed that base case level and we're optimistic that there's some number between zero and that $1.3 million that would allow us to reach the upside case.

Okay, sound good. One other quick one for you. There was a line item noting miscellaneous income, I think for the year total about $1.8 million. But is there any color you could add to what the miscellaneous income represented? And is that some sort of repeatable fee income or what's in that line?

It's just late fees and admin fees that were that we were able to collect in 2020, which is down from historical levels. But nonetheless, I think that they can be collected this year again, particularly after the CDC lifts their monetary .

I got you. Okay, great. I'll turn the call over to the next analyst and will follow up later. Thank you.

Thanks, Buck.

Our next question comes from Rob Stevenson from Janney. Please go ahead.

Good morning, guys. Matt, did you say that you had 198 payment plans versus 168 at year-end? Or did I get those numbers mixed up?

Yes. That's about right. We started out with roughly in April, down to…

Ninety-eight.

Yes, down to 98 in February. We're at 168 at year-end.

Okay, so just 98, not 198? It's not an increase, it's a continued decrease?

That's right. That's right.

Okay, perfect? I was wondering why was going up? I just didn't hear that right. Thank you. And then did you give January 2021 collection percentage yet?

Yes. We have it. It is just the 95%.

And how does that compare versus December at this point, sort of 45 days in or November is an improvement? Status quo? Little bit weaker? How would you characterize that?

Yes, it's so -- you could kind of compare it to last year in 2019 and it's about 70 basis points behind. But it's about 30 basis points behind trend but it's caught up and seems in-line for now.

Okay. And then any substantial no differential per day versus core FFO and what NAREIT would be calculated as of that you're anticipating prepayment penalties or anything else big that's likely to come through?

No. I think we're in-line with NAREIT. If we sold those properties that Matt indicated, we would think has some prepayment penalties. But that's factored into our guidance.

Okay. And then the last one for me, you guys gave the market-by-market, quarter-over-quarter same-store operating metrics. I think it's paid 16 in the supplemental. Nashville had negative, a slightly negative average effect of rent sequentially and flat occupancy, but total rental income was up 10%. Can you walk me through how those numbers -- how you get to that big of a jump in rental revenue with occupancy flat and rental rate down slightly? Because the total rental revenue maybe includes some sort of fees or something that we're outsized in Nashville that drove that?

Hold on one second, Rob.

Okay. But Tampa and South Florida, both have -- both negative effect of rent changes quarter-over-quarter and negative occupancy and are slightly positive, but that 10.1% jump in Nashville really stuck out?

Yes, I think it might just include the additional property Argus being added to the pool.

Okay, all right. Thanks, guys. Appreciate it.

Thanks, Rob.

We'll take the next question that comes from Amanda Sweitzer from Baird. Please go ahead.

Thanks. Good morning, guys. On your fourth quarter results, what was the main driver of the 90 basis points sequential decline in occupancy? And on that, the demand for renovated or non-renovated units deviated off from your expectations during the quarter?

Yes, the demand didn't deviate. We thought we would upgrade basically what we did. There were a couple market specific issues: one, one in Houston with an asset holt replaced that experienced some evictions that is now recovered. It's about 94% occupied today, and the other one was an asset in Charlotte, that same issue, right . And then, the other deal we have now in Charlotte had a small fire to Timber Creek that had some occupancy. But those are the main drivers of the decline and like I said, today we're back in 94 plus percent for those assets.

Good, that's helpful. And then pulling up until the earlier question is, how much bad debt are you assuming in 2021 guidance? And then how much of a benefit did you realize from some of those state-issued rental assistance bonds in the fourth quarter?

Yes. Bad debt assumptions, roughly 120 basis points for 2021. And were in the band, I think this is your question in the band from the base case to the upside case. I think that that number can decrease to about 80 basis points to cause further upside, but more often that it will be better on bad debt in 2021 than 2020. We're already seeing an increase in first payment with rent on time. And like I said to Rob's question, the decrease in the payment plans.

Go ahead.

Yes, I was going to answer the aid -- particularly, we've collected around $1 million dollars of aid across our various markets from local aids that's being offered outside of everything and the stimulus packages.

Okay, that's helpful, and then, are you expecting additional aid in your guidance ranges at all? Or that would be incremental if you received that?

Yes, it'd be incremental. I mean, from all the states, in our markets, there's over $7 billion of available aid, $40 million at the county level. And that's all available that we're not underwriting out of the guidance.

Okay, thanks. And then last question for me, it's just on capital allocation, the expected capital is like grading your guidance, right, total sense to their given cap rates, but are you exploring any alternative external growth opportunities, given how competitive the transaction market is today?

Not at the moment in terms of any other deviation from our core property tied for value and multifamily, we're not trying to venture outside of any of that. We're focused on the internal growth first and foremost and buying -- recycling the capital. And then, we can orb our stock like we did in 2020, which I think Brian mentioned, we bought $60 million and implied 5.8 cap and sold plus $50 million at a 4.6; I think we'll continue to do that.

Thanks. That's it for me.

The next question comes from John Massocca from Ladenburg Thalmann, please go ahead.

Good morning. In the prepared remarks, you mentioned some market-specific NOI expectations. But if I heard correctly, they were all at or above the midpoint of total NOI growth expectations. So what are the markets counterbalancing those stronger markets? And why are they making relative underperformers?

Yes, the three largest attractors, or under the 4% or 5%, are Dallas, Fort Worth and Nashville. The good news for both of those markets are, if the tax has come in at the upside case for either markets, and those markets will be above the midpoint, it should provide upside to our guidance. So it's largely -- it's almost entirely texture.

Understood. And then, as you think about Q4 same-store rental rate change, what would that have been if you exclude uplift from rehab projects?

Actually, we have organic -- probably just under 1%, so call it, 70 basis points.

And then, if you think about the NOI expectation for next year, in terms of occupancy, are you seeing the current levels of maybe the ceiling on total occupancy particularly versus 4Q? Or is a potential uplift there as well as kind of rental rate?

Yes, I think I think there's a lot of uplift in occupancy, I think it's going to be a primary driver of growth first, and then the rates will -- once you have stabilization across…

I think it was a feeling kind of the 96.5% you're at today or you could even go higher? Because everything kind of shakes out when we get to the end the month.

Yes, I mean, we've historically run around 94%, so -- and pushed up interest rates for -- instead of another 0.5% to 1.5% in occupancy. So, I think we'll continue to do that. I'd be surprised if we pushed in higher than 96%.

Okay, that's it from me.

The next question is a follow up question from Buck Horne from Raymond James. Please go ahead.

Yes, just one quick follow up for me. So you mentioned in some of your NOI forecasts and your outlooks that you're seeing continued economic strength into Sunbelt markets, plus, some facts there continued in migration, population trends that seem to be playing out. I'm just wondering, in some of the early lease application data, whether it's fourth quarter or the January, February numbers you got so far, is there any tangible uptick in applications coming from out-of-state or out-of-market residents that are part of that net migration effect that you can quantify?

Yes, absolutely. So January -- the January numbers, we have to net migration until moving into our markets for NXRT markets as they enter our markets is 10.9%. Majority of that is 11% from California, 9% New York, Ohio is 8%, and then Illinois was above 5%. January 2021 net migration data into our markets, and we can send it to you later after the call, but just to give it to you here was 14.4%, to roughly 3.5% increase January to January. Same leading markets, California 19% of those numbers, so from almost 11% in January 2020 from California to 19% in 2021. New York, 14%, that number is up about 8% year-over-year; so definitely seeing an impact, and in a big way, both in Texas, specifically Phoenix, and Florida.

Hey, it's Brian. So I just want to follow from your earlier question about miscellaneous income. You were talking about the actual miscellaneous income on the face of financial, so we misunderstood the question, but what that $1.77 million is mostly business interruption insurance that we received on the cutters property, which was basically completely destroyed in October of 2019. So we've been rebuilding it this year and getting income from that insurance.

There we go. That's helpful, I appreciate it.

Once that's operational again, that'll flip up the NOI and out will be the miscellaneous income.

Got it. Thanks.

The next question comes from Jon Petersen from Jefferies. Please go ahead.

Thanks. If we think about more leisure travel affecting certain markets, and looking specifically at Orlando and Vegas, places that you have significant exposure; I mean, if you can help us characterize, maybe specifically how some of your properties are positioned there and if you expect some uplift, as we see more leisure travel? And then on the other side of it, I like the migration trends you were just talking about, I mean, it's your same guidance, underwriting some unwinding of that in migration turning into out migration as things reopen?

Yes, we really took it on the chin, if it's your first question on leisure travel markets. In Orlando in 2020, the one asset I can think that comes to mind and say we'll call him a like what -- like one of us which was directly impacted by the closure of the theme parks and in some cases got down to 90% flat occupancy, which we hadn't seen since we all know -- since we own the asset. That we're getting through those issues, and are really optimistic that we can see that property come back and perform much better in 2021. Vegas, on the other hand, really, really wasn't as weak as we thought it would be. Obviously, the district closed down and a lot of the leisure-related jobs were lost or furloughed. But we saw that kind of offset that was in migration from California particularly, and that helped us have a pretty good year in Vegas, all told, and I think, ended the year positive, from a year-over-year basis. I particularly don't believe that net migration trends into these markets will reverse because of a vaccine or some other development. I think that these cities are Argus cities they were 20 years ago, they offer a lot of lifestyle and other amenities at an affordable cost. While we're located in these markets, and we think they'll continue to grow, and I don't think that once a millennial or other new jobs applicants comes and stays in the Sunbelt will return anytime soon. But that's our personal belief.

And yes, a lot of that is this -- the jobs in companies that moved there, and they're not likely to turn around and move back. Especially in our renter cohort, these aren't people that were escaping the cities, and then they're going to go back once things return to normal. They are more working-class people that are made permanently to follow jobs, or companies.

Appreciate the color. Thank you.

The next question that comes from Michael Lewis from Truist Securities. Please go ahead.

Great, thank you. I wanted to ask about the cap rate assumption in the NAV calculation; it looks like you took the cap rate down about 30 basis points across all the markets. So I was just wondering if you could give a little more color on -- is that due to interest rates or some blanket assumption? Or, alternatively, that it's based more on transactions you're seeing in each of those markets, just a coincidence that they're all the same? And, the level of transactions and the confidence you have in cap rates right now?

Yes, the main drivers were tightening at the high end, and there was supreme cap rates, sub 5%; I haven't seen a 5% cap rate in several years now. And so, I think that from what -- when we surveyed CVRE and Green Street in real page , they came back, frankly, a lower number than these are. And from a transactional perspective in the acquisition marketing and bidding intent, we haven't seen and have offered on assets, most recently in Tampa and Charlotte, that have gone sub 4%. And we're holding our notice bidding around for 4.4%, 4.5% cap rates. So there is a lot of capital out there to your point, I mean there is an incredible amount of sub-figures in debt financing, as well. And it's just driving material supply demand in balance for this type of product in the Sunbelt.

Thanks. Matt, you mentioned Nordics Core , this is an internal growth company, you have about 14,000 units, you get this kind of modest acquisition activity in the 2021 guidance. Do you like the size of the company or do you think there are any advantages to diversifying or going into new markets? Or, just growth of the portfolio, in general, or do you like where you are now?

Yes, great question that we've debated a lot. And we've never been the company that's saying we're going to own 50,000, 75,000 or 100,000 units. We had basically 40 properties since we've been public and we went public in 2015. And we were able to quadruple the market cap by recycling capital. And that's what we care about, first and foremost, is the stock price and getting that up for stockholders. We don't want to venture into any new property types of speed, but we are looking at and intrigued a little bit by Research Triangle in Raleigh, Durham. made some in the life sciences a part of -- like private space, made some acquisition there. We like the growth there. We like the demand drivers there. That's a market that we were searching for. And it could be interesting over the next few years for us, but other than that, we're comfortable and like what we're doing.

Sounds good. And then just lastly, for me, I'm going to ask about a line item in the Income Statement, as well. That corporate TNA line was down a fair amount sequentially in year-over-year. When I looked at the guidance for next year it looks like it goes back up. Was there anything unique or that we should look through that -- that kind of draws that number over the lower?

Yes. I think maybe being conservative on the guidance, the cheese and drop in auto cost in some of our transfer overhead; they are pretty minimal and immaterial now, but they're certainly less travel and stuff, it's getting flushed through corporate G&A, except the pandemic. But yes, we don't really expect a material increase in those expenses, but I think we -- for guidance kind of averaged it back out to you where we thought it would be historically.

Next question comes from John Massocca; it's the follow-up question, from Ladenburg Thalmann. Please go ahead.

Just a quick one on capital recycling. I guess, as you think about that today, understanding the timing and the bespoke transactions, would that be day one dilutive on a per share basis, given cap rate dynamics you're seeing today? Or do you think it would be largely, potentially what you can dispose of is equal on a day one and alive versus what you can take on?

Certainly, we've done it in a reverse manner. So we've acquired the property before we've settled on the disposition. And that's cash -- that's cash accretive. But depending on where you buy the deals could be, to your point, cap rate dilutive. But, our stabilized basis will would probably, more than likely -- that could beat by $4.25, $4.5 . Our goal is to generate 75 basis point to 125 basis point in a whitelist post-rehab in three years. So, that kind of second -- year half, second year, cap rate accretion would deliver at that point -- would be the way we think about it.

We typically recycle on something that's older and has gone through the rehab process. And so, the upside there is not as much, to Matt's point, as the new deal with burning in and then not too much NOI focus but core FFO for refinancing that -- that new deal or putting financing on that new deal and cheaper cost of debt and what the current deal was; ultimately, I think that's accretive to core FFRO.

Thank you.

That ends the question and answer session for today, and I'd like to turn it back over to you for any closing remarks.

Yes, no, we're good. I appreciate overall participation, a lot of good questions. Look forward to 2021. 2020 was definitely a tougher year than we thought going in. But I think we came out pretty well and well-positioned and have some good prospects for the future. So, thank you for everybody's participation.

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