NXRT (2022 - Q1)

Good day and welcome to the NexPoint Residential Trust Q1 2022 Conference Call. This conference is being recorded. Now 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 ended March 31, 2022. 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 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 the conference call speak only as of today's date and 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 an analysis of non-GAAP financial measures. For a more complete discussion of these non-GAAP financial measure, please 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. I appreciate everyone for joining us this morning. I’m Brian Mitts and I’m here with Matt McGraner. 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 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 our Q1 net loss was negative $4.7 million or $0.18 loss per diluted share and total revenue of $60.8 million, that compares to a net loss of $6.9 million or a $0.27 loss per diluted share in the same period in 2021. And that was on a total revenue of $51.8 million. For the quarter, 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%. This 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 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. Increasing our velocity there. And leased 489 renovated units during the quarter, achieving an average month 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 have 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%, 70.8% and 33.5% respectively. For NAV based on the current cap rates that that we're estimating in our markets and our partially 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 mid-point of $102.90 at the midpoint. These are based on the cap rates that we estimate between 3.5% and 3.8%, which is unchanged from last quarter. In the first quarter we paid a dividend of $.38 per share on March 31. 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 has 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 in low end, $3.90 on the high end, for a midpoint of $3.1. That compares to prior guidance of $2.97 or $0.04 increase. For same-store NOI we're estimating 12.6% on the low end, 16% on the high end, the mid-point 14.3% that compares to our prior guidance of 13% for 130 basis point increase. At the mid-point of our 2022 core FFO of $3.1 represents 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 shows 6.3% or greater growth in all markets while same-store average effective rent 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 NOI growth was pretty special across the board with the portfolio averaging 16.4%, driven by 11.3% growth in total revenues in a well managed 4.6% growth in total operating expenses. Eight 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 eleven 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, 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 remain 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% of renewal growth north of 18%. As I said up through this morning. Turn to 2022 acquisitions and dispositions, as Brian mentioned, we acquired two assets on April 1 Adair and Sandy Springs, Georgia and Estates on Maryland, Phoenix. These purchases added 562 units to our portfolio for a total purchase price of $143.4 million. We use cash on hand and proceeds from a $70 million upside to our revolver to acquire them and expect to recycle capital from successful property dispositions at Houston through previously had 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 $45 per unit for that amenity. As a result, our underwritten four-year average, same-store NOI growth for this asset is 6.5%. For estate we purchased $77.9 million for a year one economic cap rate of 4.3%. We plan upgrade 165 units at an average cost of $11,700 a unit and generate premiums of $142 a unit in ROIs or approximately 17.5%. We also plan here 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 for estate is 7.7%. Turning to guidance, as Brian said, we're excited to an upward revision to our prior guide loan of 15%, same-store NOI growth for 2022 to 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 in 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 FFR rents to our markets, with deltas ranging from $300 to $500 unit for multi and nearly over $700 for FFR. In closing, I'll just reiterate that we're excited about the strong start to the year. And we’re expecting to see continued strength in the middle market rental housing, particularly in our core Sunbelt markets. That's all I have in prepare remarks. Thanks to our teams here at NexPoint and BH for continuing to execute. I’ll turn back over to you, Brian.

Yes, let's go to questions

[Operator Instructions] And we'll hear first from Michael Lewis with Truist Securities.

Great. Thank you. I wanted to ask a little about your 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 you raised the interest expense guidance just a little bit for the full year. Could you maybe talk about, especially since you have – now you have a more sizeable 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 are breaking up a little bit on your end. But I think I caught most of that. Yes, obviously with the floating rate debt and interest rates moving upwards, that's something that we're very focused on. The portfolio is very hedged, which is using 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 will decrease. So that's part of the math where rising rates would otherwise affect this, 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’s really new to our change in interest rate expense throughout the year. So overall it really new to our change in interest rate expense throughout the year, so, again I didn't really get the full question but hopefully that addressed it if not, happy to follow-up.

Yes, no, that's helpful. And then kind of a bigger picture question, a lot of people are kind of guessing the next stage of the economic cycle with maybe 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 that's expected and that's okay. But how do you see this – 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 how the multifamily cycle might end?

Yes. Hey, Michael, it's Matt. I think we're experiencing sort of a rerating of rents across the core Sunbelt markets and while they are pretty dramatic on a percentage basis, the whole dollar $1,300, $1,400, $1,500 rents as 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 long as we see these population trends in that migration and job growth really the only in my view existential threat our business is an uptake in crime. So as long as we continue to see our submarket prevent that and provide, I say affordable housing rate unlike 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 up there in terms of pipelines and portfolio transactions. I think that the bidding for those deals will be less wide as they have in the past or at least last year, stronger groups such as ourselves, other REITs, the larger asset managers will probably get narrower to just the qualified guys instead of or the more qualified group instead of casting a wire net, but transactions are still getting done. The agencies are still productive. The banks and likes those are getting more aggressive as the agencies are slower to produce or tighten spreads, but 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 growths 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 market that can't really speak to, to their view but this is, I think our view is pretty constructive this year.

Yes. That's great color. It's interesting to hear you talk about prime. 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 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 maybe you were able to find such success fighting some of those or maybe talk a little bit about what's happening on real estate side of business?

Yes. You're exactly right, Michael. I'm knocking on the wood while I answer this question, but we've had a little bit of success so far, and the first quarter from 2021 appeals and most notably in Tarrant County have about $350,000 of savings and settlements that we didn't expect. So that's some attribution for that, but overall, we've – we've had a more muted, I guess real estate tax paradigm this year than in the last few. And it's not like – and then in the last few years, frankly we were frustrated by being 3% to 4% to 5% higher than our peers. So hopefully that – that'll 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 Tayo Okusanya with Credit Suisse.

Yes. Good morning, everyone. Just a 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 in place 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 new environment?

Yes. So, Tayo, how are you.

I'm good, Brian.

So, it's not until really 2026 we start to see these swaps fall off. We had a couple that ended at the end of this quarter, Q1. I think there's another one that 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.

Okay. That's helpful.

Sorry, which is good. I was going to refer you to Page 22 of our supplement. We've got the swap table there, if you want to take a look at that, sorry, go ahead.

Thank you. And then the second question is when 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, so suddenly you can’t buy homes, again, realizing you're kind of in the affordable housing segment, but ones I'm wondering if you have seen any of that at all?

Hey, Tayo, it's Matt.

Hi, 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 as sort of anecdotally will send out renewal notices and get to push back from tenants and we're like, okay, we'll then go check – 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, and there's really no other affordable option that's better. When you add on moving costs plus the rent delta that's highlighted in a pilot page in supplemental, we're seeing probably a quarter of our renewal nodes is coming back with that sort of same narrative, so maybe that we ended up renewing 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. And so, we're continuing to sort of see enhanced wage growth within our tenant cohorts that's positive. And then for the vacancy aspect from us the courts are open again largely in our markets. So, 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.

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

Yes. That's just tested as of Q1, so it'll include the newer – the newer leases, but plus the legacy assets.

Got you. Thank you. Great quarter.

You bet. Thank you.

[Operator Instructions] We'll now move to Peter Abramowitz with Jefferies.

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 annualizing them would – 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'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 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 guide?

Yes. Hey, Peter it is 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 meet the runway attack 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 its 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?

Yes. 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 code. I think in that – within that report, I think only our portfolio had positive zip code trends so in each of our markets. So, you guys are all over it. So, we track them every quarter, year-over-year I would say. This year it increased to 11%, still double-digit increase. But 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, there's still elevated, California is still the number one kind of new or where people are moving from, and then New York and Virginia and Illinois kind of follow that. But California is still 20% of each of our new leases – our new lease apps. Illinois and New York are double-digits also, so in terms of the – is it going to slow us? I think sure, naturally there's some regression to the mean because New York and now those other markets are reopening so to speak, but we like our problems relative to theirs, and so we're still positive on that migration train again as your data illustrates.

Got it. Had 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 list for where they're going, any others that stand out markets in your portfolio where movers from New York are going?

Yes. We do track it. So, in order Florida's first, then Atlanta is stronger than Nashville are to very important. California is just because I have you Arizona, Nevada 1 – 1 and 2 and then Tennessee 3.

Got it's, and that's helpful.

Yes. [Indiscernible]. You bet.

Exactly. Thank you.

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

Yes, I appreciate everyone's time. Great questions, another great quarter, and as we discussed we think it's going to keep going forward for this year. So, we'll see you in three months. Thank you.

Ladies and gentlemen, this will conclude your for today. We do thank you for your participation and you may not disconnect.