NexPoint Residential Trust, Inc.
Q1 2021 Earnings Call Transcript

Published: 27 Apr 2021

[Operator:]

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

[Jackie Graham:]

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust's conference call to review the company's results for the first quarter ended March 31, 2021. 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. Forward-looking statements can often be identified by words such as expect, anticipate, estimate, may, should, intend and similar expressions and variations or negatives of before.

[Brian Mitts:]

Thanks, Jackie. So I was a little longer than you think lawyers got to hold to that one. Well, yes, thank you. Welcome to everyone joining us. I'll start with the highlights and commentary for the quarter, discuss results and guidance and then turn it to Matt for his commentary on the quarter and outlook, and then we will go to Q&A. So let's start with the highlights for Q1. Net income for the first quarter was negative $6.9 million or negative $0.27 per diluted share as compared to $28 million or $1.08 per diluted share in the same period in 2020. Same-store NOI decreased by $100,000 for a decrease of 30 basis points as compared to 2020. We reported Q1 core FFO of $14.1 million or $0.56 per diluted share which is an increase of 6.9% compared to the same period in 2020. Total revenue for Q1 was $51.8 million and total NOI was $29.6 million, which was a decrease from 2020 of 1.5% and 1.3%, respectively. NOI margins for Q1 2021 were 57.1%, which is a slight increase of our margins of 57% same period in 2020. We continue to execute our value-add business plan by completing 285 full and partial renovations during the quarter, achieving an average monthly rent premium of $163 on 421 lease upgraded units, which resulted in a 20.7% ROI during the quarter. Inception-to-date in the portfolio as of March 31. We've completed 5,543 full and partial upgrades, 4,364 kitchen upgrades and washer dryer installs and 9,422 technology package installs. Achieving an average rent -- monthly rent premium of $129, $48 and $44, respectively, and a return on investment of 21.5%, 74.1% and 33.3%, respectively. Based on current cap rates and our NOI, we are reporting NAV per share range as follows $45.07 on the low end, $55.31 on the high end with a midpoint of $50.19 is based on cap rates ranging from 4.5% on the low end to 4.8% on the high end. The updated NAV compares to a midpoint of $38.47 at March 31, 2020, or a 30% year-over-year increase. For the first quarter, we paid a dividend of $0.34125 per share on March 31st to shareholders of record as of March 15. The Board has declared a dividend per share of $0.34125 payable on June 30 to shareholders of record on June 15. Since inception, we've increased our dividend 66%. And year-to-date, our dividend was 1.65x covered by core FFO for a payout ratio of 61% of core FFO. On to some high-level comments on the business, Matt will provide a little more detail in his commentary. Despite unprecedented challenges in 2020, NXRT came through the year in pandemic in a make in very good shape. In fact, we believe that COVID and ensuing impact further prove the resiliency of our strategy, our market selections, our capital allocation strategy, our value-add strategy. Most importantly, our focus on affordable housing and Sunbelt markets and the resiliency of our tenant cohort.

[Matthew McGraner:]

Thanks, Brian. Let me start by reviewing our Q1 operational results. Although same-store NOI was essentially flat for the first quarter, due in large part to a double-digit increase in property taxes along with a peak high operational comp. We're excited about the portfolio's performance and the positive trends we're experiencing as our Sunbelt markets hit their stride. Cash collections remain favorable to NOFHC comps with 99% of Q1 rents collected and 97.8% collected for April. While federal stimulus and local rental assistance programs that Brian just mentioned have helped. Overall, demand for upgraded affordable housing in the Sunbelt continues to register at historical highs.

[Brian Mitts:]

Yes. Just real quick for go to Q&A. I think -- hopefully, my commentary and Matt, sort of showed the strength of the Sunbelt and value-add opportunity as well as affordable housing opportunity. And ironically, COVID just seems to accelerated a lot of the trends we were already seeing and I think we talk a lot about the net migration in our calls and investor presentations, and I think all that's bearing out and presents a very, very favorable platform for us to grow in the next few years. So with that, let's go to the questions.

[Operator:]

. Our first question comes from Amanda Sweitzer, Baird.

[Amanda Sweitzer:]

On your comments on your value-add program, kind of what levels of increases are you seeing in terms of renovation costs? And is that impacting your projected ROIs at all today?

[Matthew McGraner:]

Amanda, it's Matt. No, we're still seeing the 20-plus percent ROIs. In fact, the Q3, Q4 and even the first quarter have remained at that 21% or higher level. Any increases due to labor and/or cost of materials. I know there's been a lot of talk about lumber, et cetera. But list of our sourcing in terms of materials is done in both through BH and their capacity to get discounted pricing and then any additional costs we've been able to pass on to the tenants.

[Amanda Sweitzer:]

That's helpful. Good to hear. And then what were the drivers of miscellaneous income during the quarter? And can you talk about your decision to include it in NOI when I believe you've previously excluded in the past?

[Brian Mitts:]

Yes. And, so it's Brian. What was included in this quarter was business interruption insurance related to those down units I mentioned. And so we included in NOI to get more of an apples-to-apples comparison to last quarter. As I mentioned, we didn't pull in those units out. So we're still carrying the expense load and Q1 2021. Although, we did get a little bit of offset with the business interruption insurance. But still, it's a pretty big mismatch versus what the going rate for those units where the insurance company has their own for and us for calculating that. But that's what's included in there. And that's why we put it in ROI.

[Amanda Sweitzer:]

Yes. That makes sense and what I figured. And then last one for me. On the Tennessee Property Tax rate Susmit, I saw your note on valuations coming in a bit better than expected, but has the mill rate been announced yet? Or is that still an area of uncertainty?

[Matthew McGraner:]

It's still an area of uncertainty, but there's a lot of forces pulling hopefully in our direction from an ownership perspective. So we're cautiously optimistic there, but nothing has been decided yet.

[Amanda Sweitzer:]

Okay. And then is that continued uncertainty delaying your planned dispositions outside Nashville? Are buyers waiting to see what those property tax increases will be?

[Matthew McGraner:]

Yes. I think the millage rate as less of an issue versus the tax values, which came last Friday. So now that you have some certainty around the values we can, for example, take -- have better clarity on pricing for our 2 plan dispositions, Beachwood and Cedar.

[Operator:]

Our next question comes from Rob Stevenson, Janney.

[Rob Stevenson:]

Just a follow-up, how whole is the business interruption insurance versus if you had them available and lease them at prevailing prices?

[Brian Mitts:]

So it's about a $200,000 or so differential.

[Rob Stevenson:]

Okay. And then how quickly are you guys expecting to be able to get the 93 units down back into service? And were these already renovated units? Or is there an upgrade opportunity? Is there down as well?

[Matthew McGraner:]

Yes. There's an upgrade -- Rob, it's Matt. There's an upgrade opportunity for most of them because you had pipe burst or some kind of issue with the interior that you might as well go ahead and just renovate the whole entire unit we think that by June, July, we should have all them back in force.

[Rob Stevenson:]

Okay. And then last one for me. Anything in particular driving the sub 95% occupancy in Nashville and Las Vegas, given how hot those markets have been? That -- have you upgrades? Anything in particular asset or anything?

[Matthew McGraner:]

Yes. There's one particular asset in Nashville that drove occupancy there. That was brandywine. That was due to some amenity stuff that we had down during the storms during the first quarter. There at that asset. And then Vegas is just kind of a onetime thing. Today, we're -- I think we're over 95% occupied there as we sit there today. So it's been one of our stronger markets. We're seeing that migration from California, and it's been a kind of unique, great story for us when most of the folks thought it would be the other way.

[Operator:]

Our next question comes from John Petersen, Jefferies.

[Jon Petersen:]

Great. On the property taxes, I guess my first question is, does the 1Q results include like your anticipation of the property tax increase in -- on these Nashville properties. And then I was also wondering on the guidance, like if you're able to parse out the, I guess, the impact of every 4 year increase in Nashville, to kind of a more normalized property tax increase? Like what kind of normalized OpEx growth are you guys expecting to see this year?

[Matthew McGraner:]

Just for Nashville?

[Jon Petersen:]

Well, I guess I'm just looking at your guidance, was it like positive, like 5% to 7% ish, somewhere in that range. I'm trying to think if the 4-year increase wasn't happening in Tennessee this year, what would that number have been?

[Matthew McGraner:]

Yes. I mean, taxes in the first quarter, for example, in Nashville jumped 77%. And so that didn't happen. We'd be looking at a very different, I think, overall portfolio, same-store reported number. The guidance does incorporate the changes to Nashville which we are already carrying a very healthy budget for. So there's some modest pickup. I think, it's about $70,000 ish a quarter to where we budgeted taxes. The underlying kind of uncertainty on those 16 assets that I mentioned. We'll get clarity on, I think, 8 of those between now and the end of next quarter, which should help hopefully give us the ability to tighten that range even more. But overall, for our midpoint of 2021 guidance that's just been revised. We're still carrying an 11-plus percent increase year-over-year at the midpoint. So I still feel pretty good about where we're carrying it, and hopefully, our ability to realize some savings.

[Brian Mitts:]

John, Matt alluded to it in his answer, but to directly answer your question, Q1 results don't reflect any assumptions that we've been making for guidance. So in other words, it was just what we knew at the time. So to Matt's point, you saw some pretty dramatic increases in taxes in some of the markets in Q1 that we think will decline in our guidance.

[Jon Petersen:]

So the OpEx increases are going to get higher from that property tax impact over the balance of the three quarters of the year. But I guess, the upward trend in NOI will be made up for by accelerating rental growth? That the right way to think about that?

[Matthew McGraner:]

No, I think the OpEx numbers that we report account for the increases that we think that we'll get. I mean, we take -- we don't just look at our finger and put it in the air. We're consulting with our tax consultants. And they're very, very conservative. So we pushed them and try to figure out where we're going to land, and that's where we come up with our budgeted 2021 numbers in Q4 when we don't even have the information. So as the year gets better and we're -- our ability to litigate throughout the year materializes, then hopefully, we'll continue to see some savings. But the guidance, the bump, if you will, is a result of Q1 better occupancy and vacancy losses. And then combined with what we believe to be achievable revenue goals over the course of the rest of the year, which is basically growing revenues by anywhere from 3% to 4%, which historically we've been able to do and given the net migration trends that both Brian, I mentioned, we feel pretty good about.

[Jon Petersen:]

Yes. Okay. And so then on the -- that's helpful. And then on the revenue side, I guess, how much more aggressive do you think you can be on pushing rents on renewals this year? And I don't know if I missed it, but what was the tenant retention in your portfolio in 1Q?

[Matthew McGraner:]

I think 52% was the retention. The -- we're being very aggressive. What I can tell you in April, which I reported, I had to check with our guys to make sure I was right when we saw April numbers because they were 11-plus percent, 20% in Florida. We're sending out renewal notices in markets that are strong and experienced that migration from South Florida, Phoenix, the Atlanta these types of markets, in some cases, noticing tenants 10% or 15%. And that way, we can replace the tenant with someone that's either willing to pay that or renovate the unit and get the 11%, 12% increase in terms of the new lease rate that's improved. So I think that's going to continue in May and in June, especially if you walk around the streets and some of these communities and see the virus and the activity, it's good to see.

[Jon Petersen:]

Okay. And then just one more for me. I think you guys said 25% of your applications were coming from New York and California. And I think that's about 50% of your out-of-state applications. Can you remind us what those numbers were kind of pre pandemic, so we can kind of have a base level there?

[Matthew McGraner:]

Yes. It's top of that. So pre pandemic, at least in Q1 of 2020, California was 8%, 9%, now it's 19%. New York was 1%, 2%, now it's closer to 10%. So it's a doubling year-over-year.

[Operator:]

Our next question comes from Buck Horne, CIMB

[Buck Horne:]

You haven't mentioned it, what the bad debt accrual was for the quarter as a percentage of gross revenue and with the, I guess, additional assistance, you're expecting to come through from government rental assistance. What's the prospects that you're your -- or what's embedded in your guidance for a bad debt accrual going forward? Does that have a chance of normalizing in the back half of the year?

[Matthew McGraner:]

Yes. It's Matt, Buck. Q1 bad debt was about $700,000 and then we have it normalizing to $350 million in Q2, high $200,000 for the rest of the year for a total of about 1.6 -- $1.6 million, which is about double of what it should be. And in 2020, the whole year was 2.6%. So hopefully seeing that come down, but still healthy enough of a pro forma number within the guidance that might help us see some savings later on of the year.

[Buck Horne:]

Perfect. Very helpful. I wanted to also just dig in a little bit on the new lease rates in the first quarter, just Houston, Orlando, the two that kind of jumped out is negative. I'm kind of curious about Orlando, in particular, given the strength of that market. But anything in particular in the new lease rates in those markets that's notable?

[Matthew McGraner:]

Yes. I mean, there's really one deal that was the pain and that was Sable palm. That was the Disney deal. The occupancy was a challenge in the latter half of the year. And we saw in Q1, we bought some occupancy there and got -- new lease rates were down 3.5%. Renewals were positive 50 basis points. Occupancy then materialize to over 94.5% as we sit today. So that's good. And then in April, sable was positive by just 20 basis points, and then renewals were positive by 60 basis points. And so in April, the Orlando market in general will perform pretty well so far. New leases are up in April and Orlando at 5.4%, and the renewals are about 60 basis points. So we're covering recovering pretty well there. And then the one asset in Houston that's just a larger asset and that had some storm-related noise with Old farm. And that, too, in April, has recovered. In the Houston market is positive well at 1.6% for April on new leases and 1.2% on renewal.

[Buck Horne:]

Awesome. Very thorough. And one last one just quickly. Just wondering if -- given the tightness and the competitiveness of the acquisition market, I mean, what's the realistic goal in terms of acquisition and disposition throughout the remainder of the year? And what do you think is achievable?

[Matthew McGraner:]

The dispositions, I think that we're going to -- we will transact on beach with this year. We've just completed our business plan. We're going to make a ton of money there. And then we're going to look to recycle the proceeds I do think the $100 million on the acquisition front is achievable. Some of the larger deals or cluster portfolio deals that we look at are still tougher to buy and execute on for most value-add leverage buyers, especially given the cap rate. So I think we're I'm cautiously optimistic in places like North Carolina or Phoenix where we can take advantage of some of our ability to find $100-ish million deals and move quickly and decisively given our scale in these markets and come up with some great properties for our investors.

[Operator:]

Our next question comes from John Massocca Latin Berth Allan.

[John Massocca:]

I guess maybe building on the acquisition environment, how sensitive have cap rates and demand been to interest rate fluctuations and I guess, specifically, was there any change in kind of the broader market, and again, that showed acceleration in rates earlier this year? Or have they largely been more a function of kind of demand?

[Matthew McGraner:]

Yes, yes, I where you're going. So the spike in interest rates, we thought would create an opportunity for some deals that would fall out due to some of the leverage nature of a value-add buyer, that didn't occur. So the deal is that I mentioned in Scottsdale that we bid on the Paragon deal that's a 3% in place cap rate. So when you grow leverage on there, you're barely breaking even. And so that's kind of just made us scratch our heads. But it's continuing to be to be competitive as we sit today, and spreads are coming in a little bit as interest rates rise. But so far, there's it offers for every value deal we're seeing that's marketed.

[John Massocca:]

Okay. And then maybe going back to the first question on the call. I guess, how, if at all, has the calculus changed with regards to rehab budgeting? I mean specifically, maybe what has been the cost growth in terms of the inputs for rehab? Or if you want to take the inverse of it, kind of what has been -- what is the new, if at all, kind of expectation in terms of rent, you need to get out of a rehab projects now?

[Matthew McGraner:]

Yes. I don't think in terms of the actual cost -- I think, has been pretty consistent. The biggest driver of the increase is to the extent there is an increase. What I would say is we're just buying higher quality, larger unit deals. The average unit size is 800, 900 square feet instead of 600 or 700 square feet, which just naturally makes you have to buy more materials. But in all cases, without exception, not even needing to knock on wood, we've been able to pass-through the increases to the extent they're already in cost and receive those at 10%, 12% rental increases. So the demand is there, which is exciting for us because we're an internal growth company at our core, and we have another 1,500 units to do this year. So we're hoping we're going to do more in Q2 and Q3 and plan to and produce good results.

[John Massocca:]

I guess, broadly, what has been the increase in kind of input costs?

[Matthew McGraner:]

I think it's our decision to go with a higher upgrade, higher quality upgrades. So instead of -- maybe like a vinyl countertop or courts. We're trying to grant it. In some cases, we're doing inside lack appliances. We're doing stainless are . So those kind of bespoke type of choices that we're making them because we think that the demographic at these sites wants that, and we'll pay for it.

[John Massocca:]

Okay. And then one last detailed question. I know it's a much smaller number than tax. But where do we maybe sit in the insurance cycle? And could there be any impact to kind of insurance expense growth given some of the events this winter, particularly in Texas?

[Matthew McGraner:]

Yes. So our renewal is March 1. So that basically got priced into our renewal, meaning the winter storm or is best that they could, given the information at the time. We continue to pull different levers like trying to take different risk verticals or horizontals within the stack. But it's certainly been a challenge over the last few years. There's been a lot of events, anything in the hurricane area gets a premium put on it. But as with taxes, we do a lot to manage that situation. And I think with our increasing bulk, we're able to get better pricing and otherwise would be the case if we're a smaller operator.

[Operator:]

So our next question comes from Michael Lewis, Truist Securities.

[Michael Lewis:]

I just had a quick question about -- I think Brian said that cutters it out of the same-store pool. You've got a bunch of these 93 units at a handful of properties that are not included in 1Q. So when you give the full year same-store NOI guidance, are these units at these specific properties out for the whole year? Or as they come back online, they come back in? And do you expect that to be a tailwind or a headwind? How do we kind of think about those?

[Brian Mitts:]

Michael, just real quick, just to clarify, we do include the 93 units in the same-store pool. Meaning there is...

[Michael Lewis:]

So as they sell back up then, that will be a to your SAAR growth.

[Brian Mitts:]

Correct. So it's a detractor for Q1 as we compare that to Q1 of 2020. Is the 93 units are in both. Unless we're talking about occupancy or something like that. But as far as results, it's still in that pool. We did get some of the business interruption insurance accrued for in the first quarter, but not all of it. And then we're still carrying all the costs of those properties.

[Michael Lewis:]

Okay. I see. So it's bridging the 2.1% same-store revenue growth you had in 1Q, for example, to get up to the guidance range, which is materially higher. That's -- maybe that's a small piece, but that's a piece that will help kind of bridge that gap.

[Brian Mitts:]

Correct.

[Michael Lewis:]

Okay. And then just lastly for me. The stock valuations improved. You're now trading right around the midpoint of your NAV range. Do you think about maybe issuing some equity and freeing up that credit facility, which has been largely drawn for a while?

[Matthew McGraner:]

Yes. Michael, it's Matt. I think I think we're going to continue to monitor it. It's kind of in concert with the planned dispositions. Kind of the good news and sort of the opposite side of -- in the acquisition market is the disposition market. I think when we dispose these deals, I think we'll probably get a little bit more than we thought we otherwise would at the beginning of the year. So we're going to look to use all the tools. But at this stage, we don't have any material plans one way or another.

[Michael Lewis:]

Actually, maybe I'll ask one more, which maybe you answered this mostly, you got asked a little bit about the new lease rates versus the renewals. I noticed, of course, the new lease rates are more than renewals in a lot of your markets. Is that largely a function of what's happened with the rehabs doing better? Or is there another dynamic there at play that's causing those new lease spreads to be better than the renewal spreads?

[Matthew McGraner:]

I think it's some of the renewal -- or excuse me, the upgrades, but I think what it speaks to more is this net migration. I think that we're seeing the demand and occupancy and people moving to these sites, in these markets that -- where we have vacant units our revenue managers are telling us that we can try to hit these numbers and sort of the stale factor is coming in, and we're able to push pricing on a daily basis, just given the markets that we're in, we're seeing folks pour in. So I kind of chalk it up to probably more of the net migration, more than anything else.

[Operator:]

There are no further questions in the queue at this time.

[Brian Mitts:]

Great. Well, thank you. I appreciate everybody's participation, and we'll talk next quarter.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.