NexPoint Residential Trust, Inc.
Q1 2017 Earnings Call Transcript

Published: 2 May 2017

[Operator:]

Good day and welcome to the NexPoint Residential Trust Incorporated First Quarter 2017 Conference Call. Today's conference is being recorded. At this time. I'd like to turn the conference over to Marilynn Meek. Please go ahead.

[Marilynn Meek:]

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. 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 site www.nexpointliving.com. Additionally a copy of the company's first quarter 2017 supplemental information is available for your review on the Investor Relations section of the company's website under financial material. 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 also be identified by words such as expect, anticipate, intent and similar expressions and variations or negatives of these words. These forward-looking statements include but are not limited to statements regarding the company's time for financial results for the 2017 full year and expected property dispositions and the use of proceeds there from. They are not a guarantee of future results and are subject to risk, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward looking statement. 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 risk and other factors that could be 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. The conference call includes analysis of funds from operations or FFO, core funds from all operations are core FFO, adjusted funds from operations or AFFO and net operating income or NOI. This 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 income accordance with 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.

[Brian Mitts:]

Thank you, Marilynn. I want to welcome everybody into the NXRT first quarter 2017 conference call. I am joined here with Matt McGraner, Executive Vice President and Chief Investment Officer and as Marilynn mentioned, I'm Brian Mitts, Chief Financial Officer. I'm going to begin with some highlights from the quarter and then discuss at a high level some of our Q1 results. Then I am going to turn to over Matt and let him talk about the portfolios and some in detail and some other items. We'll come back and discuss guidance for the remainder of 2017 and then turn it back to the operator for questions. So let me get started on the highlights. We feel first quarter was a pretty solid start to the year. Just stepping back and looking at the stock price, our prices up 11% through yesterday's close, 12% if you include the dividends, which you think is a good performance versus peers in the index. We reported GAAP net loss of $3.3 million, which was driven by an increase in depreciation $2.8 million over Q1 of ’16, which is primarily related to the acquisition of the Houston portfolio. At the end of 2016 in the Hollister Place our property in February, as well as an increase interest expense of $1.9 million, which is also related to the debt that we use to acquire both the Houston portfolio and Hollister Place. As we mentioned in previous discussions, disclosures and presentations, we utilized debt to acquire those portfolios with a plan to pay those down via reverse 10

[Brian Mitts:]

Thanks, Brian. Let’s dig deeper into the value add results, the same store recap and leasing activity and in some capital recycling. From value add perspective as of today reflecting the four assets sold in the first quarter, all the remaining 35 active assets have some type of rehab in progress, approximately 73% of all budget exterior and common area dollars has been spent and approximately 57% of all budgeted interior dollars have been spent. As we reported earlier, we completed 427 upgrades, two units for the quarter, portfolio wise and since in its inception, excluding the sold properties we have now upgraded 4460 interiors or about 33.7% of the growth portfolio for an average cost per unit of $4800 achieving approximately 21% Our ROI ended $86 per month increase. The same sort recap as Brian mentioned, we reported 8.4% same store NOI growth over the prior year. The same store fours reached 87.5% of our properties or 11,409 units. Our rental revenue increased Brian mentioned by 5.6%, digging deeper into that number we achieved the following results as compared to the prior quarter. Market rent was up 6% on the top line. We did better un-loss [ph] the lease recording at 22.1% reduction, also did better in vacancy [ph] the loss recording at 10.2% improvement there. Average rent increased to $857 in the same store pool from 813% percent or $813 or 5.3% percent increase. Other income as Brian mentioned was 19% better year over year, led by strong upfront fee which was $83000 increase year every year at 20.2% increase and then valley trash [ph] program continues to help drive other income as well, that was 166,000 increase for the first quarter. The same store by market, Dallas was up 8.3%, Houston up 3.3%, DC metro area was up 5.5%, Atlanta was strongest at12.6%, Nashville was 3.6%, primarily due to real estate tax adjustments. Charlotte was 5.4%, Phoenix was 9.3%, West Palm Beach was 7.1%, Orlando was 7.8%, Tampa at 9.2%. Same store effective rent by market was also as strong and continues to be robust with five markets producing 5.3% or better effect rents year over year. On the leasing activity front, we saw strong effective rent growth across the portfolio year-on-year same, same year at new tenant for the first quarter although being slower part of the year we saw 2.6% growth in new leases, some of the markets with the highest were West Palm Beach at 7.23%, Atlanta at 4.82% and Dallas and Orlando each pushing over 3.5%. Renewal growth also continue to be robust with 4.8 9% overall on 1379 renewals during the quarter. So $42 average monthly increase. Nashville was the highest at 6.82% during the quarter. Atlanta was second with 6.68% growth on renewals. Charlotte came in third at 5.86% and Tampa and Dallas rounded out up the top five with new increases each about 4.63%. On the capital recycling front, as we previously discussed subsequent to the quarter we saw 3% [ph] in Dallas, Myanmar, Susquehanna 12

[Brian Mitts:]

Thank you. So before we recap and then turn over to questions, let me go through our guidance. We are reaffirming our 2017 full year guidance as follows, revenue low in $142 million, high end $144 million for midpoint of $143 million. Net income $26.25 million on the low end $28.25 million on the high end for a midpoint of $27.25 million. NOI $75 million on the low end, 77 million on the high end for midpoint of $76 million. FFO per diluted share $1.55 per share in the low end, $1.64 per share on high end for midpoint of $1. 60 cents per diluted share. Core FFO on the low end $1.58 per diluted share, $1.67 per diluted share on the high end for midpoint of $1.62 per diluted share. And finally AFFO $1.80 per diluted share on low, $1.80o per diluted share on the high end for midpoint of $1.85 per diluted share. Same basic assumptions last quarter overnight projecting any additional acquisitions or dispositions beyond what we’ve already discussed. Obviously as Matt discussed, we are engaging upon a refinancing strategy. These numbers don’t necessarily reflect all that. It does reflect in these swaps that we put in place and the pay downs of the debt from the 4 dispositions, as well as the anticipated pay downs from the Regatta Bay disposition. With that let me just give a couple of closing thoughts and kind of recap. We continue to focus on our recycling of capital on a tax efficient manner and growing NOI, FFO and core FFO and AFFO per share. We think that we’ve done a pretty good job of that here and as Matt mentioned continue to be active looking for opportunities that fit into what we're trying to do. We will continue to position the balance sheet in the capital stack for the future. Walking in more certainty by fixing more a larger percentage of our debt and try to take advantage of some of the things we see in the marketplace there's Matt not talked about. We’re going to continue to use reverse 10

[Operator:]

Thank you. [Operator Instructions] And we'll take our first question from Daniel Donlan with Ladenburg Thalmann.

[Daniel Donlan:]

Thank you and good morning. Just wanted to dig little bit into the guidance, is the additional $150 million of interest rate swaps, was that originally part of your thought process when you put out guidance. Was that kind of - is that that kind of potential you know, head or potential plus you know kind of versus what you originally expected?

[Brian Mitts:]

Yeah, it was in the original guidance we put out in March. So that's new for this quarter. But we felt there was other changes that overall guidance was right in line with where it was before. Also as mentioned and Matt talked about in little bit of detail, it’s kind of done in conjunction with refinancing strategy to take advantage of tighter spreads. So it's kind of a net wash ultimately.

[Daniel Donlan:]

Okay. So it sounds like fundamentals are maybe better than you expected when you put it out and that's probably making it a net wash, is that fair to say?

[Brian Mitts:]

Yes, I think that part, but then also the decrease that we expect to get from refinances from the debt these swamps recovery.

[Daniel Donlan:]

Okay. And then the jump in same store maintenance costs. You know I think of competitive years for put some of their repair and maintenance expense in the winter months, we just kind of curious if that something similar was going on with you guys or is this something that we should expect to remain elevated in future quarters?

[Matt McGraner:]

There is two components of it. One is the higher turn costs. We had a higher turnover ratio in the first quarter than it’s been in the past. So that was a decent component of it. The other part was it - was sort of an implementation or continued expansion of some of the other income items that have to hit the arm in bucket based on our policy. For example Valley trash [ph] and rolling out Valley trash there's an immediate expense taken to the rollout of the program. But it’s then recaptured through the other income bucket. The net effect of it is that for every dollar that we spend on Valley trash and other income buckets we get about $1. 63 back, but it have an increase in the line item.

[Daniel Donlan:]

Okay. Okay. And then I think you talked about in the past that you might have to get some tax reductions at the Houston properties. And given what you paid versus what the prior owners pay, we’re just kind of curious you know when you think that those benefits would hit you know and how you're progressing toward that goal?

[Matt McGraner:]

Yes, so we're actively working on it. It's a good question and I would say it's a portfolio wide question that we're currently working on. We think that the numbers the real estate tax numbers in our guidance and our budgets are conservative. So we're hoping to beat those, not withstanding the municipalities robust interest in finance. That being said for the Houston assets, specifically the H2 and Hollister Place, we think that will some clarity on those by the beginning of the third quarter.

[Daniel Donlan:]

Okay. Okay. I appreciate that. And then I'm sorry I got a little bit late this – a lot of this morning, but just kind of curious if you could characterize the current acquisition environment. You know it certainly seems to be pretty competitive. But you know you do have a lot of capital avail to you, you know whether it's you know to your debt, I am just kind of curious you know your general appetite for acquisitions going forward and kind of where you know where you see - if you see opportunities out there and you know is a more one off or is there any potential you know smaller portfolios you think that you can you can pick up especially given that there's been some big trades and you know oftentimes when that happens you know there's a couple of properties that may shake out that may not be viewed as core to somebody else but it could be for the years?

[Matt McGraner:]

Yes, it’s a good question. We first start by saying we think that there's a robust market for demand in the middle income rider [ph] profile which is where we play obviously and we don't see that waiting off any time soon. So we still like the market a lot and we're still pursuing acquisitions or being under the 10 if you will in a number of opportunities, but we're also being patient. I’d say that for smaller deals, sub $30 million, the competition is still very robust. You know have 10 12 offers, everyone in close. Sometimes you have a 10%,31% that just you know those are stupid number and it beats everyone. So we've seen now a lot of. We’ve also around sell side and we're continuing to take advantage of it. But we focus mainly is the $20 million to $50 million our equity check range where you know a few folks could play especially for these types of value add assets. We're outside of the core fund. And then we're outside of the core corpus fund guys. And then we're you know we're outside of the private regional guys as well. So we're focusing on that in 2015 with our pre check range and don't have anything yet, but we're certainly - we're certainly trying to dig up opportunities and exist.

[Daniel Donlan:]

Okay. Okay. And then just curious going back to your comments about you know the maintenance costs being elevated this quarter because of the higher turn. Is there any trend there that you can maybe point to, maybe it was just like one or two assets, but you know is it you know what do you thinks been driving, you know what drove that higher turn in the first quarter relative to kind of maybe past quarters?

[Matt McGraner:]

I think in past quarters or with respect to that it's time over Q1 of 2016, we have created more units and we're pushing – and not pushing people out, but we're certainly trying to push rents at higher cliff and that end you know, March was pretty much I'd say the big impact of that and that's typical with spring leasing season , yes, March, April, May June is when you can see when you're going to see higher term and you should also see higher rents which you know as I said in my prepared remarks April was incredibly strong for us and we don't and we don't think that's going to stop the functioning.

[Daniel Donlan:]

Okay. I appreciate the color.

[Matt McGraner:]

Thanks, Dan.

[Operator:]

[Operator Instructions] We'll go next to Ryan Meliker with Canaccord Genuity.

[Ryan Meliker:]

Hey good morning guys. Thanks for a lot of good color earlier and to Dan's questions. I just want to talk a little bit more about Houston you talked about the property tax dynamic that could unfold to Houston will address your properties. I'm just wondering when you think about Houston specifically what are you seeing across that market. Do you think that fundamentals are going to start to turn positive soon in a meaningful way? Do you think it is just that the second derivative and the pace of deceleration is sighted. And are you seeing that start to impact the valuation?

[Matt McGraner:]

Very, very good questions. I wouldn't say the tale of two cities and that tells you asset are class sizes or class type. So [indiscernible] eastern and the western portion - the western portion is still a challenge regardless of if it you know class A or B. But these are stronger and then the eastern portion continues to be strong, an example is our sailing in Regatta Bay that’s going to sell for you know assuming its starts sale out 5.5% cap rate on an T3 over T12 adjusted. So that's on a nominal basis. And then within sort of the you know the 10, I think I may have mentioned this on the first quarter call or the fourth quarter call, a lot of people are focusing again on using the think that there's a bargain which is increasing the size of the transaction activity and the number of people focusing on trying to get a discount. So there are no shortage of buyers in that market today at least as it pertains to class-B assets. I think that you know you've heard both in America say this they are focusing on the you know the lease up opportunities in class-A which seems like a strong smart strategy because there are many opportunities I this year but it's just not our [indiscernible] so to speak. As far as demand you know in part of our H2 acquisition we think the 17 deliveries are still going to be probably that net neutral because we're still going to be some, the ’18 the supply really falls off a cliff. And again if you get any sort of stable stabilization and job growth there which we're seeing and when we'll publish down on this review presentation. I think the market's going to you know turn positive in the early to mid half of 2018.

[Ryan Meliker:]

Great. That's helpful. And then just one other real quick one we had you know you did you gave some good color surrounding interest expense and what you guys are doing from a refinancing perspective. Obviously you sold some assets pay down some debt more recently. As we think about you know how of the next three quarters are going to trend from an interest expense perspective. You know can you give us some guidance in terms of what we should expect you know is it going to moderate and we're going to be at a run rate basis comparable you know for three consecutive quarters in a row or is it going to gradually wind down based on how swaps come into play and when you when you as you execute your refinancing strategy et cetera?

[Matt McGraner:]

Yeah, I think going forward looking to this second quarter you will see a decrease based on the debt we paid down already and will continue to pay down. And I think given the assumptions that we're making which is no additional acquisitions or dispositions, you'd see kind of moderate and get on the run rate. The difference would be if we did some acquisition and didn't raise the equity and did what we did with the Houston Hall's portfolio where perhaps we use leverage to fund them and then use the sale after the fact to pay down that additional debt. So you may see it jump for a quarter, but they will come back down and that maybe something that happens over time that it’s a decrease in then decrease back down to a more normalized run rate.

[Ryan Meliker:]

Got you. That makes sense. That's helpful. Thanks guys.

[Matt McGraner:]

Thanks, Ryan.

[Operator:]

We’ll take our next question from [indiscernible] with Jefferies.

[Unidentified Analyst:]

Good morning guys. I just a quick question on the M&A call you did hear some commentary about new supply and many of the market and I think that's one of the key reasons that took down same store revenue guidance. Granted you guys do not focus on the exact same type of properties. But could you just talk a little bit about kind of what you were seeing in your markets and specifically what you're seeing in regards to the product type that you're targeting to supply headwind?

[Matt McGraner:]

Yes, absolutely. So our two largest markets Dallas and Atlanta are certainly seeing supply, Dallas especially most of that is in the you know in the case of Dallas the uptown area you have some [indiscernible] but the majority of it is sort of in the CBD uptown area. Same thing as it relates to Atlanta and the perimeter in Buckhead and it's on the top end to the class there class A or class A - luxury and for the most part as that relates to our products. You know we said in the past that you know a new developer in our markets needs you know $15, 1700 range for a one bedroom to get you know 4% stabilize yield. We need $800, 850 to make it 6. So there's still that to get into a retail rent between class A B markets and the market and the market just doesn't allow for new construction of affordable housing which is the segment that we focus on. And you know late last year you know a tax credit developer in which case you're in a different demographic and area of the city in general. So we think that seeing new construction in our markets is good because it just helps you know show that rent demand is there. All that being said, it is still very, very difficult or increasingly difficult to get a construction on. Whereas you know a year or two ago you could get a construction loan with 25%, 30% equity today 40%, 50%. So we're seeing you know we're seeing entirely new standards in an age waiver of wage and labor costs continue to rise. And then there's less land available so all that seems to be pointing to signs of moderating supply. Our markets still have strong permitting data. But you know eventually I think that those factors will lead to lots of fire.

[Brian Mitts:]

And it's worth mentioning as far as our strategy as Matt mentioned in prior question. We're trying to play in that $20 million to $50 million equity check range where there's less competition. So if you take the supply question out of it and focus on the bidding for our assets there's not a lot of people I think who we are because of the public agree or lower cost of capital well-positioned to compete in that area, particularly in these markets.

[Unidentified Analyst:]

Got you. And another one for me. Could you just talk a little bit about the your [[indiscernible] on your Phoenix market where you have negative year-on-year growth rental rates is kind of what's happening with market dynamics?

[Brian Mitts:]

So DC is market that I would say it was our weakest at the Frederick Maryland, some market was our weakest asset market and obviously with the sale of our second asset there drove it all in which we made money on a pretty decent return, we're out of. So those were assets that say it doesn't feel anything about the you know the DC metro area in general. With respect to Phoenix. So Phoenix is again an asset specific topic. One of our - two of our largest properties there Colonnade in the Point at Foothills, our larger properties that we are focusing more have focused more on our debt in the first quarter and into the fourth quarter making sure we had heads in the beds such that we can start implementing our business plan and turning units and upgrading needed on turns as they roll and then the total revenue in Phoenix. If you look at it just from the above net effective rents and the other income was actually up 6.7% percent in the quarter. So while we were moderating to 54 in the door in occupancy up to stabilize those two properties that are higher in 93%, 94% percent cliff we did see a pretty significant outperformance in total revenue there.

[Unidentified Analyst:]

Got you. Thank you very much.

[Brian Mitts:]

Thank you. That concludes today's question-and-answer session. This time I'll turn the call back to Mr. Brian Mitts for any final remarks.

[Brian Mitts:]

Thank you. We appreciate everyone's time. Very good questions. Hopefully we got some good color out there and hope people kind of think about what’s headed here in 2017. We look forward to. I am mad seeing everyone is NAREIT New York and then we'll be back in August on Q2 call. So thank you very much.

[Operator:]

This does conclude today's conference. Thank you for your participation. You may now disconnect.