NexPoint Residential Trust, Inc.
Q2 2017 Earnings Call Transcript

Published: 1 Aug 2017

[Operator:]

Good day, everyone and welcome to the NexPoint Residential Trust Inc., Second 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 second quarter ended June 30. 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 second quarter 2017 supplemental information is available for your review on the Investor Relations section of the Company's website. 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 expected property acquisitions and dispositions and the use of proceeds therefrom, expected results from the buyout of BH Equities' minority interest, and NXRT's strategy and guidance for financial results for the full year 2017. They are not guarantees of future results and are subject to risks, uncertainties, 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 risks and other factors that could affect any 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 also includes analysis of funds from operations, or FFO, core funds from operations, or Core FFO, and adjusted funds from operations, or AFFO, and net operating income or NOI all which are non-GAAP financial measures of performance. These non-GAAP measures should be used as a supplement to and not a substitute for net income loss, computed in accordance with GAAP. For a more complete discussion of FFO, Core FFO, AFFO and NOI see the Company's earnings release that we 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 would like to welcome everyone to the NXRT 2017 second quarter conference call. I am Brian Mitts, who joined here with Matt McGraner. I going to kickoff our prepared remarks by reviewing some of significant transactions we completed in the second quarter, I will review the Q2 results, and then I will discuss our revised guidance for full-year 2017 and discuss the reasons behind this revision. Then turn it over to Matt for detailed discussion of portfolio and it’s more in-depth discussion around Q2 activity. So we start with the major transactions we completed in the second quarter. Keep in mind that three of the four that I am going to talk about, we closed them in the last day of quarter. That's an important point because there is some one-time cost of all these transactions which hit in the second quarter, but there is no positive impact in the second quarter from these transactions. Although, we think that they are – there is some significant upside in the future. Let’s start with – let me just say kind of in the late May, we embarked on some of these transactions in an effort to increase our now longer term in our FFO and Core FFO over the coming quarters. Doing this, we do a little bit of short-term – now as usual I will talk about here to effect these transactions, but we think that the long-term benefits far outweigh any one-time costs. I'm going to discuss these at a high level in the map. We will discuss in some more detail on this prepared remarks. First, we completed acquisition of the Rockledge property. It’s a 708-unit property in Atlanta for $113.5 million. This was part of the 1031 transaction or reverse 1031 which we've done in the past as part of our tax efficient recycling of capital program. We intend to essentially swap this out with another portfolio, a four-property portfolio in Atlanta. We anticipate selling in the fourth quarter of this year and we anticipate a cap rate on this, Matt will talk about this in a little more detail, it’s in our supplement as well. We sold at a lower cap rate and bought the Rockledge property at a higher cap rate. The second transaction was the buyout of BHs minority stake for $51.7 million. BH is of course our property manager, who's been our joint partner from the beginning. We felt that their interests which was essentially equity represented some of the most expensive capital on our balance sheet, so bind it out was accretive particularly the price which we did it simplifies our financial presentation as well as our forecasting which is positive. We were able to accretively buy a large portfolio essentially that we obviously knew well, we’ve been managing it and with the transacted price that was mutually beneficial both for us and for BH. We estimate that this transaction in the future years will bring $0.18 to $0.20 per share to FFO and Core FFO. The third transaction as we embarked upon a refinancing of 22 mortgages, totaling $468 million. In the process, we lowered our spread by 57 basis points on the effective debt. We took advantage of tighter spreads that Freddie was offering on floating-rate debt. We didn't incurs more time cost in the form of [indiscernible] modification costs, but we also will be reducing our annual go forward interest expense by $1.7 million. As part of this transaction, we took an additional $34 million proceeds to help fund the BH buyout which we mentioned above. We estimated that this will add $0.08 per year to FFO and core FFO. The fourth transaction, we added three swaps for $250 million this quarter. We actually entered into one of the swaps in Q1, but it didn't become effective until April 1. This also simplifies our forecasting by 2016, the vast majority of our floating-rate debts. We don’t have that variable within our forecast that we are trying to qualify for. We've essentially narrowed mortgage debt, so that does not include the mortgages on the properties that we list is held for sale nor does it include our revolver bridge facilities as those are shorter-term. So essentially our long-term debt is now 98% fixed. The all-in fixed rate is 3.34% and that's locked in until June of 2021 when about two-thirds of these swaps mature. So this gives us certainty over the next four years to five years for our interest costs on our long-term existing debt, which we think is a huge positive. So kind of recapping, we think these transactions when keeping with our long-term plans of maximizing shareholder value for accretively recycling capital in a tax efficient manner, prudently managing our balance sheet and continually upgrading the quality of our portfolio. As I mentioned, Matt will discuss these in a little more detail in all different perspective in his prepared remarks. We move on to the second quarter results which you think was another solid quarter particularly from a same-store perspective. Total revenues were $35.2 million for the second quarter 2017 as compared to $33.7 million for the second quarter of 2016. Net income was $9.9 million versus $16.6 million in the same quarter last year. FFO was $1.7 million or $0.08 per share versus $7.2 million or $0.34 per share in Q2 2016. Core FFO was $6 million or $0.28 per share versus 7.9% or $0.37 per share in the prior quarter last year. AFFO was $7.4 million or $0.34 per share versus Q2 of 2016 was $8.3 million or $0.39 per share. NOI for the second quarter 2017 is $18.1 million versus $17.4 million in the second quarter of 2016. Same-store rents increased 5.2%, same-store occupancy was down slightly by 40 basis points from second quarter 2016 to 93.3%, same-store revenue increased to $29 million from $27.2 million in the same quarter last, 6.6% increase, same-store expenses increased to $13.7 million from $12.8 million in the same quarter last year, that's a 7.1% increase driven primarily by higher real estate taxes, we will talk about that in a minute, same-store NOI increased to $15.3 million versus $14.4 million in the same quarter last year, which is a 6.2% increase. On the rehab front, we completed 401 units in the second quarter bringing our total to 4,524 units that we rehab in an average cost per unit of $5,116 which is just inclusive of the interiors. That produced a 21.8% historically return on investment – our portfolio. Core FFO coverage 1.51 times for the six months ended June 30. Before I turn this over to Matt for his remarks, let me walk through our revised guidance. We are going to revise full-year 2017 guidance for the following reasons. It means all impact FFO, Core FFO and adjusted FFO unless I mentioned it otherwise. One-time costs regarding the transactions that I mentioned above essentially $0.22 of this revision. That’s added back to Core FFO, so does not impact Core FFO or AFFO. These include prepayment penalties, putting on the going refinance, flushing out of deferred financing costs on the plan disposition of the landed portfolio to close the Rockledge 1031 and then modification cost from the refinance. The second item is higher interest costs, which is about $0.12 is related to increased debt. We essentially funded the Rockledge acquisition as well as BH buyout of 100% debt, which we didn’t sent to paydown with the portfolio of sale we’re making it in the fourth quarter. With the new swaps that we added that had reference rates of 1.78 to 1.96 compared to one-month LIBOR, which is about 1.23 today that added some cost to interest, but again we feel that the cost is worth given the certainty in the low rates, which we've walked in our fully rate debt. Additionally, within the interest cost we had higher deferred financing costs write-offs with the expected sale on that land of portfolio, which is partially included above in the first one. The third item is real estate taxes. As we mentioned before, we see some of the municipalities aggressively push values higher. We've protested these and if necessary we will litigate them. We do expect a decrease to these through year protest or litigation. So if we are successful on that and in the future quarter, those will come back around and be increased, but however we're including them under gap and we're in guidance as a result. The fourth item, a little bit of an arcane piece, but hedge accounting under GAAP as refinance debt on that are covered by longer-term swaps that we designate those and create some accounting entries and some noise that account for $0.03 for the difference. So that's the major bulk of the difference in our guidance, so revised guidance for fiscal year 2017 is as follows, revenue on the low end, $143 million, high-end, $145 million with the midpoint of $144 million. Net income $52 million on the low-end. $57 million on the high-end with the midpoint price of approximately $54 million, NOI, $75.25 million, high-end $77.25 million, midpoint $76.25 million. FFO per share on a diluted basis $1.12 low end, $1.20 in the high-end with the midpoint of $1.16. Core FFO per share diluted basis $1.35 on the low end, $1.45 in the high and the mid point of $1.40, AFFO per share on a diluted basis, $1.60 on the low end, the $1.70 on the high-end for the midpoint of $1.65. We updated our acquisitions from a low end of $140 million, which includes some of the acquisitions to-date to the high-end of $200 million to account for potential acquisitions. So midpoint of $170 million and dispositions $225 million of low end, $230 on the high end of the midpoint $227.5 million. So this guidance represents decrease to FFO per share $0.44, $0.22 or Core FFO in $0.20 for AFFO per share, due to the reason just mentioned. So with that let me turn it over to Matt for his comments.

[Matt McGraner:]

Thanks Brian. I'm going to begin by reviewing portfolio performance and then flesh out from the significant transactions that took place during the quarter. As Brian mentioned, starting off with a value-added result. We completed full in partial renovation on 401 units at an average cost of $5,459 per renovated unit. The SW was the largest MSA that we have a unit in at 122 upgrades. We achieved 22.1% ROI on those upgrades. Our second was Atlanta. We had 94 units and achieved 18.4% ROI on those units. Nashville was the third largest MSA with 37 units, upgraded during the quarter with 20.2% ROI achievement and Orlando was the fourth with 35 units upgraded and achieving in 19.4% increase on those units. On the same-store basis, the full for Q2 encompass 10,211 units or about 80% of our portfolio of the average rent increased to $884 per unit from $840 a year at the 5.2% increase. Total revenues increased 6.6%, expenses were up 7.1% largely driven by Brian mentioned 17.5% increase in real estate tax assessments that we had a chance to appeal later on this year and intent upon doing. We also have higher turn cost in R&D and the returned 400 more units during the quarter in 2017 in the second quarter of 2016. All this resulted in the same-store NOI being 6.2% for the quarter. Same-store by market, Dallas was 6.3%, the DC metro area, which is one property, was 30%, Atlanta was 5.3%, Nashville was 5.8%, Charlotte was 7.6%, Phoenix was 8.3%, West Palm Beach was 5.9%, Orlando was 4.5% and Tampa was 10.5%. On the leasing front, we achieved incredibly strong effective rent growth during the second quarter year-over-year coming in at 5.8% overall for the portfolio. There are small sample size DC and West Palm Beach that all our markets with new lease growth of 18.9% and 13.6% mostly attributable to newly rehab units. Dallas all new lease growth of 11% during the quarter again largely attributable rehab activity. Each of the Atlanta, Nashville, and Charlotte and Orlando had new lease growth of at least 6.4% or better. Atlanta is 7.2%, Nashville 9.6%, Charlotte at 6.4% and Orlando at 9.6%. On the renewal growth front was also very strong end of the quarter with 4.9% overall for the portfolio. We achieved highest renewal growth in Nashville, Atlanta 5.8% and 5.7% respectively. Dallas Fort Worth was third with 5.5% growth on renewals, West Palm Beach, Orlando and Charlotte were all 4.7% or better. Subsequent to the quarter we closed on the sale Regatta on June 14 for $28.2 million we generated 36.1% levered IRR and 1.9 times equity multiple on our invested capital. We sold Regatta nominal 5.5 cap on T3 over T12 NOI, which allowed us to fully repaid KeyBank Ridge take now to acquire the previously announced H2 portfolio in Hollister Place that we closed in February. With this transaction we close out the capital recycling activity that we did – we announced December of 2016 executing as we said we would. As a result of this transaction activity and BOE solicited on the remaining portfolio. We have updated our nominal cap rate range to 5.5% to 6% for remaining Huston asset. On the refinancing front, Brian mentioned most of it. But in connection with de-risking the balance sheet fixing the rate for 4.5 years and pushing out the maturity while maintaining the prepayment flexibility that we strive for, we did lever up slightly partly from the cash portion of the buyout from BH. BH is non-controlling interest of 8.4%. As a management team, we felt this acquisition of our NPI made sense for a number of reasons and then brand-new mercenary on how to funded given the value of our stock and the cost of our capital we thought this was the best way to do it. The purchase price, BH is minority interest closed on June 30 the last date of the month. It was funded 49.65 million in cash with 2 million of OP units, which can be converted in the NXRTs common stock at the midpoint of our NAV for the second quarter. The transaction we think was mutually beneficial for both parties for several reasons some of our obvious. BH was able to monetize attractive gains within their own portfolio of assets and so continue to hold an illiquid minority stake in a public company. While also maintaining in the multi-million dollar investment in our portfolio in a tax efficient manner. We of course now report 100% of the entire portfolios NOI earnings in NAV and that’s materially simplifying our financials for our investors. We also acquired approximately $6 million of 2017 estimated NOI on a go forward basis in a portfolio that as Brian mentioned we know very well. A couple words on BH, we are extremely grateful for the partnership and the great work that team does everyday executing on the property management side. I look forward to continuing that relationship and welcoming them as a shareholder. On a Rockledge acquisition as really previously mentioned, on June 30, we bought Rockledge, a 708-unit apartment community in Marietta, Georgia. Our purchased price for the [indiscernible] was $33 per square foot that’s less than a mile from the new Atlanta Braves stadium adjacent to the second largest office market in the Atlanta MSA, which we believe creates an enviable covered-land play long-term. Over the shorter term, we expect our pro forma year-one economic cap rate to be 5.6%, which we believe we can move 30 to 40 basis points a year through 2019 using our value-add strategies that you are familiar with. As previously announced, we funded the acquisition using a $68 million Freddie Mac first mortgage – floating-rate first mortgage and $53 million short-term bridge loan through KeyBank, which we expect to retire using proceeds from the sale of our North Atlanta portfolio which is in the final stages of the marketing process. Today, we received 15 offices on the portfolio and are currently in the best and final process with a select group of prospective buyers. We expect our portfolio to be under contract in the next couple weeks and in the range previously announced over $110 million to $120 million. We expect to close this in the fourth quarter of this year. As a result of these transactions and the BREs listed on the remaining Atlanta portfolio, we've updated our normal cap rate range to 5.5% to 6% in our supplement. So bottom line, what all this means is that we're still very bullish on our value add for housing thesis especially relative to the broader remarket and given our continued above average same-store NOI growth, 20% plus ROI achieved its new lease for renewal growth of 5.8% and 4.9% respectively. In addition, we took proactive steps to reduce our interest expense, while fixing the rate without incurring harmful decisions or prepayment penalties. We acquired our partner's interest in a mutually beneficial prices. That’s allowing us to realize the core earnings potential of our portfolio. And perhaps most importantly, we continue to monetize attractive gains in our portfolio at 5.5% to 6% nominal cap rates by recycling capital and assets that exhibit value added potential in extremely strong locations. To remind everyone, year-to-date we sold over $112 million worth of assets for an average IRR of 39.7% in a quarter times multiple on invested capital. In closing, I would also like to point out several changes we made to our quarterly supplement. As a result of the acquisition of BH interest, we are dropping the joint venture details slide. We are also adding two slides; the first is slide detail and dispositions, and the second is slide detail in the relevant transaction activity during the quarter and what we believe to be the effects of those transactions. For example for this quarter, we believe our capital allocation moves translate into a $27 and $0.31 per share NAV at the midpoint and an additional $0.27 of core FFO on an annualized basis. As always I'd like to thank our team here NexPoint and BH for their continued hard work and execution. And that's all I have for prepared remarks.

[Brian Mitts:]

Thanks Matt. So to wrap up and a piggyback of what Matt said. Again, this quarter we think we shown that the same-store NOI growth story is still intact. Our rehab, return on investment story is still intact. We're continuing to prudently manage the balance sheet and interest rate exposure. We've created a clear line of sight into our debt cost with the swaps while maintaining flexibility. To continue to improve the value creation story for disposition program where IRRs are averaging 40% or above in equity multiples or two times or above. We continue to focus on long-term results and increase in shareholder value. If I just reiterate Matt’s comments on BH. They've been a huge part of our passed success. We think it will be – continue to be a huge part of our future success. This buyout I think does all the things that we said it does and drives BH very closer into our organization. So we think given our structure in the way we're organized that having them involved and incentivized as critical. So again, I want to thank them and just point out the integral part of our success that they are. So with that, we will turn it over for questions.

[Operator:]

[Operator Instructions] We’ll have our first question from Michael Kodesch, Canaccord Genuity.

[Michael Kodesch:]

Hey, thanks for taking my question guys. Just a couple for me. I guess starting with guidance. Can you talk a little bit about kind of what you're seeing seasonality wise? It seems like the $0.12, I guess of lowered Core FFO from the interest costs, or is it largely going to come in the third quarter and then maybe the $0.07 or so from real estate taxes, maybe throughout the year. Is that a good way to think about that?

[Brian Mitts:]

I’d say the interest cost is more a historical kind of where we seen the rates go, I mean LIBOR. It’s up 45 basis points this year when we issue guidance, which we did in kind of early-March or mid-March. I think one month LIBOR is around 90 basis points, 75 basis points, so we’re kind of taking a swag there and making some guess as to what’s going to happen. But part of it is also as you flush out some of the deferred financing cost on dispositions that maybe you didn’t anticipate, when you originally issue guidance that hits interest costs. And then also the way that this refinancing was accounted for created not only the prepayment penalties that you saw especially there which we add back to get the Core FFO. But also had some fairly significant modification costs associated with it. So those are one-time costs that have already been incurred. So we think going forward with the swaps, essentially fixing a lot of our rates. There's not the seasonality or variability that will see from movements in LIBOR, and then a lot of these one-time costs were put into the guidance and they’ve already been incurred.

[Matt McGraner:]

Specifically on a real estate taxes Michael, we got notified there be values during the quarter from Dallas and Tarrant County is that even when we underwrote and provided budgets and guidance earlier on the year, we didn’t anticipated an additional 12% to 13% move up. We will be obviously appealing those throughout the course of the year and expect to have some revisions to the lower in the coming quarters probably in the fourth quarter. So we do expect to recapture some of that. And then other piece that was sort of seasonality that you mention was the turn. We had an unusually amount of large expirations occurring in the second quarter. We don’t expect that to continue into the third and the fourth quarter, but they did impact the same-store pool.

[Brian Mitts:]

Hey, Michael also to point out that would be the last three swaps we put on. The swap rates have moved, so we are paying a higher rate. Some of the older swaps we put on are now in the money so to speak, so their strike rates are below over LIBOR currently as we're getting inflows from those. But the new ones we're getting outflows that increased interest cost beyond what we had anticipating on organically issued guidance.

[Michael Kodesch:]

Thanks. That’s helpful. Just a quick follow-up on that. In terms of guidance you guys are not building any of those real estate recaptures into guidance correct?

[Brian Mitts:]

Correct.

[Michael Kodesch:]

All right. Then I guess looking at the Atlanta portfolio sale, it sounds like you guys are kind of expecting that to be sold in the fourth quarter. Is there any chance that that moves up into the third quarter a little bit here is that nearing, a potential deal or is that pretty firmly built in the fourth quarter?

[Brian Mitts:]

Yes, that the fourth quarter is the estimate. We feel really good about the marketing process. So we got 15 offers, 12 on the portfolio itself, three kind of one-off on individual assets. The highest synthetic offer is 118 that of course, if we took two different buyers, could push the timeline back and your dealing with a couple of different folks and different contracts. So there are portfolio purchasers, real portfolio purchasers five or six or so that have really quick fuses. So 15, 21-day looks 30-day closes. So that could push the time. So it’s close it into September, but I think the most likely outcome is – it closes in October.

[Michael Kodesch:]

Great. That's helpful. And then I guess looking at some of your NOI trends, revenue trends and over the past two quarters it's decelerated a time of bit. Can you talk a little bit about what you're seeing from a leasing perspective in the third quarter and kind of your expectations for the balance of the year?

[Matt McGraner:]

I don't think the leasing activity per se is – has it impacted our same-store pool. To the extent it expense side, I mean if you look over Q1 and Q2, Q1 expenses were up 6.1% and then 7.1% a large portion of that is labor RM turn and in the non-controllable with tax and insurance. For the most part the market the topline growth has been great. When we can this look across whether folks are doing. We still feel really good about 6% new lease growth being achieved and then double-digit ROIs or 20% ROIs on the CapEx and then 10% plus rental increases. We don't see that dissipating anytime soon. So I think it's just incumbent upon us in the go forward in order to get back to the 8% to 10% same-store NOI growth that everyone used to make sure we drive occupancy but has in the beds and then whole expenses tighter, which were completely focused on and they will get back to I mean we think the Q3 and Q4 will be very strong.

[Michael Kodesch:]

Thanks. That’s good color. And then just one last one if I can. Can you mind us I guess what G&A you guys are capable of generating, but what you're expecting to see I guess for 2017 are you capping it?

[Matt McGraner:]

Yes, I mean we're I think contractually able to take $8.6 million or so on an annualized basis and fees and we’ve got that its $7.4 million. So we don't instead upon taking any more than $7.4 million.

[Brian Mitts:]

Yes. Our actual G&A or right on top our guidance we didn't talk about those in our revised guidance, but if you look and supplement we put it them there same and were run budget of that.

[Michael Kodesch:]

And then just moving past 2017, do you kind of expect to continue coming in a little under what you're contractually able to take?

[Brian Mitts:]

Yes what our goal is Michael is to manage G&A to the point where you we’re trying to bring it in line with some of our larger competitors or peers. So that we're not viewed as typical external manager. We have the ability to do that we can certainly obviously manage our cost like any good business should and we can also toggle fees as needed to make sure that we're line. So we're trying to drive down our overall G&A percentage and keep in line below some of our externally managed peers and maybe more towards our internally managed peers.

[Michael Kodesch:]

Great. I appreciate all the color guys. I will hop back in queue with anything else. Thanks again.

[Brian Mitts:]

Thank you.

[Operator:]

[Operator Instructions] We’ll go next to Dan Donlan, Ladenburg Thalmann.

[Daniel Donlan:]

Yes, thank you. Just wanted to inquire about in terms of the guidance what is embedded in guidance in terms of you selling the Atlanta assets what's the timing on that?

[Brian Mitts:]

In the fourth quarter.

[Daniel Donlan:]

Any in middle.

[Brian Mitts:]

Yes, the 15th or beyond, it’s October 15 or 30.

[Daniel Donlan:]

Okay. And then what's your thought process on replacing that capital or that kind of that that sales essentially going to fund your performer your Atlanta transaction that you’ve already completed that how we should be thinking about it?

[Brian Mitts:]

Yes. That’s how I think about it that the sale of this capital. And keep in mind it’s not going away, it sounds like we're making a special dividend or something, so the compound annual growth of the capital is still generating outsized returns, but we think about it as, if we sell it 150 for example, there's $65 million worth of capital coming out of the sale that goes to repay the bridge we took out acquired Rockledge which is in all respects to superior I think location and then partially from the acquisition of the BH minority interest. So two very accretive uses of capital. When that settles, we think we’ll be pretty happy with the run rate on a NOI basis and earnings basis.

[Daniel Donlan:]

Okay. And just moving to the AFFO, are there some type of one-time items in AFFO that you are including? I'm just trying to think about that the delta between kind of the reduction in FFO and the reduction in AFFO?

[Matt McGraner:]

Yes. So a lot of the costs were through to both Core FFO and AFFO, real estate taxes and some of the net interest cost. And then there are really difference between AFFO and Core FFO as we add back our deferred financing cost on the longer-term debt as well as the equity compensation and income. That’s demonstrating Core FFO and AFFO, so you do have that add back of deferred financing cost which changes what this amount of portfolio.

[Daniel Donlan:]

Okay. And then as far as the interest expense savings is that you're anticipating, is that being kind of offset by the increase in LIBOR versus what you had expected when you provided guidance at the onset of the year or just trying to understand the outlook better as well?

[Brian Mitts:]

Yes. It gets a little confusing because we originally set guidance, we only had 50% order versus 60% of our long-term debt fixed. Today it’s almost 100%. In the interim, you did see a quite dramatic move in LIBOR. Additional to get to that that bridge that gap between what was fixed when we originally issued guidance versus today. We incur some additional costs, but we fixed our debt. We think that’s worth of trade-off. So yes, it kind of circles back around and it’s a tough calculation to kind of graph just thinking about it directly, but over time you're seeing movement in both and we’ve increased the amount of debt as mentioned to Rockledge and BH. We’ve had a movement in LIBOR up and then we’ve increased our cost by putting more swaps in place.

[Matt McGraner:]

For three months we are paying 180 to the swap counterparty on $250 million notional when LIBOR was 120, so that spread obviously does tickup our interest expense quite a bit. That being said, we feel comfortable. I go to our supplement and pull the outstanding debt detail tab and you won’t see a maturity for the next five years and that's completely fixed. So yes, it’s hurt, it’s little pain right now, but the longer-term earnings profile the companies vastly improved as a result.

[Brian Mitts:]

And I think what we locked in is essentially 3.34% and that's going to drop as we pay-off some of the more expensive debt like the bridge in the revolver, but you locked in a pretty low LIBOR still maintained the flexibility from the full-year rate. We see in these asset sales, if you compare that to what would happen if we had fixed debt on it and had to put – we had incur a lot of decision in the yield maintenance costs. We wouldn’t be putting up our and equity multiples that we are.

[Daniel Donlan:]

Sure. And then just kind of moving to the G&A, is there any thought process behind having kind of a formalized kind of structure to that. What are your thoughts on internalization? Just kind of curious, how you're looking at that because that the original portfolio has a set fee, obviously that's changed over time. So just kind of curious if there's any intention to set some type of formalized numbers around it?

[Brian Mitts:]

Yes, I mean other than guidance, which one of the numbers we don't really move is that G&A. We feel very comfortable with it. We should point out that we haven't taken any additional fees on either the H2 Portfolio that we closed at the end of 2016. The Hollister Place deal, we closed in February and there's no intension to take anything on this Rockledge portfolio for the time being as we flushed through some of these dispositions, we can kind of reassess. But the idea is to drive G&A lower on a percentage basis each year. But we haven’t talked about any sort of defined formalized process or metrics. And then maybe we can put that out next quarter, but as far as internalization, obviously it’s a conversion that comes up all the time. We think that as long as we are – still where we are, which we sub-grades in the equity, we’ve grown the market capital of the company, but still a small company. We think that there is still a lot of value that’s been drive from the association with NexPoint is an external adviser and we’re generating returns for shareholders and keeping our G&A costs at a reasonable level. So it's not something that we've talked a lot about as far as executing a plan or putting out a timeframe, but it's certainly something that's always brought out and discussed.

[Daniel Donlan:]

Okay, and then just kind of lastly on the acquisition front. Just curious what you're seeing now as it become, it seems to me that in every call it gets a little bit more competitive from the acquisition front. So just kind of curious how competitive it's becoming as your success as a public company kind of across some copycats that kind of come along and look at some of the asset you are buying. Just any clarity there would be helpful?

[Brian Mitts:]

Yes, I mean I think that it certainly more competitive, but I wouldn't trade that because I wouldn't – we couldn’t recycle the capital, as well as we have been. I mean we've put $220 million into the company starting in 2013 and notwithstanding today, its worth $525 million. So I think we’ve done that pretty well and we do have a competitive cost of capital, we do have liquidity and financing available to us such that we can move quickly and do some of the deals in a way that we'd like to do them. So for example Rockledge is $113.5 million acquisition. There wasn't a ton of buyers for a value-add $113.5 million deal given this thin edge that’s in maintaining that $20 million to $50 million type of equity check whether just not the buyer pool that there are for $30 million individual transaction. So you'll continue to see as focus in that respect. We're also bidding on a fair amount of deals and we're active in South Florida for example, Nashville, Charlotte areas that we want to recycle some capital out of Dallas and Atlanta into those – to get bigger into those markets. And so if we find one of those deals we’ll buy them, but we're not going to overpay and we haven't been the highest bidder on any of them. And so if we miss one because we're a couple million dollar short albeit, but yes, it's competitive, but we think that the market being as liquid as it is, is only helpful to us, as long as we can maintain the ability to do things that other market participants can't, like a syndicator buying a $30 million deal in 21 days because they have all cash – net cash on hand to do it. We can do that. They can’t do that. So that's what we’ll try to do and use the tools available to us to create value for shareholders, and so I think we've done a fairly decent job at it continues to drive.

[Daniel Donlan:]

All right. Thank you, Matt. Appreciate it.

[Matt McGraner:]

Yes. Thanks, Dan.

[Operator:]

[Operator Instructions] We’ll have a follow-up from Michael Kodesch, Canaccord Genuity.

[Michael Kodesch:]

Hey, thanks for taking the follow-up. Just quick one, just I wanted to know how you guys thought maybe about potentially issuing equity rather than kind of have this mismatch and timing of acquisitions in dispositions how do you guys just kind of think about that?

[Matt McGraner:]

Yes. We spent I want to say four days in a conference room, modeling out the various ways we could do all these things and the ingredients to the ultimate recipe to produce a $27 NAV that we think is real and very defensible. So we thought about issuing equity and we thought about issuing partial equity, we though about an ATM, we thought about dispositions and at the end of the day and each of the scenarios given the fact that we fixed our long-term debt and derisk the balance sheet we thought that we could execute on a sale that would replace the debt that we took out. And obviously owning 20% of our stock, we view as extremely valuable and we will continue to believe that is extremely valuable and should be treated as such and so, if we can generate for our current shareholder base $2 of NAV growth being smart with capital allocation and executing on that will lever up to do it. Because we've shown I think now three times that we can pay it off and an efficient manner. And yes, you might pickup the FFO a little bit learn some of that but at the end of the day our job was to create NAV growth and so yes we thought about it, believe me we have people asking about it all the time but under each of the scenarios that we took down and again we spent a lot of time on this. We thought this was the best way to do it.

[Brian Mitts:]

Yes, Mike one of the things that we also discovered in that process was if we focus on the long-term and we do things based on that not the short-term, we can accomplish a lot of things without raising equity. Not opposed to it, but you’re ultimate with the process and some of the things we happens cost of that the discounts the current that you have to issue ad things like that to us just makes it more expensive endeavor than what we've done.

[Michael Kodesch:]

That's really helpful color Thanks being guys. Appreciate it.

[Matt McGraner:]

Yes, you bet.

[Brian Mitts:]

Thank you. End of Q&A

[Operator:]

And with no further questions. I'll turn the conference back over to management for any additional or closing remarks.

[Brian Mitts:]

Yes. That’s further from us. We think it was a good quarter obviously a lot of time to wait out there that hopefully we got there in this call on our supplement. We look forward to Q3 in the rest of the year was the income as Matt mentioned quite a positive things happen in the market and with the portfolio. So we will continue to try to achieve good results. Thanks for everyone's participation.

[Operator:]

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