NexPoint Residential Trust, Inc. (NXRT) Q2 2020 Earnings Call Transcript

Good day and welcome to the NexPoint Residential Trust, Incorporated. Second Quarter 2020 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jackie Graham, Investor Relations. Please go ahead, ma’am.

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust’s 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 at www.nexpointliving.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 or variations or negatives of these words. These forward-looking statements include, but are not limited to, statements regarding NXRT’s business and industry in general, the COVID-19 pandemic and its effect on the company, NXRT’s 2020 adjusted NOI estimate and the related assumptions, NXRT’s strategy for the third quarter and full year 2020, NXRT’s net asset value and its related components and assumptions, planned value-add programs, including projected average rent, rent change and return on investment, and expected acquisitions and dispositions. They are not guarantees of future results and forward-looking statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statements, including the ultimate geographic spread, duration and severity of the COVID-19 pandemic and the effectiveness of actions taken or actions that may be taken by governmental authorities to contain the outbreak or treat its impact, as well as those described in greater detail in our filings with the Securities and Exchange Commission, particularly those described in the company’s annual report on Form 10-K and quarterly report on Form 10-Q. 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 this 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 analysis of funds from operations or FFO, core funds from operations or core FFO, adjusted funds from operations or AFFO and net operating income or NOI, all of which are non-GAAP financial measures of performance or total debt. These non-GAAP measures should be used as a supplement to and not a substitute for net income loss and total debt computed in accordance with GAAP. For a more complete discussion of FFO, Core FFO, AFFO, NOI and net debt, 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.

Thanks, Jackie. I want to welcome everyone to the NXRT 2020 second quarter conference call. Today, we’re going to discuss the highlights for the quarter. We’ll spend some time analyzing Q2 results as well as the early part of Q3 through July. Let me start with the Q2 and year-to-date highlights. First, we announced last week on July 27 that the Board elected to expand the composition of the Board from 5 to 6 members. We added Catherine Wood as an Independent Director. We believe Cathy brings significant experience and a unique perspective to the Board, so we’re glad to welcome her on. Net loss for the quarter was $9.3 million or negative $0.38 per diluted share, as compared to a $2 million loss or negative $0.08 per diluted share in Q2 of 2019. Same-store NOI increase for the quarter is $1.1 million or an increase of 5.8% as compared to Q2 2019. We’re reporting Q2 2020 Core FFO of $14.5 million or $0.59 per diluted share, which is an increase of 31.1% on a per share basis as compared to Q2 2019. Total Revenue for Q2 was $50.7 million and total NOI was $29.2 million, which represents an increase of 17.6% and 18.9% year-over-year respectively. NOI margins for Q2 were 57.6%, which was a 50 basis point improvement over margins in Q2 of 2019 of 57.1%. We continue to execute our value-add business plan by completing 411 full and partial renovations during the quarter, with 392 upgraded units leased, achieving an average monthly rent premium of $113 and 23.4% ROI during the quarter. Inception-to-date in the portfolio as of June 30, we’ve completed 7,325 full and partial upgrades achieving an average monthly rent premium of $95 and a return on investment of 25%. Through our equity repurchase program we repurchased approximately 2.4 million shares of stock through Q2 of 2020 at an average repurchase price of $25.70 per share. We ended the quarter with $85 million of cash. Regarding our NAV per share, given the unprecedented disruption of the economy over what is also an unprecedentedly short period of time, cap rates have become difficult to judge, although we do have more clarity today than we did after Q1. Nevertheless, we’re updating our NAV based on our revised outlook for NOI and cap rates. Based on our updates in cap rates and NOI, we revised our NAV per share as follows: $34.37 on the low-end, $42.31 on the high-end, for a midpoint of $38.34. That’s compared to a midpoint of $38.47 in the prior quarter or a 33 basis point quarter-over-quarter decrease and a midpoint of $37.51 at June 30 of last year or a 2.21% year-over-year increase. For dividends, for the second quarter, we paid a dividend of $0.3125 per share on June 30 to shareholders of record as of June 15. And last Monday, the Board declared a dividend per share of $0.3125 payable on September 30 to shareholders of record on September 15. Year to date, our dividend is 1.77 times covered by Core FFO for a payout ratio of 56% of Core FFO. Overall, just big picture, our rent collections are stronger than we anticipated in Q2, and I think maybe better than everyone anticipated across the industry. And that trend continued into July. Our biggest attractor to higher revenue was our inability to charge late fees or process evictions. The moratorium on evictions under the CARES Act ended July 27. However, we’re still restricted in certain markets. To the extent we can process evictions, we’re doing so thoughtfully. A number of local governments are offering assistance to residents, and we’re encouraging our residents to take advantage of that, also helping them to find information and/or complete applications for that. The next big event that we’re watching closely is the new stimulus package, or, in lieu of that, how the withdrawal of stimulus may impact our results overall and our ability for tenants to make rent collections. However, given the forced nature of the situation, unprecedented decline in the economy and increase in unemployment, not to mention the fact that it’s a major election year, we continue to believe that some sort of stimulus will be forthcoming. However, we also believe that the new stimulus bill’s impact may be less than perhaps people expect. Evidence of this is a decline in assistance requested by our residents throughout the quarter into July, and just the general strength of our portfolio performance since COVID. The non-payment of rents is only impactful to the extent we can’t evict non-paying tenants, which we’ve been forbidden to do up until just last week. In that regard, any additional stimulus is likely to be a double-edged sword with the carrot of more stimulus, which may help some tenants make payments. But the stick is that we can’t—we have a continued extension of moratoriums on eviction. We continue to see strong demand for our product in most markets, which is evidenced by our results, as well as the demand that we’ve seen on our upgraded units, where we’ve been able to drive strong rent increases. One of the reasons that we see a strong demand for our products, and something we’ve talked about historically, is a trade-down effect. We believe this was a factor in 2008, 2009 and beyond, where essentially a tenant in a product decides to trade down to one of our renovated units, saving money, but sacrificing little in terms of quality or amenities. This is probably a very underappreciated part of our strategy and our story. Net-net, all these factors have resulted in strong NOI growth, relatively strong new lease rent growth in most of our markets, strong renewal rent growth and occupancy compared to our public peers and far better than smaller private operators. Although some of the unknowns remain around COVID, we believe that after 5 months, we have a lot more transparency and understanding of how this is going to impact our business and believe that we’re well positioned for the future. When we go through some of the details on results, let me turn it over to Matt.

Thanks, Brian. We were extremely pleased with the operational performance of the portfolio during the quarter, especially given these difficult times. The property and asset management teams at NexPoint are operating at high levels, and the performance this quarter demonstrates their talents and the durability of our company’s investment thesis, namely that well-located affordable Class B apartments in the Sunbelt should continue to produce durable cash flows even during the most challenging operating environments. As Brian mentioned, same-store NOI grew by 5.8% year-over-year, it was 20 basis points sequentially better than the first quarter. We saw strength across most of the portfolio during the quarter with 7 out of our 10 markets growing NOI assumption by 4% or better, including Dallas, Houston, Atlanta, Phoenix, Nashville, West Palm and Tampa. Notably, Tampa, West Palm and Phoenix, all grew NOI by double-digits during the quarter. On the operational front, leasing activity and revenue growth were better than expected during the second quarter. New lease rates were slightly negative down 1% and down 3%, excluding rehab units, but renewals were positive and increased by 2.3% across the portfolio for a blended positive rate change during the quarter of 54 basis points. Our top Q2 value-added programs revenue growth during the quarter were Dallas-Fort Worth, Charlotte, Nashville, Phoenix, Tampa and West Palm posting 4% or better revenue growth. Houston made this list as well during the quarter, surprising us. Our quote-unquote weakest markets for revenue growth during the quarter were Las Vegas and Orlando, but they were only down modestly. Las Vegas revenues were down 73 basis points from the first quarter. Orlando revenue was down 4.8% year-over-year, but only 1.2% quarter-over-quarter. Overall occupancy for the portfolio grew by 90 basis points year-over-year and finished the second quarter at a historically strong 95.3%. Renewal retention for the quarter was an all-time high for the company as well at 57.9%. Collection activity for the quarter ended at 96.5% and ultimately finished 98.1% as of the end of July. Markets below the portfolio average were Las Vegas at 95.9%, and Atlanta and Orlando both at 97.3%. Importantly, as of July 31, only 5 basis points or 70 units out of 14,104 units were unaccounted for, meaning we have seen no rent payments from such residents during the quarter. For July, our preliminary operating performance metrics are as follows: July occupancy finished the month at 95%, rent collections for the month totaled a strong 99.1%, including payment plans, with Las Vegas being the only market below 97% at 95.6%. July new leases and renewals showed positive trends of 1.5%, 1.52% and 1.96%, with a blended positive rate change of 1.72%. Now on to our Q2 value-added programs. Our Q2 rehab pipeline base case was previously revised lower to 225 upgrades. We are pleased to report that we completed 411 rehabs leasing 392 of them for a blended ROI of 23.4%, again demonstrating consistent demand for upgraded, yet still affordable housing products. We completed rehab in every market, responding to particular demand in Dallas-Fort Worth, Atlanta, Phoenix and Nashville. Our largest asset at Timber Pines saw 22 interior upgrades during the quarter achieving a 17% ROI on leased units. Even our Las Vegas assets demonstrated demand for upgraded products, realizing 14% revenue growth on 34 rehab units. For the third quarter, we had budgeted 540 interior upgrades fairly evenly distributed amongst all the markets with the exceptions that we plan to upgrade over 100 units in Dallas-Fort Worth, but almost none in Houston and Orlando. In the fourth quarter, we expect to complete 290 interior upgrades, again largely evenly distributed across our markets except for Houston and Orlando, bringing the annual expectations to 1,900 units or approximately 75% of 2019 space, which is quite good given the circumstances. On the transaction front, we are pleased to announce that we have signed a contract to sell Eagle Crest, an asset located in Dallas-Fort Worth that we purchased in 2014, for $55.5 million, generating approximately a 5.2 times multiple on invested capital and an unlevered IRR of 35%. The purchaser currently has a meaningful amount of non-refundable earnest money in escrow and closing is expected to occur in the third quarter. This purchase price represents a 4.75% nominal cap rate, which is tax-adjusted on T3 revenues over T12 expenses. For the rest of my prepared remarks, I’d like to update our stress test scenarios and provide some observations operationally for the rest of the year. First, we expected and worked through a challenging leasing and operating environment during the quarter. We do expect this environment to continue. You may recall we underwrote bad debt to reach over 4% for the year increasing to over 8 times from our historical average. We hit bad debt particularly hard in Q2 thinking it could reach as high as 8% and then level off in Q3 and Q4. Recall also that we assumed rents would go modestly negative from April through September, and remain flat for the year. We underwrote physical occupancy to 92.9%, while economic occupancy declined to 89%. Fairly modest savings were expressed on controllable expenses. These draconian assumptions still yielded a $2 per share core FFO for the year result. Obviously, Q2 bad debt performance in general has outperformed our expectations for the quarter, given our release today, as affordable housing in our suburban Sunbelt markets continue to demonstrate resiliency. Given this Q2 performance, we have taken a step back and considered what needs to go wrong in order for our portfolio to produce a $2 share core FFO performance for the year, which again is modestly up $0.07 from last year and incrementally positive compared to our public peers. In sum, even if revenues were down 4% for the second half of the year and vacancy losses increased from a budget of 5.4% to 7% of GPR and bad debt rose to 4% or tripled from the first half of the year, we still believe we could produce a $2 a share core earnings for the year. Finally, on the NAV price, despite the Eagle Crest transaction, and as Brian mentioned, the only changes we made this quarter was to plug-in actual Q2 NOI, reflect repurchase activity and reflect the fair value on our swap book, which reduced our NAV midpoint by a modest $0.13 per share to $38.34. So that’s it from my prepared remarks. But in closing, I just want to thank our teams at NexPoint for all the hard work during these difficult times.

Thanks, Matt. Let’s go ahead and turn it over for questions.

Thank you. [Operator Instructions] Our first question will come from Alex Kubicek with Baird.

Good morning.

Hi, Alex.

Have you guys seen a material performance differential between those units, which you’ve renovated and just your kind of more core products? I’m just curious if you’ve seen the trade-down effect is more pronounced on those upgraded units versus something that might be many years removed from a recent rental?

Yeah, I’d say, it’s market-dependent. Obviously, markets that are stronger, for example, Phoenix and South Florida, where we can just rehab more, I think that we’ve seen—and, again, as I mentioned, demand rise in those markets. I think Dallas-Fort Worth, Charlotte, Phoenix and South Florida. We didn’t think we would budget as many during the quarter, but ultimately did increase our revised pipeline numbers, because of that demand. So I think there are trade-down effects in these organically strong markets with $1,000 affordable rent.

Yeah, that’s helpful and then just a follow-up there. Have you adjusted your internal requirements that you guys are underwriting on renovations? Or how do you guys kind of adjust your expectations going forward as you’re kind of evaluating opportunities?

Are you talking about in terms of adjusting what ROIs we would need to test and upgrade or...?

Correct, correct, or kind of both on the current products that you guys own or just in future acquisitions as you’re underwriting and then kind of call it the next 6, 12 months?

Yeah, sure. We haven’t adjusted our internal expectations for the current pipeline. The full and partial interior rehabs that we plan to complete, we still think we can get the consistent 20% to 25% ROIs on that stock. And then, going forward, in terms of new acquisitions that we do, if any, it will be interesting to see, but I think that we’ll focus on markets that are showing or demonstrating the growth that we’re seeing right now like Phoenix and South Florida, Charlotte, etc.

That’s helpful, and then just one more quick one. Just on the accounting side, how do you guys recognize bad debt? Is it certain months of delinquency? Just wondering how you guys judge collectability going forward here?

Yeah, it’s a good question. And that’s exactly how we do it. Once – we tweaked this a little bit given the payment plans we put in place for COVID. Once we put somebody on a payment plan and they’re 60 days or more out, that’s when we start to write it off pretty aggressively. Then, once we get past, up to 120 days, it’s completely written off unless they’ve been making payments toward it. If they’re not on a payment plan, it’s just kind of typical what we’ve been doing historically. So, you write that off much quicker. As Matt mentioned, there are not many of those that are out there, but that’s getting flushed out pretty quickly.

Understood. Thanks for taking my questions.

Thank you.

Thank you. Our next question will come from John Massocca with Ladenburg Thalmann.

Okay. Good morning.

Hey, John.

Hey, John.

So I was kind of thinking about Eagle Crest. I know it’s still kind of early days for the market to kind of get going again. But, I mean, is that maybe typical where you think transaction activity could shake out when the market gets a little bit more liquid?

Yeah, I mean, I think it’s not surprising to us that we can still hit pre-COVID pricing given where interest rates are right now. New acquisition buyers can obtain agency financing into the 70% range at 2.75% to 3%, which, if you take a 4.75% cap and you layer that on, you can still produce a desirable cash-on-cash yield. The geographical dispersion between markets with evictions or higher bad debt may lead to harder hits to pricing expectations in some areas. However, for Dallas largely, we think that 4.75% cap or the cap rates expressed in our NAV on a nominal basis are going to be pretty steady for the rest of the year. Plus, for just the market right now, there’s just not a lot of product. So there is a scarcity, and we thought we would take advantage of it and produce a bit of liquidity with a nice print for price discovery, and really, it’s pre-COVID pricing.

Okay. And then, considering leasing in the existing portfolio, how have total shows in applications trended, especially maybe in some of the Sunbelt states that have been hit a little harder here in the last couple of months by the pandemic?

Yeah, I mean, we think that in really the renewal retention, the shows were down obviously in Q2. We did see a spike in kind of new lease traffic and lower retention in July. So we think that could potentially be a trend, when people start getting out more and looking for updated products. One thing to note is that our leasing revenue on new lease units in July basically went up 3% from where it was in Q2. So we’re positively inclined to believe that that’s a healthy sign for our market and ties into Brian’s point about a trade-down effect occurring out there in our markets for affordable product.

When you say a trade-down effect, I mean, some of that potentially may be urban, suburban kind of switch potentially going on? Or was it more economic that people do not want to pay rent?

I think it’s both. The propensity for folks to want a higher quality upgraded unit for $300 or $400 or $500 less than what they were paying in the same MSA shows that demand is shifting. Additionally, our product has lower density; you don’t have structured parking, and you don’t have 5 or 20 stories. You can drive up to your unit. You don’t have to see anyone or get in an elevator. This qualitative aspect to our apartments is likely to be in higher demand in the near term than would otherwise be the case.

Okay. And then thinking about the other income, now that some of the moratoriums are expired, is that something that could potentially accelerate a little bit here in the coming quarters, given the ability to charge some of these fees again?

Yeah, I think it absolutely will increase, but it’s not in our base case that I went over. We’re not assuming that it’s going to be a big driver.

Okay. That’s it for me. Thank you all very much.

Thanks, John.

Thank you.

Thank you. Our next question will come from Barry Oxford with D.A. Davidson.

Great. Thanks, guys. Kind of getting back to the bad debt expense and I know it’s hard to tell. But are you able to kind of get your hands around what percentage of tenants that you have are paying rent from the government unemployment benefits? Or is there a way to kind of look at that or get your arms around that? And then, if so, how does that play into your bad debt expense calculations?

Yeah, I mean, I think the bad debt expense, the last time we did this was at NAREIT in June and we did a deep dive in our portfolio, and I think the results that came out of it was that at that time 2.5% of our total population in our units described themselves as having lost a job due to COVID. So at that point it was very modest. We plan to do a refresh at the end of August to see where we are based upon the stimulus expiring in July, so it didn’t really make sense to do it then. So that’s the latest kind of indicator of that metric if you will. But in terms of underwriting bad debt going forward, as I mentioned, we thought it could reach as high as 8%, and it was about 2% or less. If we had 4% for the rest of the year, we still think we have positive results.

Hey, Barry, on the accounting side, what we’re trying to do is do deep dives into all the payment plans. If people are making payments, we’re trying to take that into consideration as we think about who may just stop paying and never repays. That’s how we’re arriving at the percentages of what we write-off and when. It’s sort of evolving as we get more information. Obviously, we take a backward look also, for example, we take it all the way through July and said if these people paid and maybe hadn’t paid as of June 30. We’ve got our slide in our supplement that sort of talks to that, because there was quite a bit of payment for Q2 outstanding in the month of July. We’re trying to learn as we go and take that into account, obviously being conservative in our numbers. But that’s what we’re doing from an accounting perspective.

Okay. That makes sense. Appreciate that. And when you guys are looking at acquisitions, as far as the competitors out there, has that mix changed any? Or is it still that the money is roughly coming from the same group of people?

Yeah, it really has, Barry, it’s a good question. There aren’t a ton of institutional buyers right now partaking in the current transaction environment. Despite the fact there’s not a ton of deals out, but the institutional bid is kind of 10% to 15% discounts to where pricing is. They’re not actively seeking to purchase right now; they’re more in a wait-and-see mode. Most of the buyers that are out there are private syndicators and high net worth 1031 type of money. There is more than $10 billion of multifamily product on the sidelines that was going to be launched during the second and third quarters, but has now been put on hold in their system. When that comes out later in the year, perhaps the institutional bid comes back, but for now it’s largely just the private smaller folks.

Okay. Appreciate it. Thanks, guys.

Thank you.

Sure.

Thank you. Our next question will come from Rob Stevenson with Janney.

Good morning, guys.

Hi, Rob.

Hi, Rob.

Hey, how is it going? When you guys take a look at your new move-ins, where are those people coming from? Is that people trading up or down by price point? Are they coming in from out of state? How are you characterizing the new leases that you’ve been signing over the last few months?

Yeah. I think we’ve been talking about this earlier today. The actual household income of our portfolio is increasing. We’re now at approximately $65,000, which is up roughly $78,000 year-over-year. This quantitatively tells us that there are folks looking to live in our housing. We’ve tried our best to figure this out; it’s really difficult. But what we can tell you is that of our applications during the second quarter, there were incrementally more from California and New York. It’s not a huge number, but it’s 100% or so and that’s 75%-ish from California, 25% New York. So that’s modestly up, but again, 100%, it’s not 50% of our traffic; it’s more like 10% of our traffic.

Okay. And then given all the rhetoric that’s been going on around potential changes to the 1031 structure. Are you guys – if that winds up driving pricing up, are you guys prepared or planning on putting additional product on the market for dispositions in the back half of the year to take advantage of people that need to close the 1031 by December 31?

Yeah, I mean, we would potentially sell a few more, but it’s just because we like the—we’re not revising incrementally our disposition outlook as a result of the rhetoric. We did have initial guidance to sell around $100 million of assets this year or more. We’ve obviously completed a bunch right before COVID that produced liquidity. We could probably sell one or two more this year, but nothing on the block other than Eagle Crest. The 1031 structure isn’t a major catalyst for that.

Okay. And then last one from me. What are you and your partner seeing in terms of availability of labor, as well as materials cost for redevelopment projects right now? What’s the status on costs and availability?

Yes, the availability of workers has increased, and thus labor and materials costs have gone down modestly. The issue is logistical, getting crews on-site and materials on-site at the same time. There have been delays due to COVID impacting some crew availability, but nothing material. There has been a modest decrease in costs on both fronts.

Okay. Thanks, guys. I appreciate it.

Thanks, Rob.

Thank you.

Thank you. Our next question will come from Gaurav Mehta with National Securities.

Thanks. Good morning.

Good morning.

Following up on the asset that you currently have under contract for sale. I was wondering if you could provide some more color on how the buyer pool looks like and whether this was an off-market transaction or if you fully marketed that deal?

It’s a good question. We obtained broker opinions on values from CBRE and JLL late last year and earlier this year. We were set to launch it in March to the market. As we got further into the second quarter, we had unsolicited offers from interested parties that had capital on hand, expressing interest in value-add product in Texas. We were open to showing it to several groups and we hit our pre-COVID pricing, so we decided to transact.

Okay. And I guess for your real estate taxes and insurance, in this market, are you seeing an uptick, and what you kind of expecting for the second half as far as taxes?

I think insurance, we renewed in March, and we did see increases. We tried to pull the levers we could to keep that down. I think we did a fairly decent job compared to some of the numbers we heard. I think taxes, we’re going to continue to do what we’ve always done, which is very aggressively protest and try to get those down, going to litigation if necessary. I don’t know that the recent events are going to be helpful for us. I think cities are probably more squeezed now than they were a year ago, and are likely to be just as aggressive on property taxes as they have been. So we’re not expecting that, and I think you’re not going to see that reflected in any of our estimates or stress tests that we’re anticipating a lot of relief around insurance or taxes in the coming years.

Okay. Thank you. That’s all I had.

Thank you. Our next question will come from Jon Petersen with Jefferies.

Great, thanks. Just one question from me. I’m just curious, I know you guys give the net effective rent, but have you increased incentives for new tenants or had to offer incentives on renewals, whether it’s free rent or anything else as we think about that?

No incentives on renewals, other than to say that they’ve been largely flat. On new leases, we’ve used yields, and there haven’t been concessions. We are waiving application fees in some aspects, waiving pet fees, and other types of fees. This has resulted in a material decrease in other income. We’re not giving 2 or 3 or 4 months away like some of the gateway coastal markets are. We’re just not seeing that. Any modest rent decrease for us is $20, $30, hundreds of dollars, so it’s been pretty steady.

Got it. Okay. Thank you. That’s it.

Thank you, Jon.

Thank you. Our next question will come from Michael Lewis with SunTrust Securities.

Great, thank you. My first question is just a point of clarification. I think, I was going to ask, the casualty losses of $1,079, it looks like, it’s exactly offset by in the miscellaneous income with insurance collections of $1,079. And then in the core FFO calculation you add back $1,079 again. I just want to make sure that it looks to me like double counting, but I’m sure there is something I’m missing in there?

Yeah, so the background on that is the cuts that came through last October here in Dallas. As we rebuild that, we’re getting business interruption insurance, so we’re doing is reclassifying it from expense into the income line to reflect that revenue. And then we added back to the core FFO just reflected in there. The fact that it’s not really a part of our overall operations, but at the same time, we’re getting the income. As we would on any casualty loss, we’ll reverse it out of Core FFO. It’s income that’s coming in from the insurance company, so that’s a true number. But then you’ve got this casualty loss that’s—we’ve already recognized a lot of that. Based on what we wrote off, it was actually a gain because the proceeds that we’re going to get are going to be in excess of the carrying value at the time.

Okay. I think I understand. Maybe the timing is a little...

Exactly; yes. You summed it up in one word, it’s timing.

Okay. My second question, on Page 5 of the supplemental, you’ve got this relatively high rent collection numbers. At the bottom of the page, some of these markets have quite a number of units that are delinquent. For example, the widest gap I saw was, I think at the end of June, it was something like 95% of Orlando rent has been collected, but at the same time, about 20% of the units were delinquent. Is that just a function of the lower the rent the less likely people have been to pay?

Well, it’s also— I’ll let Matt go into some detail here. But just high level, we have tenants that haven’t fully paid, but they have paid a lot. They’ve got balances that they’re carrying. That’s what we’re trying to highlight here; most of the balances are spread across a very few number of tenants. In some cases, those tenants have been completely unresponsive to our outreach, probably writing this moratorium on evictions to our detriment and probably ultimately theirs as well. But, Matt, do you want to speak to the details?

Yeah, Michael. The first time I saw this in this chart, I didn’t like it either. It grew on me because it depicts the progress made from quarter to quarter, from June to July for the units that are fully collected. The way I see this from a positive perspective is that there are only 840 residents as of the end of July that were delinquent. You see the dispersion across the markets; Las Vegas and Orlando were two of the larger ones. Most of those 840, which isn’t that much across the portfolio, has paid. Only 70 units remain unaccounted for, which is 5 basis points of the portfolio, meaning we have seen no rent payments from those residents during the quarter. This analysis highlights the progress we have made.

Yeah, I don’t think I’ve seen that chart from anybody else before. I guess I was a little surprised how many people pay partial rent. I always thought of rent as either you pay it or you don’t. It looks like there’s a lot of people that pay some of it.

Yeah, no, you’re correct in normal times; but during COVID with the payment plans, there has been—people have partially paid their rent. We can’t evict anybody, so we do the best we can to collect as much as we can.

Okay. And then, the last question from me; it’s obviously too soon to talk about August, but as you saw improvement in July, at the same time, the cases were surging. Florida, Texas and Arizona were all in the news every day, and that’s a big chunk of your portfolio. Does that increase in cases give you any concern as we head into August, knowing that we just had a big ramp-up in those markets in July?

I think July was really strong, both from a—relatively strong growth standpoint in revenue and collections and occupancy. We expect that to continue into August. Our markets didn’t absorb as many job losses as the gateway markets did. This makes up for some of it. By and large, most of our markets are not correlating in terms of demand. If July was really a positive indicator of future activity in our markets, there has not been a clear correlation between COVID cases and our occupancy rates.

Thanks, guys.

Yes, Michael. Thank you.

[Operator Instructions] I am not showing any further questions in the queue. I would like to hand the call back over to the speakers for closing remarks.

Thank you. I appreciate everyone’s participation. We will continue to work hard and try to navigate through these times and appreciate everyone’s support. Talk to you next time. Thank you.

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