NexPoint Residential Trust, Inc. (NXRT) Q4 2021 Earnings Call Transcript

Good day, everyone. And welcome to NexPoint Residential Trust's conference call to review the company's results for the fourth quarter and full year ended December 31st, 2021. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer, and Matthew McGraner, Executive Vice President and Chief Investment Officer. As a reminder, this call is being webcast through the company's website. Before we begin, I would like to remind everyone that this conference call contains forward-looking statements that are based on management's current expectations, assumptions, and beliefs. Listeners should not place undue reliance on any forward-looking statements and are encouraged to review the company's most recent annual report 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 update or revise any forward-looking statements. This conference call also includes an analysis of non-GAAP financial measures.

Thank you, Jackie, and welcome everyone joining us this morning. I appreciate your time. I'm Brian Mitts, and I'm joined by Matthew McGraner. Let's kick off the call with some commentary on the quarter and year, then cover our results, and wrap up with guidance which we are initiating for 2022. With net migration continuing into our core Sun Belt markets and the continued shortage of high-quality, affordable housing, NXRT continues to enjoy enormous pricing power with new lease rates increasing 24.5% and renewal rates increasing 15.6% across the portfolio in Q4 2021. Net migration into our markets continues unabated. This continues to track capital and some cap rates to historic lows while rate increases soar to historic highs. Our growth prospects are not dependent on acquisitions. We continue to achieve mid-cap returns from our value-add strategy, which allows us to move yields by 50 to 100 basis points over three to five years from acquisition. The ongoing and widening shortage of affordable housing in the U.S., more acute in our Sun Belt markets, as new household formation outpaces new housing deliveries, gives us plenty of runway to implement our strategy across our existing portfolio and new acquisitions. Increased net migration and the shortage of housing position NXRT to continue to push rates aggressively into 2022 while maintaining high occupancies. Net income for the fourth quarter was $38.8 million, or $1.50 per diluted share, on total revenues of $58.5 million, compared to a net loss of $4.2 million, or $0.17 per diluted share in the same period in 2020, on total revenue of $50.5 million. For the quarter, same-store rent increased 11.1%, and same-store occupancy was up 30 basis points to 94.2%. This, coupled with an increase in same-store expenses of only 1.7%, led to an increase in same-store NOI of $3.9 million, or 14.7% compared to Q4 2020. We reported Q4 core funds from operations of $17.8 million, or $0.69 per diluted share, compared to $0.56 per diluted share in Q4 of 2020, a 23% increase. For the year ended December 31, we reported net income of $23 million, or $0.89 per diluted share, which included a gain on sales of real estate of $46.2 million, versus $44 million, or $1.74 per diluted share for 2020, which included a gain on sales of real estate of $69.2 million. For the year, same-store NOI increased $6 million or 5.5% compared to 2020. We reported core funds from operations in 2021 of $62.5 million, or $2.43 per diluted share, compared to $2.20 per diluted share for 2020, an increase of 10.3%. We continue to execute our value-add business plan by completing 353 full and partial renovations in Q4 and achieving an average monthly rent premium of $182 and a 24.1% ROI for the year. As of December 31, we've completed 6,015 full and partial upgrades, 4,321 kitchen upgrades, and washer dryer installations, along with 9,624 technology package installations, achieving an average monthly rent premium of $136, $47, and $43, respectively, with an ROI of 21.6%, 72%, and 33.5%, respectively. Collections for Q4 2021 were 99.1% of total announced charges, in line with pre-pandemic levels. Based on our current estimate of cap rates in our markets and forward NOI, we are reporting a NAV per share range as follows: $90.23 on the low end, $106.36 on the high end, and $99.38 at the midpoint, based on average cap rates ranging from 3.5% to 3.8%. For the fourth quarter, we paid a dividend of $0.38 per share on December 30. Yesterday, the Board approved a dividend of $0.38 per share, payable on March 31. Since inception, we've increased our dividend by 84.5%. For 2021, our dividend was 1.73 times covered by core funds from operations with a payout ratio of 57.9%. For 2022, we are initiating guidance as follows: net income per share is projected to be between $4.05 and $4.25, with a midpoint of $4.15. Same-store revenue is expected to increase between 9.4% and 11.1%, with a midpoint of 10.2%. Same-store expenses are expected to see an increase of 7.2% on the low end, 5.5% on the high end, with a midpoint of 6.3%. We project same-store NOI to increase between 11% on the low end to 15% on the high end, with a midpoint of 13%. Core funds from operations per diluted share are expected to be between $2.87 and $3.07, with a midpoint of $2.97. At the midpoint of our estimated 2022 core funds from operations of $2.97, this represents a 22.4% increase over 2021 core of $2.43. Let me turn it over to Matt for his commentary.

Thank you, Brian. Let me begin with our fourth-quarter same-store operational results. Our Q4 same-store NOI margin improved to 59.4%, an increase of 358 basis points compared to the previous year. Rents increased by 6% or more across all markets, while the same-store average effective rate growth reached 11.2% for the overall portfolio. Houston had the lowest growth at 6.2%, while Atlanta, Phoenix, Las Vegas, and Tampa all saw growth of 12.8% or more year-over-year. Fourth-quarter same-store NOI was impressive overall, with the portfolio averaging 15.9%, driven by an 8.9% increase in total revenues and a controlled 1.7% rise in total operating expenses. Leasing activity and revenue growth continued to show strong momentum, with seven of our ten markets achieving revenue growth of 7% or better. The top markets were Tampa at 15.3%, Orlando at 14.9%, Nashville at 10.8%, South Florida at 9.9%, and Phoenix at 9.3%. Renewal conversions were robust at 55.2% for the quarter, with seven of our eleven markets experiencing renewal rate growth of at least 15%, and none below 9%. The leading markets for renewals were Tampa at 24.5%, Orlando at 19%, South Florida at 17.5%, Phoenix at 17.1%, and Atlanta at 16.7%. We noticed a significant increase in rent growth beginning in Q2 last year. In Q2 and Q3, we capitalized on market conditions, achieving new lease rates of 23.8% in Q3 and 24.5% in Q4. Renovations decelerated in Q3 due to a 60% resident retention rate, widening the gap between new lease growth and renewals. We strategically decided to push for higher renewal rates to bridge that gap and create more renovation opportunities. Consequently, retention dipped to 54%, and renewal increases rose from 10.5% in Q3 to 15.6% in Q4. New lease increases also improved from 23.8% to 24.5% quarter-over-quarter. Q4 same-store occupancy remained above 94%, which positions us favorably for 2022. As of this morning, the portfolio stands at 96.5% leased with a solid 60-day trip trend of 91.3%. Looking at the full-year same-store NOI performance, our margin improved by 32 basis points over 2020 to 57.6%. Average effective rents and revenues each rose by 11.2% and 4.9% respectively, while NOI remained strong across most of the portfolio in 2021, with seven out of our ten markets growing NOI by at least 4%. The normal same-store growth markets for the year included Tampa at 11.8%, Phoenix at 8.9%, and Atlanta at 8.1%. Operationally, the portfolio demonstrated continued positive revenue growth in 2021, with eight of our ten markets achieving growth of at least 3.6% or more, although Houston and Charlotte lagged. The top performing markets were Tampa at 9%, Phoenix at 8.1%, South Florida at 5.9%, Las Vegas at 5.8%, and Orlando at 5.6%. Regarding our 2021 acquisitions and dispositions, as Brian noted, we acquired four properties in 2021: Creek Site at Matthews, a property at Lake Norman, Six Forks Station, and Hudson High House in the Raleigh-Durham market. This acquisition activity added 1,129 units to our portfolio with a total purchase value of $289.5 million. We successfully recycled capital from profitable property dispositions while bolstering our earnings growth profile. We sold Beechwood Terrace and Cedar Point in Nashville for $91.25 million, resulting in a 3.5 times multiple on invested capital with a levered IRR of 36.1%, generating approximately $50 million of net cash proceeds that were utilized for a tax-efficient reverse 1031 exchange into the two Charlotte assets. The newly acquired properties have performed exceptionally well since acquisition, budgeting NOI by around 15%, including Hudson High House in Raleigh-Durham, which closed on December 7 of last year. At Hudson, we plan to fully upgrade 210 units at an average cost of $13,550 per unit, generating premiums of $269 per unit with an ROI of about 27%. We also intend to install around 160 washers and dryers, generating monthly premiums of $45 per unit, along with Smart Home tech packages in all units, expecting to achieve monthly premiums of roughly $45 per unit. Consequently, our projected three-year average same-store NOI growth for this asset stands at 18.5%. Turning to our 2022 guidance, as Brian mentioned, we are excited to anticipate 13% same-store NOI growth at the midpoint. We expect particularly strong performance across our upcoming markets, with Dallas predicting same-store NOI growth of 17.7%, Las Vegas at 19.2%, and our quarterly growth projections at 14.8%. We will stay actively engaged in scouting attractive opportunities within our style box, despite the challenges in the acquisition market. We plan to exit Houston and bring Old Farm, Stone Creek, and Hollister Place to market this year. Overall, we believe the objectives of our internal growth align with our business strategy. With planned upgrades and various interior renovations, we expect to maintain growth as we move into 2022. Thank you for your attention, and I’ll hand it back to Brian.

Hey, good morning, guys. Congratulations, great work. Fantastic quarter. So a question relates to how you perceive the consumer's ability to continue keeping up with this rate of increase for too long. Just any color you have on rent-to-income ratios, how those are trending? What is the profile of the incoming renter in your portfolio looking like these days? Any signs of consumer pushback?

Yeah, I'll take that, Buck. Thanks for the comments and the question. Pre-pandemic, our average household income was roughly $50,000-$55,000; today that's ticking up over $60,000. We are attracting a higher demographic, especially from some of the newer deals in South Florida, Phoenix, and Raleigh-Durham. At the same time, while we are pushing rents, our percentage-based increase is only a few $100, while we’re seeing our average household income go up by over 10% since pre-pandemic levels. This gives us confidence that we remain an attractive option, especially with amenities we are adding. We’re seeing higher retention because when prospective tenants evaluate their options, they often find it’s going to cost them significantly to move, and they often prefer what we have to offer. This is why we are seeing above-average retention and renewal increases. Yes, there is some pushback from consumers, but our teams are effectively demonstrating the value we provide.

Thank you, guys. I appreciate the color. One question that comes to mind: given the rate of these types of rent increases, what’s your perspective on potential push-back from local politicians or city councils? Are there risks of rent regulation coming into play?

Our perspective on regulation is certainly lower than in gateway markets. We haven't encountered significant issues, aside from pandemic-related moratoriums, or any regulations like those in San Francisco. Fortunately, we own in markets that are less regulated. Currently, we don't foresee any regulations hindering our ability to meet demand for housing.

Question about labor and cost of materials on your renovations. Can you tell us what you’re projecting in your cost line for those types of items, or any other costs that may alter your expectation, including property taxes?

Yes. Our cost of materials and labor is up an additional 3% over what they were in 2021. However, our rental increases are up roughly 9% compared to 2021, so we feel confident in offsetting that cost. Regarding other important expense line items like property taxes, we are optimistic. This year looks better than last year, with property tax increases somewhat more manageable at around 7% on a same-store basis.

I just wanted to ask about the composition of your acquisition pipeline. How much of that is sourced through relationships versus what's being marketed?

I'd say roughly $100 million to $150 million of our pipeline is sourced through relationships within the family of BAH. We believe these off-market deals should yield better cap rates than those widely marketed. We're particularly interested in a few deals in Raleigh, Phoenix, and Atlanta. The marketed deals, however, have been highly competitive, averaging around 13 to 15 deals as we expect pricing to hover around low 3% cap range.

All right. Looks like that was the final question. We appreciate everyone's time, and thank you for the questions and comments.

And this concludes today's call. Thank you for your participation. You may now disconnect.