Earnings Call Transcript - NXRT Q4 2020

Operator, Operator

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

Jackie Graham, Executive

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust Conference Call to review the company's results for the fourth quarter ended December 31, 2020. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; and Matt McGraner, Executive Vice President and Chief Investment Officer.

Brian Mitts, CFO

Thank you, Jackie. Welcome, everyone, for joining us on the NXRT 2020 Fourth Quarter Conference Call. I'm Brian Mitts and joined here with Matt McGraner. Let me start with some highlights from 2020. Net income for the year is $44 million or $1.74 per diluted share, as compared to $99.1 million or $4.03 per diluted share in 2019. Same-store NOI increases $2.1 million, or an increase of 3.2% as compared to 2019. The reported 2020 core FFO of $55.5 million or $2.20 per diluted share, which is an increase of 14% on a per share basis, as compared to 2019. Total revenue for 2020 was $204.8 million and total NOI is $116.1 million, which was an increase over 2019 of 13.1% and 13.2% respectively. NOI margins for 2020 were 56.7%, which is equal to margins of 56.7% during the same period in 2019. We continue to execute our value-add business plan by completing 1,679 full and partial renovations during the year, achieving an average monthly rent premium of $131 and a 21.7% ROI. Inceptions to date, the portfolio as of December 31, we've completed 5,355 full partial upgrades, 4,286 kitchen upgrades and washer dryer installs and 8,880 technology package installs, achieving an average monthly rent premium of $126, $48 and $44 respectively, and an ROI of 21.5%, 74.2% and 33.8% respectively. During 2020, we issued 1.3 million shares of stock for approximately $59.5 million gross proceeds. Based on updates in cap rates and NOI, we're revising our NAV per share range upwards as follows. On the low end, $42.83, on the high end $52.94, the midpoint of $47.88. These are based on cap rates ranging from 4.4% on the low end and 5% on the high side. Updated NAV compares the midpoint of $46.31 at December 31, 2019, or a 3.2% year-over-year increase. For the fourth quarter, we paid a dividend of $0.34125 per share on December 31 to shareholders of record as of December 15. Yesterday the Board declared a dividend per share of $0.34125 payable on March 31 to shareholders of record on March 15. Since inception, we have increased our dividend by 66%. Year-to-date, our dividend was 1.72x covered by core FFO for a payout ratio of 58% of core FFO for the year. Overall, although 2020 provided some challenges, we continued our track record of thoughtful capital allocation and earnings. As the pandemic first hit, stocks in general, including NXRT, dropped to multi-year lows; however, we aggressively bought back stock by 1.6 million shares of common stock at an average price of $27.07 per share. The stocks have recovered, including NXRT; we issued 718,000 shares of common stock at an average price of $43.90 per share, creating significant permanent value for shareholders.

Matthew McGraner, CIO

Thanks, Brian. I'll start by recapping our fourth quarter Same-store operational results. Strength in the fourth quarter proved in six out of our ten markets in 2020, with Nashville and Orlando being essentially flat and Houston being the only one that was slightly negative; every other market ended the year in the black. Notable markets for same-store NOI growth for the fourth quarter were Phoenix at 11.3% and Dallas at 4.9%. Even during the pandemic, leasing activity and revenue growth continued to improve in the fourth quarter compared to the second and the third quarters with eight out of our nine markets achieving revenue growth of 1% or better. The top five were Phoenix at 8.4%, South Florida at 3.9%, Dallas Fort Worth at 3.3%, Tampa at 3%, and Nashville at 2.9%. Renewal conversions were healthy at 53% for the quarter with five out of our ten markets delivering renewal growth rates of at least 2%, and every market was in the black. The leaders were Tampa at 3.1%, Atlanta at 2.6%, Phoenix at 2.4%, Dallas Fort Worth at 2.3%, and Nashville at 2.1%. On the occupancy front, we're pleased to report that Q4 Same-store occupancy remained over 94% and is well-positioned for 2021. As of this morning, the portfolio is 96.5% leased and has the healthy 60-day trend at 91.5%. Turning to full-year 2020 Same-store NOI performance, our Same-store margin improved, as Brian mentioned, to 55.8%. Same-store average rents and revenue each increased by 1.3% and 3.6% respectively, inline held strong across the majority of the portfolio in 2020 with six out of our nine markets growing NOI by at least 3.9%. Notable Same-store NOI growth markets for the year were, again, in Phoenix and South Florida at 12.3% and 10% respectively. Overall, the operational portfolio generated positive revenue growth for the entire year of 2020, with eight markets achieving growth of at least 2.4% or better; Orlando being the only outlier. The top five markets were Phoenix at 8%, South Florida at 6.1%, Charlotte at 5.2%, Tampa at 5%, and Nashville at 4.8%. On 2020 collections from April through December, the portfolios collected 98.5% of all total charges. Payment plans have continued to decrease month-over-month since we started offering the program in April 2020. The 2020 payment plans were 97.2% collected as of Friday, and there were 959 payment plans in April of 2020. Those numbers are down to 168 payment plans at the end of the year and, as of today, just under 198. Turning to 2020 acquisitions, as Brian mentioned, we acquired one asset in 2020, Fairways at San Marcos in Chandler, Arizona for $84.5 million, while selling four assets for $143 million and exiting the DC market entirely. We plan to upgrade Fairways by 156 units at an average cost of $11,800 per unit and generate premiums of $152 a unit with an ROI of approximately 15.5%. We also plan to install smart tech packages in every unit, as we expect to generate monthly premiums there of $40 a unit. As a result, our underwritten three-year average Same-store NOI growth for this asset is 7.5%. Today, Fairways is $150,000 or 19% ahead of our NOI underwriting budget already.

Brian Mitts, CFO

Thanks, Matt. We will turn it over now for questions.

Operator, Operator

We'll take the first question at this time. It comes from Buck Horne from Raymond James. Please go ahead.

Buck Horne, Analyst

Hey, thanks. Good morning, guys. I guess let's start with the real estate taxes to begin with and just kind of how that impacts your outlook for 2021 guidance. It certainly seems like that is the biggest variable. So, I guess I'm curious up to what degree we know that the assessments are going to come in at these elevated ranges? What amount is your best guess here? I know Tennessee seems to be the most volatile component of coming up with these estimates, but trying to get a sense of to what degree we know the assessments are going to come in this range and to what degree is conservatism on your part relative to the guidance?

Matthew McGraner, CIO

Hey, Buck. It's Matt. Good questions. Between outside case in our guidance and the base case, the two significant drivers were basically an increase in rental revenue, roughly 90 basis points. That's the market rent and a reduction of roughly $1.3 million in property taxes. So, you add those two together and you get 5% ROI growth or plus that. We think that the midpoint represents a fairly conservative range, which includes the uncertainty in Tennessee with the millage rate increases the rent implemented in 2022 to shore up municipality budgets. So, we don't expect property taxes to exceed that base case level and we're optimistic that there's some number between zero and that $1.3 million that would allow us to reach the upside case.

Buck Horne, Analyst

Okay, sound good. One other quick one for you. There was a line item noting miscellaneous income, I think for the year total about $1.8 million. But is there any color you could add to what the miscellaneous income represented? And is that some sort of repeatable fee income or what's in that line?

Matthew McGraner, CIO

It's just late fees and admin fees that we were able to collect in 2020, which is down from historical levels. But nonetheless, I think these can be collected this year again, particularly after the CDC lifts their moratorium.

Buck Horne, Analyst

I got you. Okay, great. I'll turn the call over to the next analyst and will follow up later. Thank you.

Brian Mitts, CFO

Thanks, Buck.

Operator, Operator

Our next question comes from Rob Stevenson from Janney. Please go ahead.

Rob Stevenson, Analyst

Good morning, guys. Matt, did you say that you had 198 payment plans versus 168 at year-end? Or did I get those numbers mixed up?

Matthew McGraner, CIO

Yes. That's about right. We started out with roughly 909 in April, down to…

Brian Mitts, CFO

Ninety-eight.

Matthew McGraner, CIO

Yes, down to 98 in February. We're at 168 at year-end.

Rob Stevenson, Analyst

Okay, so just 98, not 198? It's not an increase, it's a continued decrease?

Matthew McGraner, CIO

That's right. That's right.

Rob Stevenson, Analyst

Okay, perfect. I was wondering why it was going up? I just didn't hear that right. Thank you. And then did you give January 2021 collection percentage yet?

Matthew McGraner, CIO

Yes. We have it. It is just 95%.

Rob Stevenson, Analyst

And how does that compare versus December at this point, sort of 45 days in or November? Is that an improvement, status quo, or a little bit weaker? How would you characterize that?

Matthew McGraner, CIO

Yes, you could kind of compare it to last year in 2019 and it's about 70 basis points behind. But it's about 30 basis points behind trend but it's caught up and seems in line for now.

Rob Stevenson, Analyst

Okay. And then any substantial differential per day versus core FFO and what NAREIT would be calculated as of that you're anticipating prepayment penalties or anything else big that's likely to come through?

Brian Mitts, CFO

No. I think we're in line with NAREIT. If we sold those properties that Matt indicated, we would think has some prepayment penalties. But that's factored into our guidance.

Rob Stevenson, Analyst

Okay. And then the last one for me, you guys gave the market-by-market, quarter-over-quarter same-store operating metrics. I think it was page 16 in the supplemental. Nashville had a slightly negative average effect on rent sequentially and flat occupancy, but total rental income was up 10%. Can you walk me through how those numbers -- how you get to that big of a jump in rental revenue with occupancy flat and rental rate down slightly? Because the total rental revenue maybe includes some sort of fees or something that were outsized in Nashville that drove that?

Brian Mitts, CFO

Hold on one second, Rob.

Rob Stevenson, Analyst

Okay. But Tampa and South Florida both have -- both negative effects on rent changes quarter-over-quarter and negative occupancy and are slightly positive, but that 10.1% jump in Nashville really stuck out?

Brian Mitts, CFO

Yes, I think it might just include the additional property being added to the pool.

Rob Stevenson, Analyst

Okay, all right. Thanks, guys. Appreciate it.

Brian Mitts, CFO

Thanks, Rob.

Operator, Operator

We'll take the next question that comes from Amanda Sweitzer from Baird. Please go ahead.

Amanda Sweitzer, Analyst

Thanks. Good morning, guys. On your fourth quarter results, what was the main driver of the 90 basis points sequential decline in occupancy? And on that, did the demand for renovated or non-renovated units deviate from your expectations during the quarter?

Brian Mitts, CFO

Yes, the demand didn't deviate. We thought we would upgrade basically what we did. There were a couple of market-specific issues: one, one in Houston with an asset replacement that experienced some evictions that is now recovered. It's about 94% occupied today, and the other one was an asset in Charlotte that faced a similar issue. The other deal we have now in Charlotte had a small fire at Timber Creek that affected occupancy. But those are the main drivers of the decline, and like I said, today we're back to 94-plus percent for those assets.

Amanda Sweitzer, Analyst

Good, that's helpful. And then, pulling up to the earlier question is, how much bad debt are you assuming in 2021 guidance? And then how much of a benefit did you realize from some of those state-issued rental assistance bonds in the fourth quarter?

Matthew McGraner, CIO

Yes. Bad debt assumptions are roughly 120 basis points for 2021. We're in the band, I think this is your question in the band from the base case to the upside case. I think that number can decrease to about 80 basis points to cause further upside, but more often than not it will be better on bad debt in 2021 than 2020. We're already seeing an increase in first payment with rent on time. And like I said to Rob's question, the decrease in the payment plans.

Amanda Sweitzer, Analyst

Go ahead.

Brian Mitts, CFO

Yes, I was going to answer the aid -- particularly, we've collected around $1 million of aid across our various markets from local aids that's being offered outside of everything and the stimulus packages.

Amanda Sweitzer, Analyst

Okay, that's helpful, and then, are you expecting additional aid in your guidance ranges at all? Or that would be incremental if you received that?

Matthew McGraner, CIO

Yes, it'd be incremental. I mean, from all the states in our markets, there's over $7 billion of available aid, $40 million at the county level. And that's all available that we're not underwriting out of the guidance.

Amanda Sweitzer, Analyst

Okay, thanks. And then last question for me, it's just on capital allocation, the expected capital is like grading your guidance, right? Total sense to give in cap rates, but are you exploring any alternative external growth opportunities, given how competitive the transaction market is today?

Matthew McGraner, CIO

Not at the moment in terms of any other deviation from our core property tied for value and multifamily. We're not trying to venture outside of any of that. We're focused on internal growth first and foremost and recycling the capital. And then we can even look at our stock like we did in 2020, which I think Brian mentioned, we bought $60 million and implied a 5.8 cap and sold plus $50 million at a 4.6; I think we'll continue to do that.

Operator, Operator

The next question comes from John Massocca from Ladenburg Thalmann, please go ahead.

John Massocca, Analyst

Good morning. In the prepared remarks, you mentioned some market-specific NOI expectations. But if I heard correctly, those were all at or above the midpoint of total NOI growth expectations. So what are the markets counterbalancing those stronger markets? And why are they making relative underperformers?

Matthew McGraner, CIO

Yes, the three largest attractors, or under the 4% or 5%, are Dallas, Fort Worth, and Nashville. The good news for both of those markets are, if the taxes come in at the upside case for either markets, those markets will be above the midpoint, which should provide upside to our guidance. So it's largely -- it's almost entirely tax-related.

John Massocca, Analyst

Understood. And then, as you think about Q4 same-store rental rate change, what would that have been if you exclude uplift from rehab projects?

Matthew McGraner, CIO

Actually, we have organic -- probably just under 1%, so call it 70 basis points.

John Massocca, Analyst

And then, if you think about the NOI expectation for next year, in terms of occupancy, are you seeing the current levels of maybe being the ceiling on total occupancy particularly versus Q4? Or is a potential uplift there as well as kind of rental rate?

Matthew McGraner, CIO

Yes, I think there's a lot of uplift in occupancy, I think it's going to be a primary driver of growth first, and then the rates will -- once you have stabilization across…

John Massocca, Analyst

I think it was a feeling kind of the 96.5% you're at today or you could even go higher? Because everything kind of shakes out when we get to the end of the month.

Matthew McGraner, CIO

Yes, I mean, we've historically run around 94%. So, I think we'll continue to push up interest rates for another 0.5% to 1.5% in occupancy. So, I think we'll continue to do that. I'd be surprised if we push in higher than 96%.

John Massocca, Analyst

Okay, that's it from me.

Operator, Operator

The next question is a follow-up question from Buck Horne from Raymond James. Please go ahead.

Buck Horne, Analyst

Yes, just one quick follow-up for me. So you mentioned in some of your NOI forecasts and your outlooks that you're seeing continued economic strength into Sunbelt markets, plus, some facts there continued in migration, population trends that seem to be playing out. I'm just wondering, in some of the early lease application data, whether it's fourth quarter or the January, February numbers you got so far, is there any tangible uptick in applications coming from out-of-state or out-of-market residents that are part of that net migration effect that you can quantify?

Matthew McGraner, CIO

Yes, absolutely. So January -- the January numbers we have to net migration into our markets for NXRT markets is 10.9%. The majority of that is 11% from California, 9% New York, Ohio is 8%, and then Illinois was above 5%. January 2021 net migration data into our markets, we can send it to you later after the call, but just to give it to you here was 14.4%, roughly a 3.5% increase from January 2020. Same leading markets, California was 19% of those numbers, from almost 11% in January 2020 from California to 19% in 2021. New York was 14%, that number is up about 8% year-over-year; so definitely seeing an impact, and in a big way, both in Texas, specifically Phoenix, and Florida.

Brian Mitts, CFO

Hey, it's Brian. So I just want to follow up from your earlier question about miscellaneous income. You were talking about the actual miscellaneous income on the face of financials, so we misunderstood the question, but what that $1.77 million is mostly business interruption insurance that we received on the cutters property, which was basically completely destroyed in October of 2019. So we've been rebuilding it this year and getting income from that insurance.

Buck Horne, Analyst

There we go. That's helpful, I appreciate it.

Brian Mitts, CFO

Once that's operational again, that'll flip up the NOI and out will be the miscellaneous income.

Buck Horne, Analyst

Got it. Thanks.

Operator, Operator

The next question comes from Jon Petersen from Jefferies. Please go ahead.

Jon Petersen, Analyst

Thanks. If we think about more leisure travel affecting certain markets and looking specifically at Orlando and Vegas, places that you have significant exposure; I mean, if you can help us characterize how some of your properties are positioned there and if you expect some uplift as we see more leisure travel? And then on the other side of it, I like the migration trends you were just talking about, I mean, it's your same guidance underwriting some unwinding of that in migration turning into out migration as things reopen?

Matthew McGraner, CIO

Yes, we really took it on the chin, to your first question about leisure travel markets. In Orlando in 2020, the one asset I can think that comes to mind was one of us which was directly impacted by the closure of the theme parks and in some cases saw occupancy drop to as low as 90%. We hadn't seen that since we acquired the asset. We're getting through those issues, and are really optimistic that we can see that property come back and perform much better in 2021. Vegas, on the other hand, really wasn't as weak as we thought it would be. Obviously, the district closed down and a lot of the leisure-related jobs were lost or furloughed. But we saw that offset by in-migration from California particularly, and that helped us have a pretty good year in Vegas overall, and I think we ended the year positively year-over-year. I particularly don't believe that net migration trends into these markets will reverse because of a vaccine or some other development. I think that these cities are attractive cities they were 20 years ago; they offer a lot of lifestyle and other amenities at an affordable cost. While we're located in these markets, we think they'll continue to grow, and I don't think that once a millennial or other new jobs applicants comes and stays in the Sunbelt will return anytime soon. But that's our personal belief.

Brian Mitts, CFO

And yes, a lot of that is from the jobs in companies that moved there, and they're not likely to turn around and move back. Especially in our renter cohort, these aren't people that were escaping the cities, and then they're going to go back once things return to normal. They are mostly working-class people that are permanently moving to follow jobs or companies.

Jon Petersen, Analyst

Appreciate the color. Thank you.

Operator, Operator

The next question comes from Michael Lewis from Truist Securities. Please go ahead.

Michael Lewis, Analyst

Great, thank you. I wanted to ask about the cap rate assumption in the NAV calculation; it looks like you took the cap rate down about 30 basis points across all the markets, so I was just wondering if you could give a little more color on -- is that due to interest rates or some blanket assumption? Or, alternatively, is it based more on transactions you're seeing in each of those markets or just a coincidence that they're all the same? And, what's the level of transactions and the confidence you have in cap rates right now?

Matthew McGraner, CIO

Yes, the main drivers were tightening at the high end, and there were supreme cap rates, sub 5%; I haven't seen a 5% cap rate in several years now. And so, I think that from what we surveyed with CBRE and Green Street in Real Page, they came back with lower numbers than these. From a transactional perspective in the acquisition market and bidding intent, we haven't seen and have offered on assets, most recently in Tampa and Charlotte, that have gone sub 4%. We're holding our notice bidding around for 4.4%, 4.5% cap rates. There is a lot of capital out there to your point, I mean there is an incredible amount of sub-figures in debt financing as well. And it's just driving a material supply-demand imbalance for this type of product in the Sunbelt.

Michael Lewis, Analyst

Thanks. Matt, you mentioned this is an internal growth company; you have about 14,000 units, you get this kind of modest acquisition activity in the 2021 guidance. Do you like the size of the company, or do you think there are any advantages to diversifying or going into new markets? Or, just growth of the portfolio, in general, or do you like where you are now?

Matthew McGraner, CIO

Yes, great question that we've debated a lot. We've never been the company that's saying we're going to own 50,000, 75,000, or 100,000 units. We have basically 40 properties since we've been public, and we went public in 2015. We were able to quadruple the market cap by recycling capital. That's what we care about, first and foremost, is the stock price and getting that up for stockholders. We don't want to venture into any new property types of speed, but we are looking at and intrigued a little by Research Triangle in Raleigh-Durham. We made some acquisition there looking at life sciences and some private space; we like the growth and the demand drivers there. That's a market that we are searching for, and it could be interesting over the next few years for us, but other than that, we're comfortable and like what we're doing.

Michael Lewis, Analyst

Sounds good. And then just lastly for me, I'm going to ask about a line item in the Income Statement as well. That corporate G&A line was down a fair amount sequentially in year-over-year. When I looked at the guidance for next year it looks like it goes back up. Was there anything unique or that we should look through that drew that number lower?

Brian Mitts, CFO

Yes. I think maybe being conservative on the guidance, the cheese and drop in auto cost in some of our transfer overhead; they are pretty minimal and immaterial now, but they're certainly less travel and stuff. It's getting flushed through corporate G&A because of the pandemic. But yes, we don't really expect a material increase in those expenses, but I think we -- for guidance kind of averaged it back out to you where we thought it would be historically.

Operator, Operator

Next question comes from John Massocca; it's the follow-up question from Ladenburg Thalmann. Please go ahead.

John Massocca, Analyst

Just a quick one on capital recycling. I guess as you think about that today, understanding the timing and the bespoke transactions, would that be day one dilutive on a per-share basis, given cap rate dynamics you're seeing today? Or do you think it would be largely, potentially what you can dispose of is equal on a day one and alive versus what you can take on?

Matthew McGraner, CIO

Certainly, we've done it in a reverse manner. So we've acquired the property before we've settled on the disposition. And that's accretive. But depending on where you buy the deals could be cap rate dilutive. But, our stabilized basis would probably mean more than likely -- that could be by $4.25, $4.5. Our goal is to generate 75 basis points to 125 basis points in a whitelist post-rehab in three years. That kind of second -- year half, second year, cap rate accretion would deliver at that point; that's the way we think about it.

Brian Mitts, CFO

We typically recycle on something that's older and has gone through the rehab process. So, the upside there is not as much, to Matt's point, as the new deal with burning in, and then not too much NOI focus but core FFO for refinancing that -- that new deal or putting financing on that new deal at a cheaper cost of debt than what the current deal was; ultimately, I think that's accretive to core FFO.

John Massocca, Analyst

Thank you.

Operator, Operator

That ends the question and answer session for today, and I'd like to turn it back over to you for any closing remarks.

Brian Mitts, CFO

Yes, no, we're good. I appreciate the overall participation and a lot of good questions. We look forward to 2021. 2020 was definitely a tougher year than we thought going in. But I think we came out pretty well and well-positioned and have some good prospects for the future. So, thank you for everybody's participation.

Operator, Operator

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