Q1 2022 NexPoint Residential Trust Inc Earnings Call

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Good day and welcome to the next point.

Residential Trust Q1, 2022 conference call today's conference is being recorded and now at this time I would like to turn the conference over to Jackie Graham. Please go ahead ma'am.

Thank you good day, everyone and welcome to <unk> residential Trust's conference call to review the company's results for the first quarter ended March 31 2020.

On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer, and Matt Mcgrew, Our executive Vice President and Chief Investment Officer. As a reminder, this call is being webcast through the company's website at <unk> Dot map windup.

Before I 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.

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.

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 <unk> does not undertake any obligation to publicly update or revise any forward looking statements. This conference call. Also includes analysis of non-GAAP financial measures for a more complete discussion of these non-GAAP financial measure.

Please see the company's earnings release that was filed earlier today I would now like to turn the call over to Brian . Please go ahead.

Thank you Jackie I appreciate everyone's time this morning.

I'm, Brian Mitts, and I'm here with Matt and the greater.

I'm going to start the call by going through our Q1 results talking about are now.

And then I'll finish up with guidance, which we are revising upward and then I'll turn it over to Matt to discuss some of the specifics in the portfolio.

Dig into the leasing numbers and different metrics driving performance this quarter.

For Q1, net loss was negative $4 7 million or <unk> <unk> loss per diluted share.

Total revenue of $60 8 million.

That compares to a net loss of $6 9 million or a 27 loss per diluted share in the same period in 2021.

And that was on total revenues was $51 8 million.

Quarter of same store rent increased 11, 7% same same store occupancy was down 90 basis points to 94, 4% well discuss a little bit about the occupancy.

What's driving that.

This coupled with an increase in same store expenses of four 7% led to an increase in same store NOI of 16, 4% as compared to Q1 2021.

We reported a Q1 core <unk>.

$20 1 million or <unk> 78 per diluted share.

Impaired to 56 cents per diluted share in Q1 of 2021 for an increase of 39, 5% for the.

Quarter, we completed 531 full and partial renovations during the quarter, which was an increase of 50% from the prior quarter. So increasing our waspy there at least 489 renovated units during the quarter, achieving an average monthly rent premium of $138.

And a 26, 3% ROI during the year, which is about 450 basis points higher than our long term average ROI on rehabs.

Inception to date and the current portfolio, we completed 6398 full and partial upgrades 4510 kitchen upgrades and washer dryer installments.

9000, 602004 technology package installations.

Even in average monthly rent premium of $139 $48 and $44 respectively.

And then Roy of 21, 8%, 78% and 33, 5% respectively.

For now based on the current cap rates that were estimated in our markets and our.

Karsten.

Actual NOI as well as our forward NOI for the next few quarters.

Reported NAV per share.

Falling range.

$94 58 on the low end.

$111 23, and the high end for midpoint of $102.90 at the midpoint.

These are based on the cap rates that we estimate between three 5% and three 8%, which is unchanged from last quarter.

First quarter, we paid a dividend of <unk> 38 cents per share on March 31st and the board declared a dividend for Q2 the same amount.

Since inception, we've increased our dividend 84, 5% and for the first quarter. Our dividend was 2.6 times covered by core SFO.

Which is a payout ratio of 48, 5% of our core FSS.

Turning to guidance as mentioned, we are revising guidance upwards as follows.

Our core <unk> per diluted share of $2 93 sets of low end three.

$3.09 on the high end for a midpoint of $3 one.

That compares to prior guidance of $2 97, or <unk> increase for.

For same store NOI, we're estimating 12, 6% on the low end, 60% on the high end with a midpoint of 14, 3%.

That compares to our prior guidance of 13% for 130 basis point increase.

At the midpoint of our 2022 core assets.

$3. One says represented 23, 9% increase over our 2021 core <unk> $2 43.

So with that let me turn it to Matt.

Thanks, Brian .

I will start by going over our first quarter same store operational results. Our Q. Our Q1 same store NOI margin improved this quarter to 59, 8% up 264 basis points over the prior period.

Rental revenue shows six 3% or greater growth in all markets, while same store average effective rent growth reached 15, 6%.

While still strong Houston lagged at seven 5%, while all other markets achieved year over year growth of 15, 3% or higher sample led the pack with 42, 7% effective rate rose to $216 per month.

First quarter same store NOI growth was pretty special across the board with the portfolio, averaging 16, 4% driven by 11, 3% growth in total revenues and a well managed four 6% growth in total operating expenses.

Eight of our eight of our 10 same store markets achieved year over year growth of seven 5% or greater.

On the leasing across the portfolio experienced continued positive revenue growth in Q1 with seven out of our 10 markets achieving growth of at least eight 7% or better.

By markets were Orlando at $16 four Tampa at $14 7 million Nashville in 2014 to Phoenix or 14 point too soft.

South Florida at 12, 2%.

Renewal conversions were also a healthy 55, 2% for the quarter with eight out of our 11 markets executing renewal rate growth of at least 15% and know markets were under 10%. The leaders were Tampa again at 27% Orlando at $24 six software at 21 five yes.

<unk> 27 in Phoenix, a 19 point too.

As Brian mentioned, we increased our rehab pace in Q1 between 531 units, which made up about 30% of all available new lease inventory side during the quarter rehab added roughly 8% additional growth on top of an already organically strong 17%.

We create some additional vacancy during the quarter to add where we have inventory as demand for rehab units continues to increase and be extremely well received by our tenant base.

On the occupancy private pleased to report that Q1 same store occupancy remained above 94% positioning us well as we enter the peak leasing season for 2022.

The portfolio is 96, 5% leased with a healthy 60 day trends of value.

About 80%.

Also as of today, new lease and renewal growth continues to keep pace with Q1 in April with new lease growth of 24% of renewal growth north of 18%.

Through this morning.

Turning to 2022 acquisitions and dispositions as Brian mentioned, we acquired two assets on April one.

They're in Sandy Springs, Georgia, and safe on Maryland in Phoenix. These purchases added 562 units to our portfolio for a total purchase price of $143 4 million, we used cash on hand, and proceeds from a $70 million upsized, our revolver to acquire them.

Expect to recycle capital from successful property dispositions at Houston that we previously discussed last quarter.

Reduced leverage later in the year.

These are the same person purchases should enhance internal growth for the next three years.

And our rehab pipeline in two of our best performing markets.

A little more on our business plans for each of these deals we purchased the there for $65 5 million for a year, one economic cap rate of 4%.

We plan to upgrade 225 units at an average cost of $10265 a unit and generate premiums of $161 a unit with an ROI of approximately 20%. We also plan to install smart tech packages in every unit and expect to generate monthly premiums of 48 to $5 a unit per.

For you for <unk> as a result, our underwriting for your average same store NOI growth for this asset at six 5%.

For our states, we purchased it for $77 9 billion for a year one economic cap rate of four 3%. We played upgrade 165 units at an average cost of $11700 a unit and generate premiums of $142 a unit and rois of approximately 75%.

We also plan to install smart tech packages in every unit here as well and expect to generate monthly premiums of $45 per unit.

As a result, our underwritten for your average same store NOI growth first stage of seven 7%.

Turning to guidance as Brian said, we're excited to announce that upward revision to our prior guidance of 11, 15% same store NOI growth for 'twenty two to a range of 12, 6% to $16, one with a midpoint of 14, 3%.

As you can see the upward guidance revision is primarily attributable to a stronger than expected revenue growth and is widely written and illustrated on the highlight page of our supplement supplemental our core markets are continuing to experience strong net migration. This population.

<unk> growth and lack of quality affordable housing should remain elevated this year in our opinion and as illustrated again by the highlight page compared to other multifamily options. There is still a significant delta between class B class a in FSFR rents or market with Delta is ranging from three to $500 a unit for multi and nearly every $700 for FSFR.

In closing I'll, just reiterate that we're excited about the strong starts to the year.

Expecting to see continued strength in the middle market rental housing, particularly in our core sunbelt markets. That's all I have for prepared remarks, thanks to our teams here at exploit VH for continuing to execute trabecular <unk> Brian .

Yes.

Good questions.

Ladies and gentlemen, if you'd like to ask a question you could see that by pressing star one on your telephone keypad just keep in mind. If you are using a speakerphone. Please make sure. Your mute function is released so that similar crude shark open once again star one for questions.

To allow everyone an opportunity to signal.

And we'll hear first from Michael Lewis with <unk> Securities.

Great. Thank you.

I wanted to ask a little about how you're controlling interest expense. So I realize you have hedges in place to fix your debt.

But I was I was surprised to see the interest expense go down this quarter and I think it was below what you had guided to for the quarter I realize.

The interest expense.

Guidance, just a little bit for the full year could you maybe talk about especially since you have.

Now you have a more sizeable balance on your credit facility.

Kind of walk through that math.

In the first quarter and talk about how youre thinking about higher rates.

Yes.

Hey, Michael its Brian Youre, breaking up a little bit on our end, but I think I caught most of that.

Yeah, obviously with the floating rate debt and interest rates moving upwards, that's something that we're very focused on.

The portfolio is.

Very hedged, which is meeting a lot of that increase from our perspective.

So.

The math on it is essentially.

Other really other than really the corporate facility, which we are paying down with the net proceeds from Houston. So that'll decrease so that's part of the math.

We're a rising rates would otherwise effect as well because we'll pay that down.

There are not the same extent and then the rest of it is we just.

Les on the swaps as rates increase and at some point that slips and we end up getting paid on the swaps. So.

Overall, it really mutes our change in interest rate expense throughout the year. So again.

Didn't really get the full question, but hopefully that address that staff.

Happy to follow up yeah.

Yeah, No that's helpful.

And then kind of a bigger picture question a lot of people are kind of guessing the next stage of the economic cycle.

With maybe increasing risk of a recession I was wondering how youre thinking about the next stage of the multifamily cycle right. So obviously rent spreads aren't always going to be 20%.

And that's expected and that's okay.

But how do you see this.

How do you see this kind of going I mean do you.

It sounds like your spreads into April are still extremely strong I mean, how do you think about how the multifamily cycle.

<unk>.

Yeah, Hey, Michael it's Matt.

I think we're experiencing sort of a re rating of rents across the.

Our core sunbelt markets and while there pretty dramatic on a.

Percentage basis, a whole dollar.

<unk> <unk> hundred dollars rents are still a comparison to gateway markets.

Still kind of favors a cost of living advantage for <unk>.

For the Sunbelt.

Yes, the multifamily cycle I think it can continue.

As long as long as we see these population trends in migration and job growth are really the only and my view is existential threat to our business.

As an uptick in crime.

So as long as we.

<unk> submarkets prevent that.

Our bi safe.

Safe and affordable housing I like our business, especially again on a relative price point.

Transactions in the interest rates.

Kind of the volumes that we're seeing haven't really stop there's over $10 billion.

A product out there in terms of pipelines.

The portfolio transactions I think that the.

The bidding for those deals.

Will be less wise, because they have been in the past or at least last year.

Stronger groups, such as ourselves other Reits.

The larger asset managers will probably go narrower too.

So just the qualified guys instead of the more qualified groups instead of casting a wider net but transactions are still getting done.

The agencies are still productive.

The banks and lifestyles are getting more aggressive as the agencies are slower.

To produce or.

Tightened spreads, but just the sheer amount of equity capital I think we'll keep.

Keep a strong transaction volume this year and then as long as you can see elevated growth over inflation.

Yes, I think that our business continues to be strong I can't.

Other than following the the other Reits that own in different areas in the gateway markets I can't really speak too so their view, but this is.

I think our view is pretty constructive this year.

Yes, that's great color. It's interesting to hear you talk about crime I think a lot of us think of that as like a northerner coastal city problem.

But the rates have certainly gone up everywhere.

Just lastly.

I wanted to ask about.

You had a lot of your operating expenses up the one that was down was the big one which was real estate taxes was down year over year.

So I just wanted to ask about that in May.

Maybe you were able to find such success fighting some of those or maybe talk a little bit about what's happening on real estate taxes.

Yes, you're exactly right Michael.

Knocking on wood, while I answer this question, but.

Had a little bit success, so far.

The first quarter from 2021.

Appeals, most notably in Terry County.

All $350000 of savings in settlements that we didn't expect so that's some attribution for that but overall.

We've had more muted.

I guess real estate tax paradigm this year than in the last few.

Yes, Salt Lake.

And in the last few years frankly, we were.

We are frustrated by being three to four to five.

Percent higher than our peers.

Hopefully that will flip in our favor this year, but so far we've had some success in Texas Appeals.

Great. Thank you guys.

You bet.

Yes.

And now we will take a question from Matteo Okusanya with credit Suisse.

Hi, Yes. Good morning, everyone just a follow up on Michael's question.

Around the swap Brian could you give us a sense as to like when the swaps back to expire and I think for the next one or two years.

When do we kind of thought to worry about the swaps coming off and then you have to put on new swaps in a rising rate environment.

Yeah.

Hello, how are you.

Yes.

So its not until really.

2026, so we start to see the swaps.

Falloff, we had a couple that ended at the end of this quarter Q1.

I think there is another one that expires or matures in July but the vast majority of them go out to next.

Four years.

And that's about $1 8 billion of swaps.

Okay.

It's helpful.

Yes.

Sorry, I was referring.

Going to page 22 of our supplement we've got the.

The swap table there if you want to take a look at that but sorry go ahead.

Thank you and then the second question is more I guess, realizing youre in the body.

Part of the market with affordable housing, but I'm curious as you're kind of starting to see any impact of rising rate.

Around kind of better retention, because people suddenly buy homes or more demand because people suddenly can't buy homes again, realizing you're kind of in the affordable housing segment, but.

Wondering if you're seeing any of that at all.

Hey, Tayo, it's Matt.

Yes.

Good to hear from you on the retention is strong at 55% as I mentioned.

We think that the trend will remain remain elevated.

Oftentimes just as sort of anecdotally, we will send out renewal notices.

You'll get some pushback from tenants and we're like Okay. We will go go check go check the market go check.

Before you make your decision or even sometimes poster decision they come back to us and they realize that there's really no. Other affordable option that is better when you add on moving costs plus the <unk> Delta that is highlighted on a pilot basis supplemental we're seeing.

Probably a quarter of our of our renewal knows is coming back with that sort of same narrative that we ended up renewing them and that's that.

We're also experiencing still.

Upward trends in sort of our demographic data I think the latest.

I hope this quarter I think the latest data that we show for household income is now up to 71000 for argue that switches.

Up from $56 60, and so we're continuing to sort of see.

Enhanced way.

Wage growth within our tenet cohorts us Thats positive and then FERC for the vacancy aspects from US the courts are open again largely in our markets.

We've had a chance to move out some of the slower payers.

Or non payers.

Really at a time, where we can benefit from the leasing season. So we are starting to take advantage of that.

Kind of forced turnover if you will.

Gotcha, and then one more for me the doublet data you just referenced is that just what are you getting that does some of the new applicants or you kind of have dealt with data for the entire.

Pool of residents.

Yes, that's just tested as of as of Q1. So it will include the new or the new releases, but plus the legacy assets.

Gotcha. Thank you.

Great quarter.

Got it thank you.

Yeah.

As a reminder, the star one to ask a question, we'll now move to Peter Abramowitz with Jefferies.

Alright, thank you.

I just wanted to go back to kind of the interest expense and how it's factoring into the full year guidance. So.

Just kind of looking at the first quarter results and Annualizing that would get you kind of well above.

So where you are in terms of the new full year guide. So I know you have.

Youre dealing with the rising rates and you talked about that before is there anything else kind of within the numbers.

That's kind of driving that.

The sequential decline in the <unk> run rate on a quarterly basis.

They're just kind of a significant degree of conservatism in the guide.

Yeah, Hey, Peter it's Matt I think theres, some some conservatism for sure but.

Maybe maybe what's not flashing out to you is we're also factoring the dispositions of the Houston portfolio as well so that would sort of meet the run rate a tad if you will because theyre slightly more more value.

Yes.

Those deals and the ones, we just bought.

Yeah.

Got it.

Okay.

And then.

I guess two years into the pandemic.

How are you kind of tracking the in migration.

Any signs that you know, there's potentially a slowdown or on the other side that it's.

It's remaining just as strong as it was kind of in the early days of the pandemic.

I guess kind of what are your general thoughts about you know is the acceleration.

Celebration and migration that we saw.

<unk> really over the last few years, how sustainable is it does it is it is it kind of sustain two kind of a normal pace of what it was before 2020.

Yes, great. Great question, I think you guys do a pretty fantastic job sorry to report that you put out a follow the Mayo tracking the ZIP codes I think I think in that within that report.

Only our portfolio had.

Positive.

ZIP code trends.

In each of our markets.

Guys are all over it.

So are we track them every quarter or year over year on a state.

This year has increased 11%.

Yes, still is still double digit increase that first year out of the pandemic. It was like call. It 18 19, 20%.

So I guess you could call that a slowdown but it's also.

You have compounding.

Annually and so.

There's still elevated California is still the number one.

Kind of new.

Or where people were moving from and then <unk>.

Org.

Virginia, and Illinois kind of follow that but yes.

California is still 20% of each of our new leases.

These apps.

Illinois, and New York or a double digits also so.

Yes in terms of is it going to slow I think I think sure naturally theres some regression to the mean, because new York and in those other markets are.

Reopening so to speak but.

Boy, we like our problems relative to theirs and so we're still positive on that migration trend again as your data illustrates.

Got it.

One more for me just a follow up on that.

Not sure. If this is too detailed to to answer off the top of your head, but the residents applying in new markets that are coming from New York.

I'm guessing, Florida is at the top of list for where they're going any others.

That standout markets in your portfolio.

Movers from New York are going.

Yes, we do track it so in order of Florida's first.

Atlanta, Charlotte and Nashville are two three or four.

Out of California, just yes, just because I have you.

Arizona, Nevada wanted to wanted to and then Tennessee III.

Got it that's helpful.

Thank you.

Ladies and gentlemen, this will conclude your question and answer session I will turn the call back over to your host for closing remarks.

Yes, I appreciate everyone's time, great questions another great quarter.

And as we discussed we tickets.

It's going to keep going forward for this year so.

See you in a few months thank you.

Ladies and gentlemen, this will conclude your conference for today, we do thank you for your participation and you may now disconnect.

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