Logo of jester cap with thought bubble.

Image source: The Motley Fool.

NexPoint Residential Trust Inc (NYSE:NXRT)
Q2 2019 Earnings Call
Jul 30, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the NexPoint Residential Trust Second Quarter 2019 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jackie Graham. Please go ahead.

Jackie Graham -- Investor Relations

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust conference call to review the company's results for the second quarter 2019. 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, intend and similar expressions and 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, NXRT's guidance for financial results for the full year 2019, and the related assumptions, net asset value and the related components and assumptions, guidance for the third quarter of 2019 and the related assumptions and expected acquisitions and dispositions.

They are not guarantees of future results and are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statements. Listeners should not place undue reliance on 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 the forward-looking statements. 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. These non-GAAP measures should be used as a supplement to and not a substitute for net income loss computed in accordance of GAAP. For a more complete discussion of FFO, core FFO, AFFO and NOI, 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.

Brian Mitts -- Executive Vice President and Chief Financial Officer

Thank you, Jackie. I want to welcome everyone to our 2019 second quarter conference call. Today, we'll discuss our Q2 and year-to-date results for 2019, update guidance for 2019, discuss some of our recent acquisitions and dispositions and discuss the portfolio in our markets in general.

I'm Brian Mitts, Chief Financial Officer, joined by Matt McGraner, our Chief Investment Officer. So let me jump in to some of our highlights for the quarter. We are reporting what we feel to be another solid quarter where same store NOI increased for the second quarter at 5.4% and 6.2% for the six months ended June 30, reporting 49% increase in Core FFO per share for the six months ended June 30, as compared to the same period in 2018.

Total revenues for the second quarter were up 20.8% and total NOI increased 23.9% year-over-year. Total revenues for the year-to-date 2019 were up 19.6% and total NOI's increased 23.6%, again, versus the same period in 2018. Our NOI margins remain strong at 57.1% for the second quarter and 57% year-to-date. We saw strong rent growth in the second quarter, in both renewals and new leases up 4.1% and 5.3%, respectively. We continue to execute our value add business plan by completing 475 full and partial renovations during the quarter. We see 381 of those units achieving a 27.1% ROI during the quarter on the interior renovation dollars spent on the leased units.

Inception to date in the portfolio is at 630, we have completed 6,594 units, achieving an average rate increase of 10.9% and an average ROI of 23.2%. Additionally, in the quarter we completed Smart Home Technology installs on 4,891 and 228 washer dryer installs. During the second quarter, we acquired one property, Summer's Landing in Fort Worth for $19.4 million consisting of 196 units. Subsequent to quarter end, we acquired two additional properties Glenview and West Place for a total price of $100 million, consisting of 702 units together. So for the year, we've acquired six properties comprising 1,554 units for a total purchase price of $251 million and adding approximate 900 units through our rehab pipeline.

On June 25th, we entered into an agreement for the sale six properties consisting of 2,218 units for a sales price of $290 million. We expect the sell to close on or before August 30th. During the quarter we utilized the ATM, raising net proceeds of $10 million before offering costs at an average price of $40.26, increasing our shares outstanding by approximately 252,000 shares.

On June 30th, we upsized our corporate revolver from $75 million to $125 million. And in conjunction with the purchase of Glenview and West Place, we drew an additional $41.7 million on that revolver. Our -- in our supplements, we've updated our NAV slide, based on some updates in cap rates in our NOI growth and revising our NAV per share range upward as follows. On the low end, $34.10, on the high end, $40.93, for midpoint at $37.51 as compared to midpoint last quarter of $36.41 or a 3% increase.

For dividends, in the second quarter we pay a dividend of $27.5 per share on June 28. Yesterday, the board declared a 27.5% or $27.5 dividend per share payable on September 30, to shareholders of record on September 13. For the year, our dividend payout ratio is approximately 60% of core FFO.

So run through quickly, just the results for Q2 and year-to-date are some of the high level results. Total revenue for second quarter 2019 was $43.1 million, as compared to $35.7 million in Q2 of '18, which is 20.7% increase. Net loss was minus $2 million for the second quarter or $0.19 per share versus $1.7 million in the second quarter of '18 or $0.08 per share loss.

Net operating income for the second quarter of '19 was $24.6 million, as compared to $19.8 million in the same period in '18, which is 23.9% increase. Core FFO was $11 million or $0.45 per share, as compared to $8.7 million or 41% -- $0.41 per share. In Same Store our pool -- our Same Store pool of 32 properties were 11,471 for the second quarter of '19. Rent increased 4.1% on the Same Store portfolio. Occupancy was up 40 basis points to 94.6%. Same Store revenue increased 4% to $37.1 million. Same Store expenses increased 2.2% to $16.2 million. And Same store NOI increased 5.4% to $20.8 million. Year-to-date 2019 total revenues came in at $84.6 million, which is a 19.6% increase over the same period in 2018.

Net loss was a minus $6.3 million or minus $0.27 per share, that's compared to a gain in six months ended June 30, 2018 of $8.4 million or $0.39 per share. Net operating income was $48.2 million year-to-date 2019, which is a 23.6% increase over '18. Core FFO was $22 million or $0.91 per share, that's compared to $17 million or $0.80 per share, which is a 14.5% increase over 2018.

On a Same Store basis, Same Store rent increased 4.4%. Our Same Store revenue was up 4.3% or $73.5 million. Same Store expenses increase 2.1% to $32.3 and Same Store NOI for the year-to-date 2019, is up 6.2% over 2018 to $41.3 million. As per guidance, going forward for the full year 2019, we are assuming $251 million to $351 million of acquisitions with a midpoint of approximately $301 million. This includes the three deals we bought in Phoenix in January, the Summers Landing property we bought in the second quarter, as well as Glenview and West Place, which we acquired subsequent to second quarter. And assumes we'll redeploy the remaining proceeds from the Sunbelt Portfolio sale at the midpoint. And this comparison to midpoint from last quarter of $200 million, so we've increased that about $100 million.

Our guidance also assumes dispositions in the range of $290 million or $340 million with a midpoint of $315 million. This includes the sale of the Sunbelt Portfolio that we mentioned on the low end and the midpoint last quarter was a $163 million. So it increased that quite a bit as a result of the Sunbelt Portfolio deal that we signed up.

So, with those assumptions, we are updating guidance as follows. Net income per share of $4.59 at the midpoint, which is a substantial increase from last quarter, which was a loss of $0.71, which as a result primarily a gain on the portfolio of the Sunbelt -- sorry, the sale of the Sunbelt portfolio. Core FFO per share, we're increasing to $1.90 at the midpoint from $1.87 previously. Same Store revenue we're increasing -- we're keeping the same at 5%. Same store expenses, we are decreasing to 3.3% versus 3.8% previously. And increasing Same Store NOI to 6.3% as compared to the midpoint -- compared to 6% at the midpoint last quarter.

So with that, let me turn it over to Matt to walk through some of the details of the portfolio in our markets.

Matthew McGraner -- Executive Vice President and Chief Investment Officer

Thanks, Brian. As Brian said, we saw strength across the entirety of the portfolio with seven out of our 10 markets growing NOI by at least 6.3% on a Same Store basis, including Atlanta, Phoenix, West Palm, D.C, Charlotte, Tampa and Orlando.

The notable markets for Phoenix growing at 13.1% and we also saw a reacceleration in NOI growth in Atlanta to 7.9%. Leasing activity and revenue performance were equally as strong during the quarter. For example, we achieved healthy new lease growth of 4.1% overall and 5% on the Same Store pool, with seven out of 10 markets delivering growth of 3.8% or better.

Leaders in both categories were Charlotte at 9.7%, Phoenix at 7.6%, Atlanta at 7%, D.C. Metro at 5.7% and Orlando at 4.8%. Renewal growth continue to outpace new leases and delivered 5.3% growth across the portfolio, with every market except for Houston growing at 4% or better. Top five renewal markets were Atlanta at 7.6%, Charlotte at 7.4%, Phoenix at 6.7%, D.C. Metro at 5.9% and then DFW, our largest market at 5.8%.

Renewal retention was unchanged from Q1, finishing the quarter at healthy 51%. To update you guys on our subsequent transaction activity, new acquisitions and dispositions. As previously disclosed, we marketed six property portfolio through CBRE that resulted in very competitive offers, both individually and as a portfolio, receiving over 22 offers on the portfolio alone and 200 offers on the six individual assets.

As a reminder, these six assets are Abbington Heights, Belmont at Duck Creek, Edgewater at Sandy Springs, Heatherstone, the Pointe at Foothills and The Ashlar. The disposition cap rate was a nominal 4.7% after tax adjustment and we expect to generate a 27% levered IRR and 2.71 times multiple on invested capital.

The purchaser today is nonrefundable on $12 million of earnest money and the transactions are expected to all close by August 30. We estimate the dispositions, as Brian said, to generate roughly $144 million of net proceeds, all of which we plan to recycle, either forward or reverse 1031 Exchanges at attractive cap rate arbitrages.

Examples of these include, but aren't limited to the one acquisition made during the quarter, Summers Landing and two acquisitions completed in early July. The first acquisition was Summers Landing, which is an asset located in an attractive submarket in Fort Worth. We purchased this 196 unit community off-market through BH during the quarter for $19.4 million at a year one cap rate of 5.67%. We planned to fully upgrade 59 units at an average cost of $6,000 per unit and generate monthly premiums of $125 a unit, yielding a 24.5% average ROI.

We plan to also partially upgrade 90 units at an average cost of $4,600 a unit for monthly premiums of $50 per unit, yielding an average of 13% ROI. Finally, we are also planning on installing 100 washer/dryer sets, generating a $40 monthly premium and a 150 smart tech packages that we expect to generate over 35% ROIs.

As a result, our underwritten three year average Same Store NOI growth for this asset is 8.3%. The second acquisition made following the quarter was Residences at Glenview. Located in Nashville and built in 1989, we purchased this 360 unit community for $45 million for a year one cap rate of 5.27%. We plan to upgrade 306 units at an average cost of $8,400 a unit and generate premiums of $119 a unit, yielding approximate ROIs of 17%. We also plan to install washer and dryer sets in every unit and expect to generate monthly premiums of $40 a unit. As a result, our underwritten three year average Same Store NOI growth for this asset is 11.2%.

The final acquisition made following the quarter was Residences at West Place. This asset located in Orlando and built in 2002 was purchased for $55 million for a year cap rate of 5.32%. We plan to upgrade 291 units at an average cost of $10,300 per unit, generating monthly premiums of $140 per unit or 16.4% average ROI. We also plan to install smart home technology packages in 75% of the units, yielding a $25 premium. As a result, our underwritten three year average Same Store NOI grows for this asset is 10.7%.

I also wanted to touch briefly on property taxes from our last call. We still have a potential unsettled refund pool of $125,000 to $175,000 largely as a result of an appeal going on the Atera assets.

In closing, let me end with a strong leasing activity we're experiencing so far in July. Our portfolio today sits at 94.6% physically occupied and 93% leased, with average growth on both new leases and renewals exceeding 4%.

That's all I have for prepared remarks. Thanks to our teams here at NexPoint and BH for continuing to execute. And now back to Brian.

Brian Mitts -- Executive Vice President and Chief Financial Officer

Yeah. Thanks, Matt. I have no additional remarks either. So we'll turn it over for questions.

Questions and Answers:

Operator

[Operator Instructions] And we'll go first to Jon Petersen with Jefferies.

Jon Petersen -- Jefferies -- Analyst

Great. Thank you. So if I was looking at your specific -- your markets page, it looks like occupancy declined in lot of the Florida market, even though it look like rate growth was still pretty good. And overall revenue growth looked pretty good? So it was -- I wasn't quite sure how to think about maybe there's some differences in timing there, what not, but maybe just high level, what's driving the occupancy in those markets?

Brian Mitts -- Executive Vice President and Chief Financial Officer

Yeah. Hi, John. It's -- it's really just a tough call from last year I think, where we usually run at 94% in that market and then 96% was just a quarter end date from Q2. So that was the biggest change. As you said, the revenue growth both on new leases, renewals and other income was still healthy. I believe, our financial occupancy was almost 96%, like 95.6%. So, I think it's just sort of a quarter ending timing issue.

Jon Petersen -- Jefferies -- Analyst

And then in terms of the rent growth on new leases, I guess, do you have that number excluding rehabs?

Brian Mitts -- Executive Vice President and Chief Financial Officer

Yes. New leases on the Same Store pool or just overall?

Jon Petersen -- Jefferies -- Analyst

On the Same Store pool.

Brian Mitts -- Executive Vice President and Chief Financial Officer

3.9%.

Jon Petersen -- Jefferies -- Analyst

Okay. All right. And then, in the July -- or do you have that for overall too in terms of rent growth execution rehabs?

Brian Mitts -- Executive Vice President and Chief Financial Officer

3.63%

Jon Petersen -- Jefferies -- Analyst

Okay. Cool. And then you guys had a presentation in July with your acquisition pipeline. And you haven't -- you didn't give us any sort of thoughts on the timing around closing some of those acquisitions. And I guess whether -- I think, in terms of maybe just the percentage of that pipeline that we should expect to actually close?

Brian Mitts -- Executive Vice President and Chief Financial Officer

Yeah. Given the guidance raise that we made today, we feel pretty good about completing acquisitions that are transacted in a way that's non dilutive to earnings and in terms of timing. So, yeah, we feel pretty good about hitting that midpoint number as it sits today in -- like I said, in a timing matter that can be at or near or just after the same day that the big portfolio closes on August 30.

Jon Petersen -- Jefferies -- Analyst

Got you. Okay, That's helpful. All right, thank you.

Brian Mitts -- Executive Vice President and Chief Financial Officer

You bet.

Operator

And next we'll go to John Massocca with Ladenburg Thalmann.

John Massocca -- Ladenburg Thalmann -- Analyst

Good morning.

Brian Mitts -- Executive Vice President and Chief Financial Officer

Hi, John.

Matthew McGraner -- Executive Vice President and Chief Investment Officer

Hi, John.

John Massocca -- Ladenburg Thalmann -- Analyst

[Indecipherable] touching on that last point. I mean, what is driving -- you guys kind of gave some color on what's driving the low end and the midpoint of the acquisition assumptions and guidance, but what kind of is driving that 351 number at the high end?

Brian Mitts -- Executive Vice President and Chief Financial Officer

Yeah. I think that at the high end, we have a number of offers out in really targeted markets in Nashville, South Florida, Phoenix that we've been working on for -- really in earnest in last kind of three or four weeks as we've locked in the sale and the hard earnest money. So, we're best and final on two of them, we think we'll hit on at least one of them, which gets you to the midpoint. I feel pretty good about being able to reach that mid to higher end by -- call it, maybe not September 1, but shortly thereafter.

John Massocca -- Ladenburg Thalmann -- Analyst

Okay. And then maybe on the disposition side. Kind of what -- what's kind of in the assumption for the midpoint in the high end? Any color on that.

Brian Mitts -- Executive Vice President and Chief Financial Officer

Yeah. Just one more deal on the midpoint, which would be roughly either South Point or a deal in Nashville, Woodbridge. And if we've sold both of those, that makes up the high end. That would be it for the year.

John Massocca -- Ladenburg Thalmann -- Analyst

And apologies if I missed this in the prepared remarks, but what was the close date on the acquisitions completed subsequent to quarter end?

I think July 17 was the closing on Glenview reserve and West Place. And then I want to say July 1 was Summer's -- June 6 for Summer's Landing.

Okay. And then, I guess, the Houston market struggled a little bit in the quarter. What drove that and was it just something weather related? Is their supply in that market that's affecting you guys?

Brian Mitts -- Executive Vice President and Chief Financial Officer

Yes, this has been a topic of conversation recently here, and we had real paging in our office yesterday discussing it. It's just that the market as it sits today is still pretty anemic in terms of new lease growth. There's still psychology of concessions, whether you're at the high end or in the B space. That said, we do expect and are seeing a strong pickup in Q3 at some of -- at two of the three assets that we own there. And expect to have those contribute or largely contribute more to the Same Store growth in the third quarter.

John Massocca -- Ladenburg Thalmann -- Analyst

And then in Nashville, is any of that, I mean, slight underperformance versus the other markets going to potentially go away when you -- in the portfolio disposition, given the one Nashville asset that's in their?

Brian Mitts -- Executive Vice President and Chief Financial Officer

Yeah. Absolutely. Yeah, I think that our same store pool, especially in Nashville will improve dramatically once Abbington Heights sold, that asset is a struggled for us and is probably the largest single contributor to underperformance in Nashville.

John Massocca -- Ladenburg Thalmann -- Analyst

Good. That's it for me. Thank you very much.

Brian Mitts -- Executive Vice President and Chief Financial Officer

Thanks, John.

Operator

[Operator Instructions] And we'll go next to Barry Oxford with D.A. Davidson.

Barry Oxford -- D.A. Davidson -- Analyst

Great. Thanks, guys. When you guys were selling the Sunbelt Portfolio and you said -- I think you guys had 22 offers on the portfolio, what type of other buyers were showing up there or was it just more kind of a hodgepodge?

Brian Mitts -- Executive Vice President and Chief Financial Officer

Yeah. So, what we did was, we ran the portfolio out of CBRE's Dallas office, but we search nationwide or kind of blasted out to nationwide to every single type of buyer on their list. And they're the largest commercial real estate services firm in the world. So they reach everyone. So we offered the portfolio both as you can buy them all or you can buy them individually. And so the people that wanted to buy them all, which was your larger sophisticated institutional pipe, either private sponsors or funds, we received 22 offers from those types of buyers. And then individually, there was over 200 -- I think, 214 individual offers from local groups and national buyers. So we opted for what we believed to be a strong cap rate through a strong buyer that could do them all at once. And very sophisticated group and then, we feel like I said, with $12 million of hard earnest money today, this transaction will close on time.

Barry Oxford -- D.A. Davidson -- Analyst

Do you feel in general out there in the marketplace that there's a little bit of a portfolio premium?

Brian Mitts -- Executive Vice President and Chief Financial Officer

Depends on what it is. Yeah. I mean, for B properties in the $250 million to $500 million range, yes. The one off individual asset market right now for B properties in the Sunbelt is extremely competitive. We've lost deals recently, as in Phoenix at 4.25% cap rates for a 20 year old product. We lost a deal in Nashville that Starwood was selling -- excuse me, in Atlanta, Starwood was selling at a 4.5% cap rate, that asset was 20 years old. The cap rates have pushed even further lower than what we had anticipated this year. In our acquisitions, luckily, the resource that these three were all off market or through BH. So, that's why we've been able to get -- a little bit of a cap rate instead of competing on the one off acquisitions.

Barry Oxford -- D.A. Davidson -- Analyst

Right. Right. On the -- last question on the off market, do you see opportunities as you look out over the horizon to continue source it? Or do you feel that most sellers out there want to go to that kind of for lack of a better word competitive bid process?

Brian Mitts -- Executive Vice President and Chief Financial Officer

Yeah. Certainly the latter, most sellers will opt to generate an auction. But, again, I think historically we just tried to focus on larger sized checks and we'll continue to do that. And like I said to John's previous question, we feel pretty good about hitting on one or two more.

Barry Oxford -- D.A. Davidson -- Analyst

Great. Thanks so much, guys. I appreciate it.

Brian Mitts -- Executive Vice President and Chief Financial Officer

Thanks, Barry.

Operator

[Operator Instructions] And it appears we have no further questions. I'll turn things back over to our speakers for any additional or closing remarks.

Brian Mitts -- Executive Vice President and Chief Financial Officer

Great. Thank you. We have nothing further. So, appreciate everyone's time. That completes the call. Thank you.

Operator

[Operator Closing Comments]

Duration: 29 minutes

Call participants:

Jackie Graham -- Investor Relations

Brian Mitts -- Executive Vice President and Chief Financial Officer

Matthew McGraner -- Executive Vice President and Chief Investment Officer

Jon Petersen -- Jefferies -- Analyst

John Massocca -- Ladenburg Thalmann -- Analyst

Barry Oxford -- D.A. Davidson -- Analyst

More NXRT analysis

All earnings call transcripts

AlphaStreet Logo