NXRT - NexPoint Residential Trust Inc. (NXRT) Q2 2022 Results - Earnings Call Transcript
NexPoint Residential Trust, Inc. (NXRT)
Q2 2022 Earnings Conference Call
July 26, 2022 11:00 a.m. ET
Company Representatives
Brian Mitts - Executive Vice President, Chief Financial Officer
Matt McGraner - Executive Vice President, Chief Investment Officer
David Willmore - VP of Finance
Jackie Graham - Director of Investor Relations
Conference Call Participants
Tayo Okusanya - Credit Suisse
Michael Lewis - Truist Securities
Buck Horne - Raymond James
Rob Stevenson - Jeannie
Michael Gorman - BTIG
Presentation
Operator
Good day! And welcome to the NexPoint Residential Trust, Q2 2022 Conference Call. This conference is being recorded.
Now at this time I would like to turn the conference over to Jackie Graham, Director of Investor Relations. Please go ahead, ma’am.
Jackie Graham
Thank you. Good day, everyone, and welcome to NexPoint Residential Trust’s conference call to review the company’s results for the second quarter June 30, 2022.
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.nxrt.nexpoint.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. 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 an analysis of non-GAAP financial measures. For a more complete discussion of these non-GAAP financial measures, 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
Thank you, Jackie, and welcome to everyone joining us this morning. I really appreciate your time. Just a quick heads up, I'm not in the room with the rest of the team. I’m dialed-in, so I’m hoping [inaudible] have a good connection here. I apologize in advance if there is any disruptions. We do have backup contingency plans. But as Jackie mention, I’m Brian Mitts and Matt McGraner our CIO is joining me today.
I’ll kick off the call and cover our Q2 and year-to-date results, update our NAV calculation and then provide guidance. I’ll then turn it over to Matt to discuss specifics on the leasing environment and metrics driving our performance and guidance, and details on the portfolio.
Results for Q2 are as followers: Net loss for the second quarter was $7.8 million or a $0.30 per diluted share and total revenue of $65.8 million. That’s compared to a net loss of $3.4 million or $0.14 loss per diluted share in the same period in 2021, on total revenue of $52.6 million, which is a 25% increase in revenue.
For the second quarter NOI was $38.8 million on 41 properties compared to $30.2 million for the second quarter of 2021 on 39 properties, a 29% increase in NOI. For the quarter year-over-year rent growth on renewals averaged 16.9% across the portfolio and year-over-year rent growth on new leases averaged 21.1%. Given where rental rates are in our markets for Class B apartments and equivalent single family rental product, we believe there is ample room for future outsized rent growth.
For the quarter same store rent increased 19.2% and same-store occupancy was down 150 basis points to 94.5% as we focus more on rate than occupancy during the quarter. This coupled with an increase in same-store expenses of 10.9% led to an increase in same-store NOI of 16.4%. This compared to Q2 2021.
Rents for the second quarter 2022 on the same store portfolio were up 5.6% quarter-over-quarter. We reported Q2 core FFO of $20.3 million or $0.79 per diluted share compared to $0.56 per diluted share in the same quarter 2021, for an increase of 40% on a per share basis. For the quarter we completed 654 in partial renovations and increase of 22% from the prior quarter and leased 609 renovated unites achieving an average monthly rent premium of …
David Willmore
Look like Brian has lost connection. This is David Willmore. I’ll hope in and conclude Brian’s prepared remarks.
During the quarter we completed 650 full and partial renovations, an increase of 22% from the prior quarter and leased 609 renovated units, achieving an average monthly rent premium of $138 and 24% ROI during the year, which is 310 bips higher than our long term average ROI in renovation.
Inception-to-date in the current portfolio we have completed 6,834 full and partial upgrades or 44% of the total units, 4,724 kitchen upgrades and washer dryer installs and 9,624 technology package installations achieving an average monthly rent premium of $142, $48 and $43 respectively, and an ROI of 21.8%, 69.7% and 33.5% respectively, each of which helped to drive our NOI year-over-year higher by 28.5%. On April 1 we acquired two properties, one located in Sandy Springs, Georgia and the other in Phoenix for a combined $143.4 million comprising 562 units in total.
Our net loss for the year was $12.5 million or $0.48 per diluted share on total revenue of $126.6 million. That’s compared to net losses of $10.3 million or $0.41 per diluted share in the same period in 2021, on total revenue of $104.4 million for an increase in revenue of 21%. Year-to-date NOI was $75.4 million on 41 properties as compared to $60 million on 39 properties for the same period in 2021 or an increase of 26%.
For the year same store rent increased 19.2% and same store occupancy was down 150 basis points to 94.5%. This coupled with an increase in same store expenses of 7.8% led to an increase in same store NOI of 16.4% as compared to the same period in 2021.
We reported year-to-date core FFO of $40.4 million or $1.58 per diluted share compared to $1.13 per diluted share in the six months ended June 30, 2021 or an increase of 40%. For the year we completed 1,181 full and partial renovations, an increase of 90% from the prior period in 2021.
Based on our current estimate of cap rates in our markets and forward NOI, we are reporting a NAV per share range as well as $80.70 per share on the low end, $96.27 per share on the high end and $88 to $0.48 per share at the mid-point. These are based on average cap rates ranging from 3.9% on the low end to 4.2% on the high end, which has increased approximately 48 basis points from last quarter to reflect a rise in interest rates and observable increases in cap rates in our markets.
For the quarter we paid a dividend of $0.38 per share on June 30. Since inception we have increased our dividend to 84.5%. Year-to-date our dividend was 2.08x covered by core FFO with a payout ratio of 48% of core FFO.
Turning to guidance, we are reiterating core FFO and revising our same store NOI guidance upwards. For same store NOI we are estimating 14.7% on the low end and 17% on the high end. The midpoint at 15.8% is a 150 basis point increase from our prior guidance of 14.3%. At the midpoint 2022 core FFO guidance represents a 24% increase over 2021 core FFO of $2.43 per share.
With that, I'll turn it over to Matt for commentary on the portfolio.
Matt McGraner
Thank you, Dave. Let me start by going over our second quarter same store operational results. Our Q2 same store NOI margin improved to 58.4%, up 118 basis points over the prior year period. Rental revenue showed 8.8% or greater growth in nine out of 10 markets, while same store average effective rent growth reached a record 19.3%. Eight out of our 10 markets achieved year-over-year growth of 10.4% or higher, with Tampa leading the pack with 21.7% total rental revenue growth.
Second quarter same store NOI growth was special across the board, with the portfolio averaging 16.4% holding in line with Q1, driven by an accelerating 14.2% growth in total revenues. Eight out of our 10 same store markets achieved year-over-year NOI growth of 13.2% or greater. Operationally as I mentioned, the portfolio experience continued positive revenue growth in Q2, with nine out of our 10 markets achieving growth of at least 8.8% or better. Our top five markets were Tampa at 21.5%, South Florida at 18.3%, Nashville at 18%, Orlando at 17.8% and Atlanta and Phoenix were tied at 15.4%.
Q2 renewal conversions were 49.3% for the quarter, with six out of 11 markets executing renewal rate growth of at least 15% and no markets were under 10%. Our leaders were Tampa at 26.2%, Orlando at 24.1%, South Florida at 22.5%, Phoenix at 16.9%, and on the occupancy front we are pleased to report that Q2 same store occupancy closed at over 94% despite a robust renovation output, and as of this morning the portfolio was 97.6% leased with a healthy 60 day trend of 91.4%.
The occupancy strategy for Q2 was more akin to our pre-pandemic strategy of pushing rents to force turnover in order to achieve primarily two goals: close the gap on loss to lease and renovate more interiors. Our 2Q same store loss lease was 12.7%. This is about 5 percentage points ahead of RealPage’s national average in the 8% range, because our Class B rents continue to outpace growth – more growth in the overall market.
Our initial base case for the second half of the year saw rent growth and loss lease moderating, but the actual market fundamentals have outperformed expectations to start this year and our outlook remains constructive. We now expect to see loss lease decline into the high single digits in the second half, with the most significant reductions coming in Q4 as we shift priorities to higher occupancy over max rate during the slower traffic and demand season.
As Dave mentioned, our occupancy strategy also led the 650 completed rehabs during the quarter, generating an average of 25% return on investment and our second highest rehab output since the inception of the company. As we enter the second half of the year we will place more emphasis on occupancy and will likely see some moderation of rents, but do you expect continued strength in rents in the mid to upper teens for the rest of this year and high single to low double digit growth going into 2023.
[Inaudible] so far showing continued strength and strong traffic despite record high temperatures in most of our markets, with a blended 16% growth on new leases and renewals on roughly 1,100 leases.
Turning to 2022 guidance, the strength in rent roles and GPRs and total revenues allowed us to increasing same store NOI guidance again for the second time this year, as Dave said to a range of 14.7% to 17% with the midpoint of 15.8%.
I’ll quickly share a few data points that have informed our guidance and underlined the strength that we're seeing in our market. First, our resident incomes continue to see healthy growth. Both ours and RealPage’s data show renter average annual incomes are up 24% from January 2020. Rent-to-income ratios in our market as of July are roughly 23% as our tenant’s average household incomes continue to increase to now over $70,000 annually. The gap between Class A and Class B rents also remain elevated, nearly $500 per unit, leaving little room to trade up to Class A or out to SFR.
Two factors, direct to construction financing due to credit market volatility of banking system stress tests, plus elevated hard costs are likely to keep this rent delta between Class B and other trade-up options at historically wide levels. These factors keep us constructive on our portfolio growth over the near and intermediate term.
Turning to transaction activity, no surprise here, but the transaction market has cooled significantly due to credit market volatility and negative leverage in most commercial real-estate property types. Most institutional owners have put off disposition plans until later this year, unless there is a fund of life issue or pending loan maturity.
Deals under contract pre-May have seen 10% to 15% re-trades on valuation, sending spot cap rates to 3.75% to 4% in our markets. We recently seen some capitulation from sellers at 4% cap rates, as well as buyers being able to underwrite growth to positive leverage in years two or three. Thus this has been the case since our first earnings call.
We've been transparent on our view of cap rates and NAV, and as Dave said, have adjusted our NAV downward to a new mid-point of $88 per share. At today's prices, our implied cap rate is north of 5% and as we routinely down in the past, and to the extent we stay at these levels, we will look to sell assets, namely our Huston portfolio and buyback our stock.
In closing, the first half of 2022 has been exceptionally strong for the company. We are expecting to see further strength in fundamentals for middle-market rental housing, particularly in our Sunbelt markets, and we maintain optimism that 2022 will be one of our best internal growth years ever.
And that’s all I have for prepared remarks. Thanks to our teams here at NexPoint and BH for continuing to execute.
And now I’d like to turn the call over to the operator for questions.
Question-and-Answer Session
Operator
[Operator Instructions]. And we’ll hear first from Tayo Okusanya with Credit Suisse.
Tayo Okusanya
Hi! Good morning, everyone! Congrats on the quarter! From our end, I guess the first question is kind of guidance related. Again, a good solid beat in 2Q versus us, versus the suite of about $0.05, $0.06, but you know you guys didn't raise the mid-point of your guidance. So just curious about what that implies about the back half of ‘22.
David Willmore
Nothing operationally. It’s a great question Tayo, but nothing operationally. It's more of timing around the Houston dispositions of the assets and holding those on a little bit longer than we otherwise would have. As you recall, we were attempting to take them out, you know right at the downturn and the credit markets and like I said, put those off until probably after Labor Day. So that’s the “hesitation” if you will, but again nothing operationally, it's just that delay, sort of a timing issue.
Tayo Okusanya
Yeah, but if there’s a delay, shouldn’t that kind of help the numbers, because you still have that NOI coming in?
David Willmore
Yeah, you have the NOI, but you also have – you know they are being held and we increased the revolver on the interest expense. It’s going to basically offset the NOI.
Tayo Okusanya
Okay, got you, okay, so that's Number one. And then number two again, just again with the backdrop of rising interest rates. Again you guys was a bit more levered, have a lot of swaps in place. Could you just kind of help us think through that and the potential impact of your rates keep rising. You know how that ends up impacting numbers, not just impacts half of ’22, but kind of goings into ‘23 given a lot of the swap maturities.
David Willmore
Yeah, I mean the swaps don’t mature until another kind of “four years” or so, so yeah, the near term is favorable. What we are really talking about is the revolver. Some things we’re looking to address the revolver with is, we are in talks with the agencies to potentially lower spreads on the impending maturities in ‘24. That we think the spread differential could be about 50 basis points and you know largely offset any – I guess any increased interest expense, and actually fundamentally save us anywhere from $1 million to $2 million a year starting next year if we are able to get that done, we feel pretty good about it. So that's kind of an active balance sheet maneuver that we are in talks with now to mitigate the un-hedged piece of the book.
Tayo Okusanya
Got you. And then one more, if I mean if you could indulge me again. Just the NAV recast, again with the kind of higher interest rates, higher cap rates you guys are using. Again it sounds like again you are actually seeing that in the transaction markets right now. You are kind of confirming that cap rates are moving for kind of again the affordable housing type multi-family. Could you talk a little bit about on the Class A side, if your kind of seeing a similar change, even though again it’s not traffic, but just given the tier markets.
David Willmore
Yeah sure, that we definitely are. I mean the reason why you're going to have lower cap rates in B is because you can underwrite growth, and even at the lower levered Class A core type buyer, there's still basically at parity or negative leverage on a going in cap rate with less growth. So we've seen really Class A, unless it’s of course you know some irreplaceable location or something special at the asset, but those cap rates are moving also into the four range as well.
Tayo Okusanya
Got you, alright. I will now get back into the queue. Thank you.
David Willmore
Thanks Tayo.
Operator
We’ll now hear next from Michael Lewis with Truist Securities.
Michael Lewis
Thank you. First I just wanted to follow up on the question about the guidance. It sounds like it’s really interest expense that’s keeping you from raising that. Is it $1.58 in the first half of the year core FFO? That would imply at the min-point just $1.43 in the back half and it sounds like your going to hold Huston longer. Maybe that’s a wash because of the financing on it, but is it fair to say it’s really just the thread of interest expense that’s keep you from raising the rates?
David Willmore
Yeah, it's just – it's really the curve is what we're trying to monitor on the revolver and then you know like I said, we are doing a couple of things to mitigate those items, as well as if we're able to sell Houston earlier, so those are some litigants. And I’d like to remind everyone that we’ve raised guidance twice, to – from initial guidance of $2 and change, $2.90 and change and then to $3.01 and so I think we still feel pretty comfortable with the strengthen in the portfolio.
Michael Lewis
Yeah, I understand. You already put the bar up there right. 24% growth isn't too shabby, so thanks for that. And then I wanted to ask a question a little different. I noticed you had quite a few communities that had a handful of units that are down due to casualty event. I was just wondering if that – you know was that like one weather event? Is that sort of – you know is that normal to have units out of service that you're not earning on. I guess you are collecting casualty. Anything to talk about on that, anything notable?
David Willmore
Yeah, happy to. No, it’s – I mean unfortunately time – from time-to-time the portfolio and communities experience fires and that's what you're seeing. We’ve had some kitchen fires in a couple of the assets that have taking down units, and so we're actively remediating and trying to get those back up as soon as possible. Any operator or landlord that’s ever owned a garden, you know be a solid deal or kind of you know feel our pain so to speak, but that's what that is.
Michael Lewis
Okay, thanks. And then last for me, you know I saw the same store expenses were up quite a bit in the second quarter. You raised the guidance, but not too much. You know what’s kind of the outlook or what – I guess what drove that increase in the second quarter and then you know it’s down to – the guidance kind of implies that it’ll come back in a little bit in the second half.
A - David Willmore
Yes, that’s a great question. Yeah, most of that is R&M in-turn, so repairs and maintenance expense that we don't capitalize, because it's not a capital item with ROI components. So a lot of that is quite honestly during the second quarter was HVAC and contract labor where we had to fix and cool the properties during the heat, so that was a spike. Yeah, we don't expect that to continue or to accelerate, but that’s what it was during the second quarter, plus – you know plus we are churning like I said to capture or close the gap on lost lease and renovate.
Michael Lewis
Okay, thank you.
A - David Willmore
You bet.
Operator
Moving onto our next question which will come from Buck Horne with Raymond James.
Buck Horne
Hey! Good morning guys! A question about supply in your markets and kind of what you're looking at coming to the market over the next few quarters. I know a lot of that product may not be directly competitive to your price points, but I'm curious how you're thinking about how that may affect cap rates or asset pricing as investors kind of digest that product and/or you know do you think it could get to a level where you know it does begin to hold renters potentially away from your properties?
David Willmore
Yeah, good question. There is some supply coming online. I would say that those were existing deals in motion. You know if you're trying to start something today, like I said on the prepared remarks, it's hard to generate a yield on cost north of 5% to justify the development, but markets like Phoenix for example are seeing some high supply. Yes, some – obviously Dallas is always blowing and going, but I still – you know I still don't think it's going to have a dramatic impact on our portfolios so to speak, because I think the new developments need to achieve $1,900, you know $2,000, $2,100 in rent to justify that new build and that’s roughly $700, $800 headroom for more units, so.
While we're continuing to push rents and the teams you know a low 20%, the end of the year, effective rent for us is I think $1,420 or so, so still enough headroom in our estimation to still be competitive. You know add to that some move outs, you know moving expenses, etc. it kind of addresses our underlying fundamentals and thesis, so we think we're okay.
Buck Horne
Got it, got it! I appreciate that. And just you know in terms of like leasing traffic, you know just as kind of fears of you know recession seeing the drumbeat of – economic concerns seem to be building out there. Have you seen any sort of change in rent or traffic or behavior around current leasing. You know in terms of interest per available unit. I don't know if its web traffic or you know walk in traffic. Any other indicators that might suggest kind of the demand level is starting to taper off?
A - David Willmore
No, not for our, not for BE’s [ph]. We are seeing some of that in Class-C, you know where we have renter and not that we own Class-C, but just you know observing Class-C assets. Renters are more on a fixed income basis. You know rents are growing at 8% plus in Class-C. You know obviously that wage growth is hard to sustain those types of renter increases.
So you might see some bad debt and some delinquency tick up in that space, but as far as Class-B, we haven't seen any demand abatement yet and you know obviously still pushing through great new leases and renewals. So traffic is still healthy obviously, you know during the summer months in Phoenix or Dallas or something. It’s you know a little bit difficult, but everything still feels good.
Buck Horne
Great! I appreciate the color. Thanks guys.
David Willmore
Yeah, thanks Buck.
Operator
Now we'll move to our next caller, and that will be Rob Stevenson with Jeannie.
Rob Stevenson
Good morning, guys! Matt, how has pricing been or any similar quality Houston assets to yours that you've seen traded recently?
A - David Willmore
For the quarter I would say we softly got unsolicited bids on Old Farm and Stone Creek you know before the market ball and they were just bids. We couldn’t transact during that timing, but those – you know that was kind of 3.75, 3.8 and then those buyers have come back in the 4.25 range. So that’s the best kind of apples-to-apples comparison that I can give you. So we could transact at that level today if we wanted to.
Rob Stevenson
Okay. I mean and from your standpoint, I mean when you look forward, is there any urgency you know with oil prices where they are to transact Houston in the near term or if the pricing doesn't – you know it isn’t where you want it, you guys hold that into 2023. How are you guys thinking about that or is there never going to be a better time to really sell?
A - David Willmore
Yeah, I agree with you and we – you know we share that, absolutely. We think it's a good year to do it. Oil demand as you said is strong and that's helpful for the investor, kind of optimism within the market.
And it's also you know Houston – we want to do a lot of things with Houston. We want to sell the assets to buyback our stock, delever, etc. but those were the assets that are also the slower, same store NOI growth assets within the portfolio. So there's a multitude of reasons to sell them.
Rob Stevenson
Okay. And I guess how active were you guys in the acquisition market? I mean you bought stock; it's just under 74 in the quarter. The stocks down at low 60’s versus a high 80’s NAV. Are there any acquisitions that you guys could see out there that would make sense versus your own stock at this point, although the stock’s price is much higher?
David Willmore
No, not at all.
Rob Stevenson
Alright, and then last one for me. So if I look at the same store revenue growth, you guys were 11-3 in the first quarter and then surprisingly jumped up to 14-2 in the second quarter. Is the third quarter really when your year-over-year comps get their toughest and so you start to see the aggregate growth come down, because you're at 12-7 in the first half and then the mid-point of guidance is 12 and even the high end of the guidance is only 12-4, so its suggesting coming down. But is there any likelihood that you can maintain you know 14-ish, high 13’s same store revenue growth in the third quarter or is it just the law of big numbers on the year-over-year comps going to get in the way of that.
A - David Willmore
No, that’s again a good question, you're right. The third quarter comp is going to be the first kind of tougher one that we see, but you know right now our revenue – yeah, I mean it's one month, but July we’re – you know we’re in that high teens, so.
You know I think it's sustainable as I sit here today and you know obviously things could change, but I do think we could push through teams through the third quarter and as we go occupancy maybe 10% to 12% and 13%, 14% in Q4. So that's what we’re forecasting at least. You know we think that we can do kind of 14% to 15% really is kind of our income forecasts for Q3 and Q4.
Rob Stevenson
Okay. And I guess last one for me then, are you seeing any material incremental pressure or release on you know material and labor costs to do the upgrades?
David Willmore
Not on the material costs. In terms of costs, we are having greater accessibility to the durable goods like washers and dryers. Like the supply chain there has loosened a little bit, so that has caused us to be able to reduce the turn time on renovations from you know kind of 35, 40 days, which was pandemic, to less than 30. So that's where we're seeing the, I guess the best improvement, but still you know contract labor and goods pricing is still elevated.
Rob Stevenson
Okay. Thanks guys, I appreciate it a ton.
A - David Willmore
You bet. Thanks Rob.
Operator
We’ll now hear from Michael Gorman, BTIG.
Michael Gorman
Yes, thanks Matt. Could you just spend a minute and talk about Vegas and kind of what you're seeing in the market there. I noticed quarter-over-quarter it was the only market with the negative rental income, but it seems like I don't know what happened there. The 50 basis points occupancy decline up against a pretty decent quarter-over-quarter rent growth. Can you just walk us though kind of what happened there, and what you are seeing in the Vegas market?
David Willmore
Yeah, thanks Michael. It’s really isolated to one asset, which is Bloom, and we’ve had kind of notorious late payers and delinquent renters there throughout the pandemic area, and we are able to clear out quite a bit of evictions in the 75 to 100 resident range and renovate as many of those and try to turn the demographic profile of that asset. But largely it was the wash out of those evictions, were if the courts open and we were able to push through a lot of these late payers and skips and hopefully that that, you won’t see that again going forward.
Michael Gorman
Okay, and then I guess, just were those higher rent units, because I’m just trying to figure out if I can pair the Vegas numbers with like the Atlanta numbers, and they are in the same ballpark for effective rent growth, same ballpark for occupancy change. But Atlanta saw 5% increase in rental income quarter-over-quarter and Vegas saw a 1.5% decline. I guess I'm just – I'm not quite clear what drove that, but anything you could add there would be helpful.
David Willmore
Yeah, I mean I think your apples to oranges there, because that Atlanta job market’s a little bit more diversified, less leisure, and while it might be the same whole dollar rent, it's a different market, different tenet. These are – this asset in particular doesn't have as much of a diversified job basis as Atlanta asset or the other Las Vegas assets there. I think it’s – like I said, I think it’s just attributable to this one asset and changing the demographic profile.
Michael Gorman
Okay, great, that's helpful. And then maybe just more holistically as you look at the portfolio and we get deeper into the housing cycle. Obviously there's pressure kind of across the board with rents going up in almost every product type. Have you see any change in terms of where the move outs or the non-conversion renewals, where they are going when they leave your properties?
David Willmore
Yeah, I mean I think it's, I think it's for another kind of competitive garden deal most likely. We haven't – you know we spent a lot of time with RealPage yesterday and the good news for our market is while Gateway – and maybe this is what you're getting at.
While Gateway traffic and rents are accelerating in San Francisco and New York and other places like that, it's not coming at the expense of the Sunbelt market. So we are not seeing a flight back to New York so to speak. What we're seeing is that people are just moving for personal reasons, obviously not to buy a home, but they either had a job, like a new job, relocation or you know in some cases doubling up with a roommate now is kind of the more likely option that we're seeing. So that's really where it’s going.
We are still seeing net migration data, you're very positive, 20% plus inflows from California and Illinois, so that's a trend that we're continuing to see also. But otherwise that's – you know I think that’s the story.
Michael Gorman
Yeah, that's helpful. We noticed the same trend, the improvements on the coast not having, not coming at the expense of the Sunbelt. Last question from me, I think you touched on it briefly, but when you're thinking about the cap rate shifts, how much of that do you think you can attribute just to the disruption in the capital markets versus, are you seeing buyers change their underwriting for future rent growth. Is that having an impact on pricing as well or is it almost entirely just due to the cost of capital.
David Willmore
Yeah, I think it’s the cost to capital. We had good meetings yesterday with some of the large brokerage houses as well and it's – you know it’s largely just a shock to the system that was so quick. And quite frankly the lenders, whether its banks that are charging more for balance sheet warehousing or the agencies they can't seem to find, you know they are born [ph] to the credit market too with the Freddie K Securitizations and spreads and demand from bond investors. So, all that is trying to find a place and a calm place to sit, and settle for a while and it just it hasn't happened yet.
So that's – you know we know where kind of floating rate spreads are, kind of for normal highly leveraged buyers. It’s 200, the [inaudible] on top of that plus cap costs, your negative leverage. So unless you have a growth, a growth story in underwriting, you know 10% plus, then it just didn’t work right now.
Fixed rate is, you know the buy and hold long term fixed rate buyers, that's a 4.5% to 4.75% all in, and so obviously that doesn't work unless you compare cap rate in the 4.25%, 4.5% range and have growth. So yeah, everyone seems to be liking the same assets and is constructive, but I think they are waiting to have a credit market settle down a little bit, and hopefully, you know hopefully it does.
Michael Gorman
Great! thanks for the time.
David Willmore
Thanks Michael!
Operator
[Operator Instructions]. We have a follow from Tayo Okusanya with Credit Suisse.
Tayo Okusanya
Hi! Yes, thank you. The NOI margin improvement during the quarter, let's just talk a little bit about it again. What drove that and again longer term, what we can expect NOI margins to be as you guys start to do more with PropTech and just again relative to comping you guys as a peer group, where your peer group turns to have NOI margins in the low to mid 60% range?
David Willmore
Yeah, I mean that’s been our aspiration right and we are continuing to do it. I think largely the improvement this quarter and really the first half of the year was on the non-controllable side. If you recall, you know over the past few years we’ve just gotten hammered on property taxes and insurance. The team has gotten – we’ve changed consultants in several, on both of those fronts and we've honed in better – we have better control on the non-controllable expenses if you will. So those are a couple of the categories that we see.
I’d also say on the payroll and leasing front, yeah, we are taking the lead of some of the gateway in another REITs and operators in terms of virtual leasing and you're having maybe a call-center leasing agent instead of having on-site employees at the sites. So I think you will continue to see that cost come down and be more efficient on the property management staffing side, and so I would say those are the primary two category drivers of same store NOI margin improvement that we hope to continue to execute on.
Tayo Okusanya
Got you. Thank you.
David Willmore
You bet.
Operator
And this time there is no additional questions in our queue. I'll turn the call back over to your host for any additional or closing remarks.
David Willmore
Yes, thank you. I appreciate everyone dialing in today and look forward to the next quarter, and have a good rest of the day. Thank you. Bye-bye!
Operator
And with that 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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NexPoint Residential Trust, Inc. (NXRT) Q2 2022 Results - Earnings Call Transcript