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$NXRT 2018-08-24 : Transcripts- Edited Transcript of NXRT earnings conference call

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Q2 2018 NexPoint Residential Trust Inc Earnings Call

DALLAS Aug 25, 2018 (Thomson StreetEvents) — Edited Transcript of NexPoint Residential Trust Inc earnings conference call or presentation Tuesday, July 31, 2018 at 3:00:00pm GMT

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EARNING UPDATE $NXRT NexPoint Residential Trust, Inc. for quarter ending q_Jun18 – Revenue rose but Margins contracted

[s2If !current_user_can(access_s2member_level0)]Please login to read the earning update on NXRT [lwa][/s2If][s2If current_user_can(access_s2member_level0)]NexPoint Residential Trust, Inc. reported earnings (EPS) of -0.08 per share for the quarter ending q_Jun18. This is vis-vis 0.47 per share for the previous quarter ending q_Mar18, a decline of 117 %. Compared to last year same quarter…

The best thing to ever happen to investors is only getting better with age.

Wednesday marked the fortieth birthday of the most investor-friendly idea in stock market history: the index fund. Forty years ago Vanguard introduced the first fund that merely tracked the S&P 500. It has appreciated 6,334 percent since inception, trailing the S&P by a mere .14 percent annually, all of which was the ‘expense ratio’ charged investors. Few, if any other funds have matched or exceeded this annual return.

Today roughly $5 trillion is invested in index funds. Vanguard is the largest index manager, with over $3 trillion in assets under management (AUM). Other money managers now offer index products alongside their traditional, actively managed funds.  

Study after academic study shows that index funds outperform most actively managed funds. The reason is simple. Fees. The average expense ratio for actively managed stock funds is around 1.5 percent. It is somewhat less for fixed income funds. As Vanguard founder John Bogle has convincingly shown, a fund with a 1.5 percent annual fee (and the same pre-fee annual return) will produce a much smaller total return over a multi-year period than a fund with a .14 percent annual fee.

Investors have taken notice. According to the Wall Street Journal, they have invested $409 billion in passive index funds in the last year and pulled $310 billion out of actively managed funds over the same period. Roughly 20 percent of all money in stock funds is now indexed, up from zero 40 years ago.  

I suspect this trend will accelerate. America’s economic growth and thus profit growth will likely remain below historic levels for years. Economists predict US productivity growth and population growth will continue decelerating (see Northwestern economist Robert Gordon’s recent book The Rise and Fall of American Growth). Given that interest rates are already at zero, this scenario all but guarantees future market returns will be lower than the S&P’s roughly 9 percent annual gain since the end of World War Two. As this occurs, the outperformance by index funds vs. the average actively managed fund will be much more pronounced than in previous years.  

But don’t expect the asset management world to go down without a fight. A week ago, the reputable money management firm Bernstein issued a call to stem the indexing tsunami. The piece’s sensationalistic title--“The Silent Road to Serfdom: Why Passive Investing is Worse than Marxism”—was obviously meant to attract media attention, and paint Mr. Bogle’s invention in the worst light possible. I’ve seen this kind of scare mongering in the asset management industry for three decades now. When I started out, indexing was still in its infancy, but people in my business were already shading the truth about it, and for good reason: it represented a major disruption to our industry. Rather than acknowledging the clear benefits of that disruption to the majority of investors, many folks have chosen to demonize and misrepresent it instead. As Upton Sinclair famously said: “It is difficult to get a man to understand something when his salary depends on his not understanding it.”

I have always believed that most mutual funds and most hedge funds will underperform the indexes on an after-fee, after-tax basis. Results over the decades prove this. But I have also believed (and continue to believe) that a small minority of managers can, and will continue to outperform. The managers who accomplish this feat employ varying investment strategies, but they almost always possess a similar combination of traits: an above average IQ, some years spent working at firms with above average performance results, intense intellectual curiosity, a cynical frame of mind, and a mistrust of groups and group thinking (great investors are not joiners).

As importantly, consistently outperforming managers almost always avoid growing assets under management beyond an amount where outperformance becomes more difficult. While the optimum AUM varies by manager and by style, it is almost always under $1 billion. Most managers who solicit assets beyond that amount are amoral at best, dishonest at worst. The reason sub-$1 billion funds have a better chance of producing higher returns is obvious: pricing inefficiencies are likely greater in less liquid, less analyzed securities. A number of stocks I have written about over the years illustrate these inefficiencies, including homebuilder LGI Homes and apartment REIT Nexpoint Residential Trust. Both companies were barely followed by Wall Street when I visited with their managements, and far too small for larger funds to bother investing in—and both have far outpaced the indexes since I purchased shares.

It can give you a sneak peek behind the scenes--if you know what to look for.

A few weeks back, I flew to Dallas and hit an unexpected trifecta: in a single day, I visited three companies with strong insider buying. I wasn’t aware of this coincidence until after I scheduled the meetings and began researching the companies. I was pleasantly surprised. Significant insider buying is quite rare. It almost never happens here in the Bay Area, where tech firms hand out stock options like napkins. Needless to say, I was intrigued by each of these companies. However, I only wound up buying stock in two of them—and the reasons why are important.

Insider buying (especially at or near a 52-week high) or insider selling (especially at or near a 52-week low) are clear indications that a stock could be mispriced. After all, who knows a business better than the folks running or overseeing it? If they’re willing to stake their own money on their firm’s stock—or cash out big chunks of it—those of us on the outside might want to do the same. A few years back, the stock of Susser Petroleum (SUSS) was languishing in the $20 range. The family that owned the company started buying monster prints left and right. A few years later, Susser was acquired for $80 a share. Conversely, La Quinta (LQ) crashed this past week when its CEO unexpectedly retired. As others have pointed out, that same executive recently unloaded huge amounts of his stock holdings.

The first thing to evaluate when it comes to insider activity is its scope. Most corporate executives and board members are wealthy people. If they’re only buying ten or twenty or even fifty thousand dollars of their company’s stock, they’re probably just “painting the tape” to generate interest. Scope is also important when it comes to stock sales. Who knows? Maybe someone’s kid is about to go to college and they need to pay for tuition. Maybe they want to buy a fancy new car or add a wing to their beach house. Bottom line: if buying or selling doesn’t cross into the six or seven figure range, it’s probably not worth paying much attention to. Luckily for me, insiders in each firm I visited that day in Dallas had recently acquired sizable new positions, worth hundreds of thousands and even millions of dollars.

The first company I looked in on was developer Green Brick Partners (GRBK). I mentioned Green Brick a few weeks ago. As I wrote then, two of its principle owners, Dan Loeb and David Einhorn, as well as five of its directors bought into a recent secondary stock offering. That is virtually unheard of, and it shows that the folks most familiar with Green Brick’s inner workings have great confidence in its future. Their confidence wasn’t what prompted me to buy the stock, though. What made me buy the stock was my own confidence in them. Insider buying doesn’t matter much if you don’t have faith in the insiders doing the buying. In Green Brick’s case, we’re talking about extremely savvy businesspeople. After the 2008 housing crash, Einhorn started acquiring undervalued properties in Atlanta and Dallas, two regional centers he smartly bet would recover rapidly. The company’s CEO, Jim Brickman, has a long track record and an impeccable reputation. And, thanks to Einhorn, Green Brick is able to take advantage of large NOLs from a failed ethanol producer.

The second company I visited that day in Dallas was a new REIT called Nexpoint (NXRT). Like Green Brick, Nexpoint operates mainly in Texas and Atlanta. It owns 12,000 apartments in those two regions and pays a 21-cent quarterly dividend, for an industry-leading yield of 5.9 percent. On April 1st Dallas money management firm Highland Capital spun Nexpoint to holders of a Highland closed end mutual fund. Since then, seven insiders have purchased shares on the open market at prices ranging from $12.56 to $14.80. Most notably, Highland’s co-founder and Nexpoint’s president James Dondero has bought up whopping amounts of NXRT, totaling over $10 million, and it’s not hard to see why. The rental market is white hot right now, especially in Dallas and Atlanta. Nexpoint’s Net Asset Value is roughly $15 a share, and yet to date Wall Street has completely ignored the firm. It’s only a matter of time until analysts initiate coverage, which will likely be positive and drive investors into the stock.

That brings me to the most important factor to consider when you evaluate a company’s insider activity: the company itself. Just because insiders are buying stock in a business doesn’t mean you should. I’ve seen plenty of owners, executives, and directors go broke right along with their businesses.

As I write in my book, Dead Companies Walking, corporate insiders are often overly optimistic about their company’s prospects. You don’t rise to the top of your profession and gain control of a publicly traded firm without believing in your abilities. Even in the face of the longest odds, most senior executives and their colleagues on corporate boards tend to believe they will prevail. That can affect their stock buying decisions.

The third company I visited that day in Dallas was AH Belo (AHC). Belo operates the Dallas Morning News and other media holdings, as well as parking lots in Dallas and Providence, Rhode Island. Like all big city newspapers, the Morning News has steadily lost subscribers during the last decade. On the other hand, Belo’s parking business generates a considerable amount of cash. Like Nexpoint, Belo also pays out an impressive dividend, currently 6.4 percent. And like Nexpoint and Green Brick, it has seen strong insider buying of late. Its CEO James Moroney recently bought 44,000 shares of stock near $5 a share, and now owns 250,000 shares in all.