NexPoint Residential Trust (NXRT) 29 Oct 242024 Q3 Earnings call transcript

Thank you for standing by. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to NXRT Q3 2024 Earnings Call. Today's call is being recorded. [Operator Instructions] I would now like to turn the call over to Kristen of Investor Relations. Kristin, your line is now open.

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust's conference call to review the company's results for the third quarter ended September 30, 2024.

On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer; Matt McGraner, Executive Vice President and Chief Investment Officer; and Bonner McDermett, President, Asset and Investment Management.

As a reminder, this call is being webcast through company's website at nxrt.nextpoint.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 forward-looking statements and are encouraged to review the company's most recent annual report on Form 10-K in 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. Please go ahead, Brian.

Thank you, Kristen, and welcome to everybody this morning. Appreciate you joining the call. I'm Brian Mitts, and I'm joined today by Matt McGraner and Bonner McDermett. I'm going to start the call off by covering our results for the quarter. I'll provide updated NAV and guidance outlook for the year. And then I'll turn it over to Matt and Bonner to discuss specifics on the leasing environment and metrics driving our performance and guidance. Results for Q3 are as follows: Net loss for the third quarter of 2024 totaled $8.9 million, or a loss of $0.35 per diluted share, which includes $24.6 million of depreciation and amortization. This compared to net income of $33.7 million or a gain of $1.28 per diluted share the third quarter of 2023, which included $23.8 million of depreciation and amortization.

For the third quarter '24, NOI was $38.1 million on 36 properties compared to $42.1 million for the third quarter of '23 on 40 properties.

For this quarter, same-store rent decreased 1.8%, while same-store occupancy grew to 94.9%. This, coupled with an increase in same-store revenues of 1.7%, offset by 8.2% increase, and same-store operating expenses led to a 2.4% decrease, and same-store NOI compared to Q3 '23.

As compared to Q2 2024 rents for this quarter on the same-store portfolio were down 1.2% or $18 sequentially, while occupancy grew by 70 basis points to 94.9%. The reported Q3 core FFO of $17.9 million or $0.69 per diluted share compared to 69% per diluted share for the same quarter last year.

During the third quarter, for the properties in our portfolio, we completed 45 full and partial upgrades and leased 39 upgraded units, achieving an average monthly rent premium of $253 and a 19.5% return on investment. Since inception for the properties currently in the portfolio, we've completed 8,316 full and partial upgrades, 4,704 kitchen and laundry appliance installs and 11,389 technology package installations, resulting in a $175, $48 and $43 average monthly rental increases per unit and a 20.8%, 61.9% and a 37.2% ROI, respectively. NXRT paid a third quarter dividend of $0.46 per share on a stock on September 30th since we've increased our dividend 124.5% since inception.

For the second quarter, our dividend was 1.48x covered by core FFO with a payout ratio of 68% of core FFO. Yesterday, the board approved a quarterly dividend of $0.51 per share, which represents a 10.3% increase from the prior dividend. Since inception, NXRT has increased the dividend per share by 147.6%.

As of September 30th, we had $17.4 million cash and $350 million of available liquidity on the corporate credit facility.

Let me cover a couple of events that have happened subsequent to the quarter. On October 1st, the company entered into subcu loan agreements and expect to enter into 17 additional new line agreements on November 29th for total gross proceeds of $1.67 billion, which, in aggregate, represents 97.7% of the company's total outstanding debt. Notably, NXRT agreed to refinance interest rates, that improved pricing from our prior terms. Those rates of circa plus 109 basis points. This refinancing activity extends the company's weighted average debt maturity schedule to approximately 7 years from a previous 5.7 years. Holistically, these refinancings are expected to reduce NXRT's weighted average interest rate on total debt by 48 basis points to 6.1% before the impact of interest rate swap contracts are factored in. Accounting for the hedging impact swaps, NXRT's adjusted weighted average interest rate is expected to be reduced from 3.64% to 3.16%.

With the completion of these refinancing, the company has no meaningful debt maturities until 2028. On our -- also on October 1st, we sold Stone Creek at Old Farm in Houston for -- which is 190-unit property built in 1998. Net proceeds from the sale were approximately $3.7 million, delivering a 14.8% levered [ IRR ] and a 2.19x multiple on invested capital.

Turning to our NAV estimate, based on our current estimate of cap rates in our markets and forward NOI, we are reporting a NAV per share range as follows: $48.77 on the low end, $59.89 on the high end, for a midpoint of $54.33. These are based on average cap rates ranging from 5.25% from the low end to 5.75% on the high end, which we helped state quarter-over-quarter based on recent market intelligence and transaction activity.

Going to our guidance.

We are updating 2024 guidance range as follows: For earnings per diluted share.

We are guiding to a $0.01 loss on the low end, $0.07 gain on the high end, for a midpoint of $0.03 per share.

For core FFO per diluted share, $2.74 to the low end, $2.82 on the high end and $2.78 at the midpoint, which is an increase from the $2.72 from the prior quarter.

For revenue, expenses and same-store NOI were reaffirming prior guidance as follows: For revenue, 1.3% increase in the low end, 2.2% increase on the high end, for a midpoint of 1.7%.

For expenses increase of 4.4% of the low end, 3% on the high end, for a midpoint at 3.7%. And for same-store NOI, we are guiding for a negative 0.6% on the low end, 1.6% on the high end and 0.5% at the midpoint.

For acquisitions, we are guiding no acquisitions versus [Indiscernible] from the prior quarter. for dispositions, essentially the same at $167 million versus $175 million previously.

Finally, before I turn it over to Matt and Bonner, I wanted to mention an adjustment we are making to core FFO for this quarter. The company's adjusted core FFO to remove the amortization of all deferred financing costs instead of those solely related to the short-term debt financing as we previously did. And secondly, to adjust for the mark-to-market gains or losses related to interest rate caps, not designated hedges for account purposes. Prior periods have been recast to conform to the current presentation. We've undertaken these changes after receiving significant investor feedback and conducting a comprehensive review of our historical performance as well as comparable company disclosures. We believe the removal of these noncash interest expense items will better reflect ongoing operations of the company.

So with that, that completes my prepared remarks. I'll now turn it over to Matt for his commentary.

Yes. Thanks, Brian.

Let me start by going over our third quarter same-store operational results. Same-store revenue -- same-store rental revenue was up 2% with 5 of 10 markets averaging at least 2.4% growth with our Las Vegas and Raleigh markets leading the way at 11.6% and 5.4% growth, respectively. Total same-store revenues were up 1.7% year-over-year for the quarter.

Third quarter same-store NOI growth portfolio average, as Brian said, down to negative 2.4%. Volume growth in the quarter was [ 45.5%, 12.7% ] growth.

Secondly, properties growth driven by tax adjustments as a result of the successful process.

Our Q3 same-store NOI margin remained strong at 59.7% and are well positioned to finish the year strong on that metric. Operationally, the portfolio experienced continued positive revenue growth in Q3 2020 with 6 out of our 10 markets achieving growth of at least 2% or better.

Our top 5 markets are Las Vegas is 10.5%; Charlotte at 6.4%, Raleigh at 5.5%, [Indiscernible] at 2.3% and Atlanta at 2.1%. Renewal conversions for eligible tenants were up 63% for the quarter or were 63% for the quarter, excuse me, with 5 out of 10 markets exceeding renewal rate growth of at least 2.5%, and Charlotte, South [ Porta ], Phoenix, Las Vegas and Raleigh, all exceeded 2% growth.

On the occupancy front, the portfolio registered 98.9 -- excuse me, 94.9% occupancy as the close of the quarter as of this morning, it is 94.7% occupied, 96.2% leased and has a healthy trend of 92%.

On the expense side, expenses finished the quarter at 8.2%. R&M expenses were driven by higher turn costs due to lower renovations when compared to Q3 2023 and typical seasonality in Q3 of this year.

We expect these costs to moderate in Q4 as we maintain a higher occupancy and less lease turnover. Marketing and utilities were bright spots in the categories and saw a modest expense growth for the quarter at 0.9% and 1.8%, respectively. Current October leasing is in line with Q3 so far, and we expect new leases to be down in the fourth quarter, 4.5% to 4%, 5% and and renewals to be a positive 2% to 3% averaging to a slightly positive blended number for the quarter in the end of the year.

On the supply side, according to our market research and our own intelligence, we think 7 out of NXRT's 10 markets are past peak supply. 9 of those 10 markets are forecasted to grow occupancy over the next 12 months and all of them, 10 out of 10 are expected to grow rents over the same period.

We expect to reach peak supply across the 3 final markets, Charlotte, Phoenix and South Florida by the third quarter of 2025. At which point, we expect to see a fundamental shift in our favor. This should sustain growth and stronger performance through 2027. Thus, our operational strategy will likely remain defensive over the next quarter or 2, but we are becoming incrementally more constructive on rent growth given the next 12-month outlook.

In addition, as we underwrite the portfolio for value-add opportunities in 2025, we expect to increase the rehab output somewhat materially. This outlook, coupled with our refinancing activities led to management recommending the dividend increase approved by the board yesterday.

As you may recall, upon completion of refinancing activity in November, we will have reduced our average floating rate spread to 109 basis points from 158 basis points and pushed out nearly all maturing debt to 2031. This full year core earnings benefit is forecasted to provide $0.15 to $0.20 of earnings annually. The cash from the expected sale of Stone Creek and available account on the balance sheet gives us the ability to have a $100 million buying power going into 2025 to add accretive investments to the portfolio and continue the growth of the company. especially on the internal growth front with new rehabs.

On the NXRT's NAV, as Brian mentioned, we remain transparent of our view and what we're seeing in the market.

Our new midpoint is $54.34 per share using a 5.5% cap rate on our revised 2024 NOI. And at today's prices, our implied cap rate is roughly 6%.

As we've routinely done in the past, to the extent we stay at these levels, we use our NAV as our guide post to utilize free cash flow and/or to look to sell assets at us to free up liquidity and buy back our stock at a discount. In closing, I'll just reiterate that we're excited about the near-term outlook for the company, and we'll continue to work on generating another quarter of outsized NOI and core earnings growth. And that's all I have for prepared remarks. Thanks to the team here at NexPoint and BH for continuing to execute. Brian?

Thanks, Matt.

Let's open it up for questions, please.

[Operator Instructions] Your first question comes from the line of Omotayo Okusanya with Deutsche Bank.

A couple of questions from my end.

First of all, I wanted to focus on the same-store revenue for the quarter kind of rental revenue up about 1.7%. And year-over-year. But again, occupancy up 100 bps, net effective rent down 1.8%. It doesn't quite mass out to the 1.7%.

So just kind of curious kind of what else may have happened during the quarter, whether it's bad debt or something else that maybe you just haven't considered in that overall same-store revenue growth number.

Yes, this is Bonner.

I think the 2 things that were really impactful this quarter, driving -- continuing to drive occupancy growth we saw the quarter the financial actions about 94.5, we closed the fourth quarter at 94.9. That was up 140 basis points year-over-year.

So 1.4% over the last third quarter on a financial occupancy perspective. And then on bad debt, bad debt continues to trend down for us. We had about 1.3% bad debt in the quarter, a little bit better than forecast. That's coming off a comp last year at 3.1%.

So those 2 lines really drove the increase in [Indiscernible]

Okay. That's very helpful. And then in the quarters will property G&A came down quite a bit. I know, again, that's all kind of legal services and all sorts of things that are passed on to the property levels that can be lumpy. But just trying to understand what happened in 3Q, and if that's sustainable going forward?

Tayo, it's Matt.

We continue to utilize AI and a reduced lease example on site as the whole guided tours seems to be waning and having less on-site staff. We do think that it is a sustainable path. But Booner, if you have anything to add here.

Yes, I think we're happy with where G&A, property genic turned out for the quarter, very little growth in market spend, very little growth in utilities overall.

I think we've been really focused on ways we can turn expenses. Obviously, in a ton leasing environment, controllable expenses is really important for us.

So continued focus. We're into '25 budgets and continuing to look very hard at the way we continue to control those lines.

[Operator Instructions] Your next question comes from the line of Michael Lewis with Truist Securities.

Great. I don't know if I missed this.

So what drove the small increase in core FFO guidance.

You kept all the same-store metrics the same and you took out some acquisitions. Does this have to do with the definitional change of core FFO, or is there something else.

Michael, it's Matt. Yes, it's not only a definitional change, frankly, but it's the impact of the refinancings, right? So we're redoing all the debt and then removing the mark-to-market impacts, which have trouble, some analysts, I think, include it yourself.

So those 2 things smoothing it out for both this year and next year and the impact of the $1.4 billion refinancing, incrementally positive is the result.

Okay. That's what we thought. It really -- I mean, all said and done, it's really an interest expense

Correct.

Okay. Got you. And then what do you expect to do from a swap or a hedging perspective on all this new debt, right? So the [ SOFA ] rate is coming down, and you got a good spread. Do you write this all of that, right? A lot of your existing hedges burn off in '25 and '26. Do you float this for a little while, or do you start putting swaps on these as you do?

Yes, good question. We, I guess, holistically looked at this back when the 5-year was 3.3, 3.4 and thought that could be a good level to start layering with some swaps. And then kind of concurrently with that, we got this refinancing done, which bought us a little bit of time in our view. And then the work that we've done yesterday, we think that as long as we can earn a 3% compounded annual gross return on -- excuse me, on a same-store basis through 2027. And that really offsets all the interest expense increased due to expiration of swaps.

So that's the positive. The good news is we're -- we'll see what happens with the election and interest rates, but we are going to actively look to return to layering in swaps. We don't want to cannibalize that number, obviously, at these levels, we do think that the short term or the short short end does come down somewhat materially here.

So that's the long-winded answer. The short answer is we're going to look to take advantage of the interest rate environment to the extent that we get relief on 5 years.

Got you. And then just lastly for me. Could you share the new and renewal rec spreads for the quarter?

Yes. On a blended basis, new leases were down minus 6.43%. It's $93 on 1,730 leases. Renewals on 2040 leases were up 2.2% or about $31.

All right.

So there is no further question at this time. I will now turn the conference back over to the management for closing remarks.

Yes. Thank you. I appreciate everyone's time and questions. And hopefully, we'll see everybody in [ NAREIT ] in a few weeks. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining.

You may now disconnect.