NexPoint Residential Trust Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 31, 2023

Key Takeaways

  • Positive Sentiment: Q3 net income of $33.7 million (or $1.28 per diluted share) versus a loss of $0.6 million a year ago, driven by a 2.5% revenue increase and an 8% same-store NOI boost.
  • Negative Sentiment: Q3 core FFO declined to $0.65 per diluted share from $0.84 in Q3 2022, reflecting pressure on earnings despite revenue growth.
  • Positive Sentiment: The Board approved a 10.1% dividend increase to $0.46242 per share, marking an 8th consecutive hike and a 124.5% total increase since IPO.
  • Positive Sentiment: Year-to-date leverage has been cut with a 1.8% reduction in mortgage debt and a 45% drop in corporate credit facility borrowings, with planned asset sales set to reduce total leverage by another 9.7%.
  • Positive Sentiment: With swaps, caps and fixed-rate debt, the company is 98.1% effectively hedged, meaning rising rates will keep cash interest expense flat or even reduce it.
AI Generated. May Contain Errors.
Earnings Conference Call
NexPoint Residential Trust Q3 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Thank you for standing by, and welcome to the NexPoint Residential Trust Q3 2023 Conference Call. I would now like to welcome Kristin Thomas, Investor Relations to begin the call. Kristin, over to you.

Speaker 1

Thank you. Good day, everyone, and welcome to NexPoint Residential conference call to review the company's results for the Q3 ended September 30, 2023. On the call today are Brian Mitts, Executive Vice President and Chief Financial Officer Matt McGranier, Executive Vice President and Chief Investment Officer and Bonner McDermott, Vice President, Asset and Investment Management. As a reminder, this call is being webcast through the 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.

Speaker 1

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 ks and the company's other filings with the SEC for a more complete discussion of risk 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 to see the company's earnings release that was filed earlier today. I would now like to turn the call over to Brian Mitts.

Speaker 1

Please go ahead, Brian.

Speaker 2

Thank you, Kristin. Welcome to everyone joining us this morning. I'm joined here with by Matt McGraner and Bonner McDermott. I'm going to kick off the call and cover our Q3 year to date results, walk through our updated NAV calculation And then give our revised guidance. I'll then turn it over to Matt and Vonnard to discuss specifics on the Portfolio Leasing Environment Metrics and the items driving our performance and guidance.

Speaker 2

So start with Q3 The results, net income for the Q3 was $33,700,000 or $1.28 per diluted share on total revenue of $69,800,000 as compared to a net loss of $600,000 or $0.02 loss per diluted share in the same period in 2022 and total revenue of 68,100,000 A 2.5% increase in revenue on 39 properties versus 41 properties for the prior year period. The Q3 NOI was $42,100,000 on 30 9 properties as compared to $40,000,000 for the Q3 Same store occupancy dropped 10 basis points to 93.9%. This coupled with a 7.7% increase in other income And a 0.3% decrease in same store expenses led to an increase in same store NOI of 8% As compared to Q3 2022. As compared to Q2 2023, rents for The 3rd quarter on same store portfolio were down 40 basis points to $15.29 per unit per month. We reported Q3 core FFO of $17,100,000 or $0.65 per diluted share compared to $0.84 per diluted share in the Q3 of 2022.

Speaker 2

For the quarter, we completed 420 full and partial renovations and leased 3 30 renovated units, achieving an average monthly rent premium of $215.23.6 percent ROI, which is slightly higher than our long term average ROI on renovations. Inception to date in the current portfolio, we've completed 8,671 full and partial upgrades, which represents approximately 60% of the total units, 4,812 kitchen upgrades and washer and dryer installments and 12,285 technology package installations, Achieving an average monthly rent premium of $168 $49 $44 respectively and a return on investment of 21%, 65.3% and 37.8%, respectively. XRT paid a 3rd quarter dividend of $0.42 per share on the common stock on September 29. On October 30, the Board approved a 10.1 percent increase to the dividend to $0.46242 per share Since our IPO in 2015, we've increased the dividend 124.5%. Moving on to year to date results, net income year to date was $25,900,000 or $0.99 per diluted share on total revenue of $208,600,000 as compared to a net loss of $13,000,000 or $0.51 per diluted share in the same period in 2022 on total revenue of $194,600,000 or an increase of 7.2 percent in revenue.

Speaker 2

Year to date, NOI was $125,200,000 on 30 9 properties as compared to $115,700,000 on 41 for the same period in 2022 for an increase of 8.2%. Year to date per unit same store rent increased 3% to $15.24 and same store occupancy was down 10 basis points to 93.9%. This coupled with an increase in same store other income of 4.7% and an increase in same store expenses of 6.7% Led to an increase in same store NOI of 9.5% compared to the same period in 2022. Reported year to date core FFO of $56,100,000 or $2.14 per diluted share compared to $2.38 per diluted share in the 9 months ended September 30, 2022. Moving on to our balance sheet.

Speaker 2

As of ninethirty, we had $1,580,000,000 mortgage debt, of which $112,000,000 was held for sale And $41,000,000 was outstanding on our credit facility corporate credit facility. This compares to mortgage debt of $1,610,000,000 at twelvethirty onetwenty 2, Of which $68,200,000 was held for sale and $74,500,000 was outstanding in our corporate credit facility. This This represents a 1.8% reduction in mortgage debt and a 45% reduction in our corporate debt year to date. Once we sell the 4 assets that we show as held for sale, we'll to further reduce our mortgage debt by $112,000,000 and our corporate debt by $41,000,000 representing a total 9.7% reduction in leverage. At ninethirty, we have swaps with a notional value of $1,170,000,000 with fixed rates ranging from 2% on the high end to 57 basis points in the low end.

Speaker 2

With a weighted average fixed rate of 1.07%, our swaps have a liquidation value of 98 point $6,000,000 as of ninethirty. As of ninethirty, we have interest rate caps on $1,390,000,000 in notional debt with the strike prices ranging from 6.8 2% on the high end, the 2.7% on the low end with a weighted average strike of 5.83%. As of ninethirty, we had 13 caps that were above the reference rate of 5.32%, representing $148,400,000 of notional value. For Q3, our swaps and caps reduced our interest costs by approximately $13,500,000 NxRT is 98.1% effectively fixed when considering our swaps, caps and fixed debt, being at current or higher rates, we're basically fully hedged. One interesting point to make regarding the capital structure in regards to the caps and how that will impact interest expense in a rising rate environment, Which is to say that our interest will remain flat to decrease as rates rise.

Speaker 2

For example, for our reference rate increases 50 basis Cash interest expense net of swaps and caps will remain flat. If the reference rate increases by 1%, Our cash interest expense, net swaps and caps will decrease by 0.12% as we'd effectively be 106.6% hedged as new caps Moving on to NAV per share, based on our current estimates of cap rates in our markets and forward NOI, We're reporting NAV per share range as follows: $48.77 on the low end, $60.14 on the high end $54.45 at the midpoint. These are based on average cap rates ranging from 5.5% on the low end and 6% on the high end, which represents a 60 basis point increase over the prior quarter as compared to 70 and 100 basis point movements in 5 10 year treasuries, respectively. For guidance, for the full year 2023, we're revising core FFO and same store NOI guidance as follows. For core FFO per diluted share, dollars 2.95 in the high end, $2.81 in the low end with a midpoint of $2.88 For same store numbers, We are guiding rental revenue to 7.7% on the high end, 7% on the low end with 7.3% in the midpoint.

Speaker 2

For same store expenses, we're guiding to 4.8% on the high end, 5.7% on the low end, with a midpoint of 5.2 percent and this results in a guidance of same store NOI of 9.5% on the high end, 7.8% on the low end and 8.7% at the midpoint. So with that, that completes my prepared remarks. I'll turn it over to Matt. Thanks,

Speaker 3

Brian. Let me start by going over our Q3 same store operational results. Same store effective rents ended the quarter at $15.29 per unit per month, up 3.1% year over year. 7 out of our 10 markets averaged at least 3% growth, while our South Florida and Raleigh markets led the way at 8.1% and 5.5% growth Same store rental revenue growth was 4.6% for the period with the Florida markets again facing the field 10.3%, 8.2% and 4.6%, respectively, for South Florida, Tampa and Orlando. Dallas Fort Worth also had strong showing at 7.3% growth.

Speaker 3

Total same store revenues were up 4.6% year over year. We're also pleased to report some welcome moderation in expense growth for the quarter. 3rd quarter same store operating expenses were down 40 basis points year over year. Payroll growth was a mere 60 basis points in Q3, down from 15.3% and 6.9% in Q1 and Q2 respectively. R and M expense growth was 6.6% lower than the prior period off of an elevated post COVID comp in 2022.

Speaker 3

Real estate taxes have also moderated and true ups booked in Q3 reflect a reduction to our overall real estate tax forecast for the year. Year to date same store tax growth was down to 6% year over year. Insurance expense growth stabilized at 6% in Q3 after a successful to Q2 renewal negotiation as well. On the NOI side, the portfolio achieved strong third quarter same store NOI growth of 9.5%, While our NOI margin improved to 61.4 percent, nominal NOI quarter over quarter also increased, as Brian mentioned, as our teams continue to operate more efficiently. In 6 of the 10 same store markets achieved year over year NOI growth of 8.7% or greater with South Florida again setting the tone at a healthy 18.4%.

Speaker 3

Turning to operating performance and the go forward strategy. While our average effective monthly rents per unit ended Q3 at $14.97 per unit, A 3.5% increase year over year. New leases did turn negative for the quarter by $60 per unit or 4.6% on a lease over lease basis. As other Sunbelt peers reported, new supply skips and evictions and fraud are putting downward pressure on total financial occupancy for now. On the new supply front, given the strong job market and heavy concessions for merchant build product, consumers are expecting and demanding concessions across the board, Even for Class B product as Class B runners migrate to Class A product.

Speaker 3

And given the interest rate environment, even Class B owners are being more defensive in their operating We do expect this to abate by the end of the first half of next year as Class C renters use their wage gains to upgrade their housing options And both inflation and delivery start to moderate. We expect to see pricing power return to Class B assets sustained by continued net migration into the Sunbelt And the fact that 67.5% of total U. S. Households can afford to live in an NXRT community. Perhaps most importantly on the supply front, in 20 of NXRT's to the Q3 of 2019.

Speaker 3

Supply growth over the next 3 years is less than 6%. While deliveries have been notable in 2023, The forecasted full year 2023 total is down 17% from RealPage's projection earlier in the year, most likely due to difficult financing environment. In addition, we'll be exiting 2 of the few supply heavy markets submarkets after the 2 planned Charlotte dispositions I'll get to in a minute. As we noted last quarter and as broadly reported by other Sunbelt focused REITs, skips and evictions remain a problem in a few key markets, most notably for us, Atlanta, Charlotte, Las Vegas. The good news here is that Atlanta started to work through their core backlogs as has Las Vegas.

Speaker 3

And as for Charlotte, over 70% of the evictions are attributable to one asset, Timber Creek, which is under contract to sell with $1,500,000 of non refundable earnest money deposit. Given these momentary crosscurrents, we will continue to focus on prioritizing occupancy, Closing the back door on skips and evictions and targeting qualified traffic. The portfolio registered 94% occupancy as of the close of the quarter As of this morning, it's 96.24 percent leased with a healthy 60 day trend of 93%, the highest it's been in a couple of quarters as we enter the winter months. The good news also is our 3 year same store effective rent growth is now caggering at 9.6% And same store NOI growth will end the year in the high single digits. This growth coupled with our continued focus on deleveraging informed our view to recommend an 8th consecutive dividend to the Board.

Speaker 3

If we are successful with these maneuvers and we do believe we will be, we think earnings growth reaccelerates in 2024, painting our core FFO payout ratio 64% for 2023 and sub-sixty percent on preliminary 2024 estimates. Our confidence in our strategy also stems from our ability to still find liquidity at a time when there's not a lot of it. Given our debt is fully pre payable and our NOIs are growing, these assets are still very liquid. Our job as management and large shareholders is To maintain our focus on increasing NOI through our targeted value add campaigns, preserving those gains and maintaining a maximum liquidity profile. So So when liquidity does return to the market, we can take advantage of it.

Speaker 3

For example, during the quarter, we were able to liquidate Silverbrook, one of the company's first acquisitions for 4.6 percent cap rate. The Silver Book sale generated $19,500,000 of net proceeds, a 34% levered IRR The 6.14 times multiple on invested capital. We used $16,000,000 of net sales proceeds to reduce the drawn balance on the credit facility to $41,000,000 As I alluded to earlier, Timber Creek in Charlotte is also under contract for sale at $49,000,000 with a $1,500,000 non refundable earnest money deposit. Estimated net proceeds from this sale are $23,800,000 which would generate a 25 percent levered IRR and a 4.3 times multiple on invested capital. We expect this sale to occur in Q4.

Speaker 3

Finally, we also expect to sell Old Farm in Houston this year. As you may recall, this asset fell out of contract in April. We have found a replacement buyer who is now under contract to purchase the asset for $103,000,000 The sale is forecasted to generate 47 net proceeds at a 22 percent levered IRR and a 2.9 times multiple on invested capital. The Old Farm and Timber Creek dispositions will retire the remaining balance on the credit facility and allow us to further delever the balance sheet, positioning us as Brian mentioned as fully hedged going into 2024. That's all I have for prepared remarks.

Speaker 3

I'd like to thank our teams for continuing to Execute through this challenging environment. Thank you, Brian.

Speaker 2

That's it. We got we'll open up for questions.

Operator

We'll pause for just a moment to compile any questions. We have a question from the line of Kyle Katarinaik with Janney Montgomery Scott. Please go ahead.

Speaker 4

Hey, good morning guys. What's your decision to raise the dividend by 10% versus buying back stock or paying down additional debt at this time?

Speaker 3

Hey, Kyle. The incremental dividend on a just a nominal dollar basis is $4,000,000 roughly And at a current share price of $25 $26 it's 130,000 ish dollars of 130,000 shares of stock to repurchase. Our strategy has always been to generate high single digit same store NOI growth, earnings growth and dividend growth and we think that's an important aspect of our strategy. And given that we have these dispositions on tap for Q4 and early Q1 to retire all the remaining unhedged debt and enter the 2024 year with the ability to reaccelerate earnings. We were we just thought that was the better use of capital and just an effective tenant of our strategy for the last 8 years.

Speaker 4

Okay. Thank you. And then related to the AtlantaLost Vegas markets, You had mentioned last quarter that Atlanta Courts opened in 2Q. So where do those backlog stand today versus where they were at last quarter?

Speaker 3

I think the Atlanta backlog was 70,000 ish skips and evictions. Is Is that right, Bonnie?

Speaker 5

Across the Atlanta market for the 1st 7 months this year, he's on about 70,000 evictions. When you

Speaker 3

look at Our AR balances and our actual

Speaker 5

net bad debt, we've seen, I think, the peak for net Bad debt is about June of this year. We think that, that continues to moderate and we closed the year sub-three percent bad debt there. So So it's getting better. It's also getting better in Vegas as well. We've seen, I think, a healthier area of balance there as well.

Speaker 5

So getting better. It's been a bit of a struggle, but we see some positive momentum heading into the end of the year in 2024.

Speaker 4

And then one last one for me. What does unit turnover been for this quarter and last Quarter and where is that compared to historical levels?

Speaker 3

Yes. It's been pretty consistent in the low 50% I guess, turnover in the mid to high 40s retention in the low 50s and that's been pretty consistent. Our strategy going into Q4 and Q1 will continue to prioritize renewals. And as I mentioned in prepared remarks, keep the

Operator

There are no further questions at this time. I would now like to turn it over to the management team for closing remarks.

Speaker 2

Great. Thank you. Appreciate everyone's time. Probably see some of you at NAREIT in a few weeks. Thank you.

Operator

I would like to thank our speakers for today's presentation and thank you all for joining us. This now concludes today's call. You may now disconnect.

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