NexPoint Residential Trust Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 29, 2024

There are 7 speakers on the call.

Operator

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. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to Kristin of Investor Relations. Kristin, your line is now open.

Speaker 1

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust's conference call to review the company's results for the Q3 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 McDermott, Vice President, Asset and Investment Management. As a reminder, this call is being webcast through the company's website at anxrt.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 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 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.

Speaker 1

Please go ahead, Brian.

Speaker 2

Thank you, Kristin, 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 McDermott. 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.

Speaker 2

And then I'll turn it over to Matt 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 Q3 of 2024 totaled $8,900,000 or a loss of $0.35 per diluted share, which includes $24,600,000 of depreciation and amortization. This compared to net income of $33,700,000 or a gain of $1.28 per diluted share for the Q3 of 2023, which included $23,800,000 of depreciation and amortization. The Q3 of 'twenty four NOI was $38,100,000 on 36 properties compared to $42,100,000 for the Q3 of 'twenty 3 of 40 properties.

Speaker 2

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 in same store operating expenses led to a 2.4% decrease in same store NOI as compared to Q3 of 2023. As compared to Q2 of 2024, rents for this quarter on a same store portfolio were down 1.2% or $18 sequentially, while occupancy grew by 70 basis points to 94.9%. Reported Q3 core FFO of $17,900,000 or $0.69 per diluted share compared to 69% per diluted share for same quarter last year. During the Q3 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 $2.53 19.5 percent return on investment.

Speaker 2

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 $175, $48, and $43 average monthly rental increases per unit and a 20.8%, 61.9 percent and a 37.2 percent ROI respectively. NXRT paid a 3rd quarter dividend of $0.46 per share on the stock on September 30. Since we increased our dividend 124.5 percent since inception, for the Q2, our dividend is 1.48 times 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%.

Speaker 2

As of September 30, we had $17,400,000 of cash and $350,000,000 of available liquidity on the corporate credit facility. Let me cover a couple of events that have happened subsequent to the quarter. On October 1, the company entered into subcu loan agreements and expects to enter into 17 additional new loan agreements on November 29, for total gross proceeds of 1,670,000,000 dollars which in aggregate represents 97.7 percent of the company's total outstanding debt. Notably, NXRT agreed to refinance interest rates, the improved pricing from our prior terms. Those rates are so for plus 109 basis points.

Speaker 2

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 6.21 percent before the impact of interest rate swap contracts are factored in. Accounting for the hedging impacts of 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. Also on October 1, we sold Stone Creek at Old Farm in Houston for which is 190 unit property built in 1998.

Speaker 2

Net proceeds from the sale were approximately $23,700,000 delivering a 14.8% levered IRR and a 2.19x multiple on best capital. Turning to our NAV estimate, based on our current estimate of cap rates in our markets and forward NOI, we are reporting NAV per share range as

Speaker 3

follows: $48.77 on the low end,

Speaker 2

$59.89 on the high end for a midpoint of $54.33 These are based on average cap rates ranging from 5.25 percent from the low end to 5.75% on the high end, which we held static quarter over quarter based on recent margin 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 $0.01 loss on the low end, dollars 0.07 gain on the high end or midpoint of $0.03 per share. The core FFO per diluted share, dollars 2.74 on the low end, dollars 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, we're reaffirming prior guidance as follows.

Speaker 2

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% on the low end, 3% on the high end for a midpoint of 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 $50,000,000 from the prior quarter. For dispositions, essentially the same at $167,000,000 versus $175,000,000 previously.

Speaker 2

Finally, before I turn it over to Matt Bonner, I wanted to mention an adjustment we are making to core FFO starting this quarter. The company has 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 the mark to market gains or losses related to interest rate caps not designated as hedges for accounting 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.

Speaker 2

We believe the removal of these non cash 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.

Speaker 4

Thanks, Brian. Let me start by going over our Q3 same store operational results. 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. 3rd quarter same store NOI growth portfolio average, as Brian said, down a negative 2.4%.

Speaker 4

Raleigh and Las Vegas led all NOI growth in the quarter with 49.5% and 12.7% growth, respectively. Raleigh's growth was driven by positive tax accrual adjustments as a result of successful protests. 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 2024 with 6 out of our 10 markets achieving growth of at least 2% or better. Our top 5 markets are Las Vegas at 10.5%, Charlotte at 6.4%, Raleigh at 5.5%, South Florida at 2.3% and Atlanta at 2.1%.

Speaker 4

Renewal conversions for eligible tenants were up 63% for the quarter or worse 63% for the quarter, excuse me, with 5 out of 10 markets exceeding renewal rate growth of at least 2.5%. Charlotte, South Florida, Phoenix, Las Vegas and Raleigh all exceeded 2% growth. On the occupancy front, the portfolio registered 94.9 percent occupancy as the close of the quarter as of this morning is 94.7% occupied, 96.2% leased and has a healthy trend of 92%. On the expense side, expenses finished the quarter 8.2%. R and 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.

Speaker 4

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 categories and saw 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 4th quarter 4% to 5% to 4% to 5% and renewals to be a positive 2% to 3% averaging to a slightly positive blended number for the quarter and 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.

Speaker 4

We expect to reach peak supply across the 3 final markets, Charlotte, Phoenix and South Florida by the Q3 of 2025, at which point we expect to see a fundamental shift in our favor that 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 2,031.

Speaker 4

This full year core earnings benefit is forecast to provide $0.15 to $0.20 of earnings annually. The cash from the expected sale of Stone Creek and available cash on the balance sheet gives us the ability to have roughly $100,000,000 of 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%.

Speaker 4

As we've routinely done in the past, to the extent we stay at these levels, we use our NAV as our guidepost to utilize free cash flow and or to look to sell assets 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 hard to generate another quarter of outsized NOI and core earnings growth. And that's all I have for the prepared remarks. Thanks to the teams here at NexPoint and BH for continuing to execute. Brian?

Speaker 2

Thanks, Matt. Let's open it up for questions, please.

Operator

Your first question comes from the line of Amitayo Kosanya with Deutsche Bank. Amitayo, your line is now open.

Speaker 3

Yes. Good morning, everyone. Couple of questions from my end. First of all, wanted to focus on the same store revenue for the quarter, kind of rental revenue up about 1.7% year over year. But again, occupancy up 100 bps, net effective rent down 1.8, it doesn't quite map out to the 1.7.

Speaker 3

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?

Speaker 5

Yes, great. Hey, Thad. This is Conor. I think the two things that were really impactful this quarter, driving continuing to drive occupancy growth. So we saw for the quarter the financial auctions, we got 94.5%.

Speaker 5

We closed the quarter at 94.9%. That was up 140 basis points year over year. So 1.4% over last Q3 on a financial occupancy perspective. And then on bad debt, bad debt was just trend down for us. We had about 1.3% bad debt in the quarter, a little bit better than forecast.

Speaker 5

That's coming off of comp last year at 3.1%. So those

Speaker 4

two lines really drove the increase in rental revenue.

Speaker 3

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

Speaker 4

Yes. Tayo, it's Matt. We continue to utilize AI and reduce leasing staff on-site as the whole guided tours seems to be waiting and having less on-site staff. We do think it is a sustainable path, but Bonner, if you have anything to add to that.

Speaker 5

Yes, I think we're happy with where G and A, property G and A 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 trim expenses, obviously in a tougher leasing environment, controllable expenses is really important for us. So continued focus, we're into 25 budgets and continuing to look very hard at ways we can continue to control those lines.

Speaker 3

Okay. That's helpful. Thank you.

Operator

Your next question comes from the line of Michael Lewis with Truist Securities. Michael, your line is now open.

Speaker 6

Great. Thank you. I don't know if I missed this. So what drove the small increase in the core FFO guidance? You kept all the same store metrics the same and you took out some acquisitions.

Speaker 6

Does this have to do with the definitional change of core FFO or is there something else?

Speaker 4

Yes. 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 troubled some analysts, I think, including yourself. So those two things and smoothing it out for both this year and next year and the impact of the $1,400,000,000 refinancing, incrementally positive is the result.

Speaker 6

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

Speaker 6

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 SOFR rate is coming down and you got a good spread. Do you ride this a little bit, right? A lot of your existing hedges burn off in 2025 and 2026.

Speaker 6

Do you float this for a little while or do you start putting swaps on these as you do?

Speaker 4

Yes, it's a good question. We, I guess holistically looked at this back when the 5 year was 3, 3, 3, 4, and thought that that could be a good level to start at layering in 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, year to date, we think that as long as we can earn a 3% compounded annual growth return on the excuse me, on the same store basis through 2027, that really offsets all the interest expense increase due to the expiration of the swaps. So that's the positive.

Speaker 4

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 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 the 5 year.

Speaker 6

Got you. And then just lastly for me, did you share the new and renewal rest spreads for the quarter?

Speaker 4

Yes. On a blended basis, new leases were down minus 6.43 percent, that's $93 on 17.30 leases. Renewals on 2,040 leases were up 2.2% or about $31

Speaker 6

Perfect. Thanks.

Speaker 4

You bet.

Operator

Your next question comes from the line of Amitayo Cassania again with Deutsche Bank. All right. So there's no further question at this time. I will now turn the conference back over to the management for closing remarks.

Speaker 2

Yes. Thank you. Appreciate everyone's time and questions. And hopefully, we'll see everybody in NAREIT here in a few weeks. Thank you.

Operator

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

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Key Takeaways

  • The company posted a Q3 net loss of $8.9 million (-$0.35/share) with core FFO of $17.9 million ($0.69/share), as same‐store rental revenue rose 1.7% but NOI fell 2.4% due to a 1.8% rent dip and an 8.2% expense increase, while occupancy improved to 94.9%.
  • NXRT’s Q3 value‐add program completed 45 full and partial upgrades, achieving nearly 20% ROI on leased upgraded units, and management plans to materially increase rehab output in 2025.
  • Subsequent to quarter‐end, the company refinanced $1.67 billion of debt, extending its weighted‐average maturity to 7 years, reducing its total debt rate by 48 bps to 6.21% (3.16% after hedges), and deferring meaningful maturities until 2028.
  • The Board approved a 10.3% dividend increase to $0.51/share for Q4 2024 (147.6% since inception), with dividends now 1.48× covered by core FFO (68% payout ratio).
  • NXRT reaffirmed 2024 guidance for core FFO of $2.74–$2.82/share and same‐store NOI change of –0.6% to +1.6%, and reported an NAV range of $48.77–$59.89/share (midpoint $54.33) based on cap rates of 5.25%–5.75%.
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Earnings Conference Call
NexPoint Residential Trust Q3 2024
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