NexPoint Residential Trust Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 30, 2024

Key Takeaways

  • Positive Sentiment: First quarter net income was $26.3 million ($1.00 per diluted share) versus a $4 million loss in Q1 2023, and core FFO rose to $0.75 per share from $0.71.
  • Positive Sentiment: Same-store rental revenue grew 3.6% in Q1 with a 61.9% NOI margin, aided by 8.4% lower marketing and 6.2% lower payroll expenses.
  • Positive Sentiment: Sold Old Farm at a 22.1% levered IRR and pending Radbourne Lake sale at a 19.3% IRR, boosting liquidity to $37.1 million cash and $335 million available under the credit facility.
  • Positive Sentiment: Initiated a $25 million share buyback, purchasing ~8.5 million shares at $31.75 each—about a 40% discount to the Q1 NAV midpoint of $52.44.
  • Neutral Sentiment: Reaffirmed 2024 guidance with core FFO per share of $2.60–$2.85 and same-store NOI range of –2% to +2%, pending clarity from the spring leasing season.
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Earnings Conference Call
NexPoint Residential Trust Q1 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good day. My name is Shelley, and I will be your conference operator for today. At this time, I'd like to welcome everyone to the NexPoint Residential Trust First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I'd now like to hand over the call to Kristin Thomas, Investor Relations. You may now begin the conference.

Speaker 1

Thank you. Good day, everyone, and welcome to the Nexford Residential Trust conference call to review the company's results for the Q1 ended March 31, 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 nsrt.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 risks and other factors that could affect any forward looking statements. The statements made during this conference call seek 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. Welcome to everyone joining us this morning. I'm Brian Mitts and I'm joined today by Matt McGraner and Baumann McDermott. I'm going to kick off the call and cover our Q1 results, provide our updated NAV and our guidance for the remainder of the year, which we are reaffirming. I'll then turn the call over to Matt and Bonnard to discuss the specifics driving our performance and guidance.

Speaker 2

Results for Q1 are as follows. Net income for the Q1 was $26,300,000 or $1 per diluted share and total revenue of $67,500,000 This includes a $31,700,000 gain on the sale of Old Farm that was completed on March 1, 2024. The $26,300,000 net income for the quarter compares to a net loss of $4,000,000 or $0.15 per loss per diluted share for the same period in 2023 on total revenue of $69,200,000 The Q1 of 2024 NOI was $41,100,000 on 37 properties compared to $41,100,000 1st quarter 2023 on 40 properties. For the quarter, same store rent decreased 0.4%, while same store occupancy increased 0.3% to 94.7%. This coupled with an increase in same store expenses of 3.6 sorry, 1.8% with an increase in same store NOI of 4% as compared to Q1 2023.

Speaker 2

As compared to Q4 2023, rents for Q1 2024 on the same store portfolio were down 0.1% or $2 sequentially. We reported Q1 core FFO of $19,600,000 or $0.75 per diluted share compared to $0.71 per diluted share in Q1 2023. During the Q1 for properties in our portfolio, we completed 59 full and partial upgrades and leased 59 upgraded units, achieving an average monthly rent premium of $2.40 and a 21.8% return on investment. Since inception for the properties currently in our portfolio, we've completed 8,593 full and partial renovations, 4,829 kitchen laundry appliance installations and 12,348 technology packages, resulting in $170,39.43 average monthly rent increase per unit and a 20.9%, 51.4% and 37.8% return on investment respectively. NXRT paid a 1st quarter dividend of $0.46 per share on the common stock on March 28, 2024.

Speaker 2

Since inception, we've increased our dividend 124.5 percent. For Q1, our dividend was 1.61 times covered by core FFO with a payout ratio of 56.3 percent. During the Q1, Anixar completed the sale of Old Farm for sales price of 103,000,000 dollars This sale generated $49,400,000 of net sales proceeds, a 22.1 percent levered IRR and a 2.98x multiple on invested capital. On March 5, 2024 NXRT fully repaid the remaining drawn balance of $24,000,000 on its corporate credit facility. As of March 31, 2024, we had $37,100,000 in cash and $335,000,000 of available liquidity on the corporate credit facility.

Speaker 2

Further, we are pleased to report that we are scheduled to complete the sale of Radbourne Lake in Charlotte, North Carolina later today for gross sales proceeds of $39,250,000 This disposition is expected to retire $20,000,000 of property level debt and generate $18,800,000 net sales proceeds and approximate 19.3 percent levered IRR and a 3.64 times multiple on invested capital. Given the success of our recent pending sales, their increase in liquidity position and what we perceive to be an attractive public private market arbitrage opportunity where our stock trade above 7% implied cap rate versus mid to upper 5s for the private market transactions. It's notable to touch on Blackstone's recently announced purchase of Air Communities. We initiated a share buyback program to purchase up to $25,000,000 of our shares. To date this quarter, we have purchased approximately 8,500,000 shares at an average price of $31.75 per share, which represents a approximate 40% discount to the midpoint of our Q1 NAV estimate.

Speaker 2

And speaking of the NAV, let's move to that. Based on our current estimate of cap rates in our markets and forward NOI, we're reporting an NAV per share range as follows $45.91 in the low end, dollars 58.97 on

Speaker 3

the high

Speaker 2

end for a $52.44 midpoint. These are based on average cap rates ranging from 5.5% on low end, 6% on the high end, which remained stable quarter over quarter. Moving to guidance, NXRT is reaffirming 2024 guidance ranges for earnings per diluted share, core FFO per diluted share, same store rental income, same store total revenue, same store total expenses, same store NOI, interest expense and its related components and reaffirming acquisitions and dispositions as follows. Our core FFO per diluted share $2.60 in the low end, dollars 2.85 on the high end for midpoint of $2.72 Same store rental income, 1.4% increase in the low end, 3.2% increase in the high end for midpoint of 2 point 3% increase. Same store NOI, negative 2% or 2% decline in the low end, 2% increase on the high end with a midpoint of 0%.

Speaker 2

So that completes my completed remarks. Let me turn it over to Matt and Bonner for commentary.

Speaker 3

Thanks, Brian. Let me start by going over our Q1 same store operational results. Same store rental revenue was 3.6% for the quarter with 7 out of our 10 markets averaging at least 3% growth with our Charlotte and South Florida assets leading the way at 8.6% and 7.6% growth respectively. We're also pleased to report some continued moderation Of note, marketing and payroll declined 8.4% and 6.2% respectively, and year over year R and M expense growth continued to moderate just up 2.9% from Q1 of 2023. 5 out of our 10 markets achieved year over year NOI growth of at least 5.9% or greater with Orlando and South Florida leading the way at 12.3% and 9.9% growth respectively.

Speaker 3

Our Q1 same store NOI margin registered a healthy 61.9%, that's up 24 basis points from the prior year. Now turning to components of Q1 performance. With peak deliveries in most of our markets occurring in Q3 of this year as detailed on Page 5 of the supplemental, we continue to focus on our operational efforts on maximizing resident retention, reducing our exposure to rising turnover costs and further centralizing labor. Maintaining and building occupancy has remained a key focus. The portfolio registered 94.6% occupancy to close the quarter and as of this morning the portfolio is 94.7% occupied and 93% leased.

Speaker 3

On the rental revenue side, new lease growth remains constrained due to near term concentrated supply in our markets, but there are signs that the deceleration in new lease growth is bottoming. New leases for the quarter improved 130 basis points to negative 6.5 percent from negative 7.8 percent quarter over quarter. And April was trending better than Q1 by 80 basis points. Renewals are also positive for the quarter at 92 basis points and have accelerated sequentially since the Q3 of last year to 1.4% as we sit in April. Bad debt is also trending in a positive direction, improving quarter over quarter.

Speaker 3

Q3 2023 was 3 point 2%, Q4 was 2% and Q1 was down to 1.8%, trending approximately 90 basis points better than our expectations. On the value add front, during the Q1, as Brian said, we completed 59 full and partial interior upgrades, achieving an average monthly rent premium of $240 and 21.8 percent ROI. We also installed 68 washer and dryer sets for an average monthly rent premium of $48 and a 54.6 percent ROI. Lastly, we completed bespoke upgrades on an additional 55 units with average rent premiums of $56 per unit. And for the remainder of 2024, we intend to complete an additional 3 52 full or partial upgrade interior upgrades, 465 washer and dryer sets and 3 18 bespoke upgrades and units where we see demand to drive rental income.

Speaker 3

On the expense side, we completed our insurance renewal at the end of March and I'm happy to report that our premiums will remain flat which aligns with our midpoint guidance expectations. On the transaction front, we continue to actively monitor the investment sales market for opportunities and price discovery. While apartment transaction volume is at the lowest point in the past decade, over the last 60 days private equity investors have aggressively priced over $15,000,000,000 of housing product in the low 5 in place cap rate range. Over $240,000,000,000 of North American focused real estate closed in fund dry powder remains on the sidelines in search of 13% to 20% levered IRRs according to Easthill. Against this backdrop and even with the near term elevated supply picture, our strategically positioned Sunbelt portfolio screens attractively, particularly given our in migration and demographic backdrop.

Speaker 3

Indeed, as you can see from the supplemental, according to CoStar, 1 out of every 2 jobs are expected to be created in NXRT markets through 2027. Now with the sale of Old Farm closed and with the closing of Radbourne later today, we we will have roughly $36,000,000 of cash to continue to buy back shares and or pay down debt. Given our cost of current cost of capital, we have prioritized this balance sheet cleanup and share buy backs over external growth pursuits. At current levels, NXRT's implied cap rate remains north of 7.25 and with a constructive view on wind supply will lane, we believe repurchasing our shares at these levels makes the most sense. In closing, we are happy with the start of 2024 through late April.

Speaker 3

We will remain focused on occupancy and controlling expenses to maximize NOI growth. In the long term, we remain bullish on our Sunbelt market as we expect to outpace Northern and Coastal cities in population, job and wage growth. In the short term, we expect to see modest growth specifically in the second half of the year as supply growth begins to decline. That's all I have for prepared remarks. Thanks to our teams here at NexPoint and BH for continuing to execute.

Speaker 3

Now I'd like to turn it over to the operator for Q and A.

Operator

Our first question comes from Kyle Katarina from Janney. Your line is now open.

Speaker 4

Hey, good morning, guys. What does concession usage look like across the portfolio? Is concession usage picking up in April versus 1Q 2024?

Speaker 3

Yes. I don't and Bonnie, you can chime in too if you have anything to add. Concession usage going forward does pick up for in the second quarter and in the third quarter and then starts to wane in the 4th quarter. That's one reason why we're maintaining guidance until July, so we have a better view on just how the supply is impacting the market rents. But as we stated, the blended rents have appeared to bottom in our view.

Speaker 3

And so the use of concessions, which were a couple of weeks free to waiving the normal fees that we would charge have begun to dissipate. And so while we're still underwriting that we'll have to use them, we're hopefully optimistic that we won't. Barney, anything to add to that?

Speaker 5

Yes. Just to quantify it a little bit. So Q1 concession use was about 24 basis points on GPR. It's not in every market. We see it more in the high supply markets.

Speaker 5

Having been out and seeing some sites, we're talking more in a couple of areas of Phoenix, a couple of areas of Charlotte, Raleigh, areas where we have more new supply delivering, there's more of a market expectation for a concession. But we're trying to maintain about 2 to 4 weeks free where the new development, particularly in the highest supplied areas are 2 and even up to 3 months free.

Speaker 4

Okay. Thank you. And then how far are you guys to the various upgrade opportunities within the portfolio? Just trying to get a sense of the runway left ahead of you versus all the units you've already done. Are you basically done with the technology package upgrades at this point having done more than 12,000 of them?

Speaker 3

Yes. We're basically done with the tech packages. There's some low hanging fruit as we mentioned on the washer and dryers, which will hit this year. And then as it relates to sort of the full interior package, we go in and audit on an annual basis what kind of bespoke upgrades we can do and then tailor make those upgrades as we go throughout the year depending on how the asset in particular is performing. But as kind of like a Gen 2, I think we have roughly 5,005 100 units still to do, which gives us another about a year and a half, 2 years of internal growth to go pursue as the supply picture wanes and we can be more competitive.

Speaker 3

That's another kind of key component and why we've paused and hit the brakes a little bit versus years prior. But as the supply starts to dissipate in Q4 and certainly into 2025, you'll see us ramp those upgrades pretty quickly. All

Speaker 4

right. That's it for me. Thanks guys.

Operator

Thanks. Our next question comes from Tayo Okusanya from Deutsche Bank. Your line is now open.

Speaker 6

Wow! Douche Bank, okay. Good morning, everyone. Good morning, Sam. So a quick question on guidance.

Speaker 6

Again, very strong Q1. Again, understand you're going to have the asset sales, which is somewhat dilutive to earnings as the year progresses. But could you kind of walk us through, again, 4% same store NOI in 1Q, but full year guidance somewhere between negative 22. Again, what's causing some of that deceleration? Is it just overall concerns about supply and the impact portfolio performance?

Speaker 6

And then also just guidance range to remains pretty wide. So is the thought get through spring leasing season have better clarity and then maybe at that point start to narrow the guidance range?

Speaker 3

Yes. That's exactly right, Tayo. We feel good with how the Q1 came in. Absorption was better than we thought. Bad debt was, as I said, 90 basis points better than we thought.

Speaker 3

And occupancy was better than we thought. And obviously, renewal rates are on the new lease side were negative 5%, 6%. As we get into the second and third quarter, we're underwriting still almost a gain to lease and the GPR, we're underwriting a GPR down another 90 basis points in the 2nd quarter and then another 40 basis points sequentially into the 3rd quarter and another 90 basis points into the 4th quarter. And so if that flips, then we'll be excited to report a narrowing range and hopefully raise as we work through the Q2. But that's the biggest reason we're just being cautious for the moment.

Speaker 6

Got you. That's helpful. And then if I may sneak one more in, again, the swaps that are going to be expiring this year about $385,000,000 of swaps. How do we kind of think about a lot of them are kind of in the money right now, they are helping you. How do we kind of think about that as it drops off, you kind of put in new swaps at higher rates, go floating on that debt?

Speaker 3

Yes, it's a great question. So, we worked on this during the Q1 and basically monitoring the fluctuations in interest rates. The it doesn't make a ton of sense in our view at peak rates, it's just where we think we are at least at peak rates to go ahead and layer on more swaps. And really the math isn't as dangerous or as gloomy as folks might think. We did some work and we only have to CAGR NOI at 5% over the next 25% and 26% to maintain a current FFO levels and have the swaps all of them expire.

Speaker 3

And that's assuming we could refi and term out all our debt at the 5% rate. Now if we're able to CAGR at a higher rate, which we have historically done since we've been a public company, 6%, 7%, 8% and we're able to fix our debt at a lower than 5% rate, then we get helpful get into the $3 a core FFO range. And so that's a long way of saying we're going to watch the yield curve and we believe as rents are decelerating that those numbers will eventually make it into CPI and allow for some easing. And while and if and when that happens, we'll be doing the same math. But really the powerful point is that this company will grow same store NOI in the mid to high single digits going forward, especially as supply becomes non existent and that's illustrated in the supplemental where we lay out the deliveries in our submarkets, we can see it.

Speaker 3

There's not going to be any supply coming in 'twenty six at all. And at that point, our swaps are expiring. My guess is our equity cost of capital will improve or and or the value of the company will be higher than it is today.

Speaker 6

Got you. And then what do you think you can actually raise fixed rate paper today, whether it's 5 year or 10 year unsecured?

Speaker 3

Yes. Unsecured, we don't have an unsecured rating, so it's not really applicable to us. Fannie Freddie debt is pricing in the 6% range on a 10 year fixed basis. You can do things we could do things a little bit better as a slug sponsor Freddie probably in the mid-5s, but that's where it is today if we went out and try to fix everything.

Speaker 6

Thank you.

Speaker 3

Thanks.

Operator

Our next question comes from Barry Oxford from Couriers. Your line is now open.

Speaker 7

Great. Thanks guys. On the interest line item quarter over quarter, can you talk about what drove the interest line item to be down as much as it was? And how we should think about that going forward?

Speaker 3

Yes, Bonnie, this is Jay Kama.

Speaker 5

Yes, I think given what we thought we were looking at in the end of the year, looking at the forward curve, obviously, it was priced in pretty significant amount, 5 cuts. We were talking in Q4. Now today, the market is somewhere around 2 cuts plus or minus. So the SOFR curve at twelvethirty onetwenty 4 is significantly steeper than it was expected to be here when we talked 2 months ago. That has an impact on the fair value of the swaps.

Speaker 5

So there's some non cash mark to

Speaker 6

market activity that I think was

Speaker 5

a little bit more significant than we estimated. We got a benefit in the Q1 from that. I think that that's the biggest differential you're probably seeing in the interest expense line.

Speaker 7

Right. So with the adjustments in the swap value?

Speaker 3

That's right.

Speaker 7

Right. Okay. No, great. It's kind of what I thought it was given your comments previously. But switching gears, you indicated that you were looking to buy back shares.

Speaker 7

Are you prioritizing the buyback of shares over acquisitions or not necessarily you could be doing both of them at the same time?

Speaker 3

Yes. We're prioritizing the buybacks as it sits today, because it's there's a clear there's still a clear gap between public and private market values like significant, almost 150 to in some cases 200 basis points as it relates to our company. The Blackstone ARRC deal was 5.9 headline cap rate, but if you dig into it, it's 5.3. That's a big bet. And so like it's just we can't find anything in the market and then the transaction volume is again the lowest it's ever been in the last decade.

Speaker 3

So makes sense to buy a portfolio that we know and love in the 7s.

Speaker 7

Right, exactly. No, makes sense. Appreciate it, guys.

Speaker 3

Thanks a lot.

Operator

No further questions as of the moment. I'd now like to hand back over to the management for their final remarks.

Speaker 2

Nothing further from us. Appreciate everyone's time and thoughtful questions and we'll speak next quarter. Thank you.

Operator

Thank you everyone for attending today's call. We hope that you have a wonderful day. Stay safe and you may now disconnect the

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