Q3 2022 NexPoint Residential Trust Inc Earnings Call
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Hello, and welcome to the next point with dental Floss Kitwe 2022 conference call. My name is Laura and I'll go with you.
Coordinator for today's event please.
This call is being recorded at the duration of the call your lines will be on listen only how about that you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one and it does keep US Register your question if.
If you require assistance at any point, please basketball as you're right you're going to be.
Operator.
I'll hand, you over to your host Kristin Thomas to begin today's conference. Thank you.
Thank you good day, everyone and welcome to <unk> residential Trust's conference call to review the company's results for the third quarter September 30th 2022 on the call today are Brian Mitts, Executive Vice President and Chief Financial Officer, and Matt and the Grantor Executive Vice President and Chief Investor.
Officer.
As a reminder, this call is being webcast through the company's website at Nx, our teams thought next points Dot 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.
There 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-K, and the Companys.
Other filings.
With the S E C for a more complete discussion of risks and other factors that could affect forward looking statements.
Shipments made during this conference call speak only as of today's date and expect as required by law <unk> does not undertake any obligation to publicly update or revise any forward looking statements.
This conference call also includes 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. Please go ahead, Brian Thank you, Chris and welcome everyone.
When you joined US this morning.
Really appreciate your time and apologize for the technical issues.
Then.
I'll kick off the call I'll cover our Q3 year to date results update our NAV calculation and then provide revised guidance.
I will then turn it over to Bob to discuss specifics on the leasing environment metrics driving our performance and guidance.
For Q3 or are as follows net loss for the third quarter was <unk> 6 million or two cents per diluted share on total revenues of $68 1 million as compared to a net loss of $5 4 million or <unk> 21 loss per diluted share in the same period in 2021 on total revenue.
$6 4 million, which represents a 21% increase in revenue.
For the third quarter NOI was $39 9 million on 41 properties compared with $33 6 million for the third quarter of 2021 on 40 properties, 19% increase in NOI for.
For the quarter year over year run rate growth on renewals averaged 4% across the portfolio a year over year rent growth I literally uses averaged 14, 5%.
Yeah.
Given where rental rates R&R market for class B apartments, an equivalent of <unk> founder and a product. We believe there is ample room for future outsized loan growth.
The quarter's same store rent increased 19, 4% same store occupancy was down 130 basis points to 94% as we continue to focus more on rates and occupancy during the quarter.
This coupled with an increase in same store expenses of 16, 9%, which was accentuated by higher year over year, R&M and turn costs due to an increase in same store NOI of 13, 1% compared to Q3 'twenty one.
For the third quarter of 2022 on the same store portfolio were up five point, sorry, four 5% quarter over quarter.
We reported core tier three core F.
21, 8 million or <unk> 85 per diluted share compared to 65 per diluted share in the same quarter of 2021 for an increase of 31% on a per share basis for.
For the quarter, we completed 649 full and partial interior renovations at least 592 upgraded units.
Given an average monthly rent premium of $163 and a 24, 3% ROI, which is 230 basis points higher than our long term average ROI on renovations and.
Inception to date and the current portfolio, we've completed 7354 full and partial upgrades or 48% of the total units 4853 kitchen upgrades and washer dryer installs and 10451 technology package installations, achieving an average monthly rent premium.
$146 $49 to $44 respectively.
ROI of 22% 69, 3% and 37, 3%, respectively. Each week, each of which helped to drive our NOI year over year higher by 19%.
Results for the year as follows our net loss for the year of $13 million or <unk> 51.
Loss per diluted share on total revenue of $194 6 million.
As compared to a net loss of $15 7 million or <unk> 62 loss per diluted share in the same period in 2021 on total revenue of $160 7 million for <unk>.
Recent revenue of 21%.
Year to date, NOI was $115 3 million or 41 properties as compared to $93 6 million on 40 properties with the same period in 2021 or an increase of 23%.
For the year of same store rent increased 19, 9% same store occupancy was down 140 basis points to nine 4%. This coupled with an increase in same store expenses at 10, 3% led to an increase in same store NOI of 15, 8% as compared to the same period in 2021.
We reported a year to date core $62 3 million or $2 43 per diluted share compared to $1 78 per diluted share and nine months ended September 32021 and increased 37%.
For the year, we completed 1830 full and partial renovations and increased one 1% in the prior period in 2021.
Moving to NAV per share based on our current estimate cap rates in our markets afford NOI reported NAV per share range as follows.
<unk> per share in the love and $83 47 per share in high end and $76 75 per share at the midpoint.
These are based on average cap rates ranging from four 3% of the low end to four 7% on high end, which has increased approximately 44 basis points last quarter and 90 basis points year to date reflect the rise in interest rates and observable increase in cap rates in our markets.
For the quarter, we paid a dividend of <unk> 38 per share on September 30, and this morning, we announced that the board of directors has improved and increased our quarterly dividend.
<unk> per share for a 10, 5% increased <unk> 42 per share.
This marks the company's seventh consecutive annual increase since inception, we have increased our dividend by 103, 9% year.
Year to date, our dividend was two three times covered by core assets.
Pay out ratio of 47% of core.
Finally, we are <unk>.
Before we discuss guidance today, we are pleased to announce some favorable improvements we are undertaking to derisk, our balance sheet increase liquidity and improve our financial outlook.
First we've executed a loan application or in the process of refinancing 19 property level mortgages for Keybanc and Freddie Mac.
In aggregate this transactional refinanced 46, 7% of the company's total outstanding debt as improved spread pricing of 150 basis points over one month sofa and push those maturities out to 2032.
Additionally, and SRT is executed 12 month extension option on our revolving credit facility extending that maturity to June 32025.
The company expects to use approximately $217 million of cash out mortgage refinancing proceeds to pay down the outstanding principal balance on the credit facility. The most expensive debt on our balance sheet today.
These maneuvers will increase the company's weighted average maturity to $6 four years up from three three years as of September 30.
Additionally, this refinancing is expected to reduce <unk> weighted average interest rate on total debt by 39 basis points to 433% before factoring in the impact of interest rate swap contracts.
Accounting for the hedging and path of the swaps and caps and SRT and adjusted weighted average interest rate is expected to be irrigation three 9% to $2 78%.
With the completion of this refinancing the company has no meaningful debt maturities until 2025, which is the revolving credit facility, but as mentioned we are using excess proceeds to pay down 65% of that facilitated share is in that maturity obligations.
Turning to guidance, we are revising guidance as follows same store NOI were estimating 14, 9% on a low end 16, 1% on the high end with a midpoint of 15, 5%, which is a 30 basis point reduction from our prior guidance of 15, 8% due to higher turn costs.
For our core us above guidance for estimated $3 <unk> per share on the low end $3 11 per share on the high end with a midpoint of $3 eight.
Which is a seven.
<unk> incurred share per share increase over the prior midpoint of $3 eight per share that represents a 27% increase over 2021 core.
$2 43 per share.
So with that let me turn it over to Matt for his commentary thanks, Brian .
Can you start by going over our third quarter same store operational results for the quarter. We achieved a 58, 3% same store NOI margin down 100 basis points year over year, driven by lower retention and higher turn cost.
But still near historical highs for our company.
Rental revenue showed a 11, 3% or greater growth in all markets, except Houston, whose performance lagged a bit as we shifted focus to promote occupancy during the disposition marketing process, while same store average effective rent growth achieved 19, 4% eclipsing our recent high watermark of 19, 3% last quarter.
Every market achieved effective rent growth of 12, 4% or higher with Houston once again lagging the field, excluding Houston the weighted average would have top 20% for the quarter Charlotte registered the second lowest growth at 13, 6%. Then we saw Las Vegas jumped to 16, 9% Dallas to 18, 8% all the way up to 26.
2% growth in Tampa.
Three Florida markets Phoenix, Nashville, all saw effective rent growth of 20% or more year over year for the third quarter.
Third quarter same store NOI growth was against special across the board with the portfolio of averaging 13, 1% driven by continued acceleration in total revenues, which had 15% growth for the period up 80 basis points sequentially over Q2, 710 same store markets achieved year over year NOI growth of 14, 7% or greater operating.
Expense growth ticked up again in the seasonally active third quarter registering 16, 9% growth overall, largely driven by increases in R&M and turnover retention for the third quarter came down year over year to <unk> 48, 8%, which led to a spike in turns to make ready while we did see elevated overall turnover expenses, our turn costs registered 500.
$25 per unit largely in line with budget expectations.
Operationally the portfolio experienced continued positive growth in Q3 2022 with nine out of our 10 markets achieving growth of at least 11, 3% or better again, Houston lag as a result of the divergent operating strategy promoting high occupancy and stable cash flow ahead of the anticipated disposition of those assets.
Our top five markets, where self four to 18, 7% Tampa at 18, 4% Nashville at 17, 2% Phoenix at 16, 8% Atlanta at 16, 5% Q3 renewal conversions, where again, 49% for the quarter with eight out of the 11 markets executing renewal rate growth of at least 10.
Percent and know markets were under 7%. The leaders were again, Tampa $18 7 million, South, Florida 16 for Orlando at $15 7 million in Dallas Fort worth at 12, 4%.
On the occupancy front, we are pleased to report Q3 same store occupancy close at over 94%. Despite a robust renovation output and as of this morning. The portfolio is 97% leased with a healthy 60 day trend and 92% occupancy strategy for Q3 was again more like our pre pandemic strategy of pushing rents to force turnover in order to.
Cheap primarily two goals the first close the gap on loss to lease which narrowed to seven 6% from 12, 5% in Q2.
And to renovate more interiors.
As Brian mentioned, our occupancy strategy also led to 649 completed rehabs during the quarter generating an average 24% return on investment and our second highest rehab output since the inception of the company as we round out the year, we will continue to place more emphasis on occupancy and we'll likely see some moderation in rents, but do you expect continued strength in the low to mid teens for the rest.
This year high single digit growth into 2023 to give some insight into October to date, we continue to see healthy leasing activity across our markets with the blended 9% growth on new leases and renewals on roughly 800 leases.
Turning to 2022 guidance the strength of it rolls GPRS total revenues allowed us to increase same store revenue guidance again for the third time this quarter or excuse me this year to a range of $12 7 million at 13, 1% with the midpoint of 12, 9% that's up 90 basis points from 12% in Q2.
Elevated move outs and the resulting turn costs did lead to an upward revision to same store expense growth. So overall, we were able to tighten our full year same store NOI guidance to a range of.
<unk> thousand 14, 9% to 16, 1% with a midpoint of 15, 5%.
Turning to investment activity and no surprise here, but the transaction market is closed significantly due to market volatility and current negative leverage in most commercial real estate property types deals under contract three may have seen 10% to 15% re trades on valuation and sending spot cap rates to 444, 5% of our markets.
That said, we have marketed our Houston portfolio for sale with the intention to generate approximately $100 million net proceeds to pay down our credit facility.
Andrew or buyback our stock we've obtained competitive bids from roughly 30 interested parties and are working to select the buyer to begin contract negotiations with a target cell timeline of year end or early Q1.
Pricing from real groups is coming in around a four 3% tax adjusted in place cap rate resolves to an estimated 23% levered IRR of 275% multiple on invested capital.
Obviously this level of execution, coupled with our balance sheet maneuvering will provide greater strategic flexibility increase liquidity and a further de risking of our balance sheet.
So that point on the balance sheet you will note that we have highlighted several pages in the supplemental detailing balance sheet moves and sensitivities based on the forward curves, a sofa and LIBOR and LIBOR as applicable.
Obviously in this interest rate shock environment renewed emphasis and focus on re balance sheets are of utmost importance to our investors as being one of them.
Viewed in isolation or with Mis information our earnings profile could be and has been misinterpreted. Thus we wanted to publish a few slides on the exact hedges that are currently in place coupled with the impact of the impending financing with Freddie Mac, which is locked in and scheduled to close at the end of November .
Our view analyses of our company that we have seen obviously don't take into account these balance sheet maneuver as an extension of maturities now pushed out six plus years because of course, the only we have that information, but they also largely done the cost for EBITDA growth during a period of rapid inflation with the fed not making housing affordability and easier to obtain.
Indeed, our latest analysis continues to show a widening delta between class, a and <unk> at $400 and $650 respectively per unit.
Also recall over the last two and a half years, our rents did not trough negatively on a year over year basis. In fact from Q1 of 2020 to Q3 of 2022, an 8564 same store units, we have not had one quarter of decreasing rent growth in the pool over time in fact cumulatively, we have increased rates by 27 six.
<unk> on those units.
If your preferred metric as an investor as a debt to EBITDA ratio rather than an LTV test of our hard to replicate portfolio of value added workforce housing assets in the fastest.
The fastest growing job markets in the U S and we believe investors should at least account for the EBITDA growth and under our current projections through 2024, we see net debt to EBITDA organically aerie narrowing to the high single digits through 2025 before any dispositions.
Further after this planned refinancing in Houston dispositions, the only two assets with debt maturities through 2024 cornerstone in Orlando.
On Camelback and Phoenix, both of which are slated to be refinanced in Q1 as part of this larger refinancing effort further pushing out $50 million of low LTV debt on highly performing assets.
In closing we do appreciate the balance sheet concerns are focused on them and firmly believe we're addressing them in this unusual environment, while continuing to focus on our core tenants peer leading same store NOI growth earnings growth and dividend growth. Thanks to our teams here for executing in this difficult environment. So that's all I have for prepared remarks.
Yes, let's turn it over for questions.
Yes.
Okay. Thank you as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Take our first question from Rod Hall with Ray.
James Your line is open. Please go ahead.
Hey, Thanks, guys. Good morning appreciate.
All of that extra color that's extremely helpful.
Question about I'm, just curious about understanding the language of you guys think you executed a loan application.
I guess with your lenders and Fannie so.
I guess I'm curious I mean rates have been changing so rapidly here is there any risk that the application <unk>.
The revised or the planned refinancing.
Additional modification.
No. It's a good question Buck.
Locked in an app and committed so we're just working through the.
The loan docs, which are pretty customary for us at this point given our relationship with Freddie.
We've closed about $6 billion with them.
Great relationships sat down face to face with them in Washington.
Earlier this summer and pounded this out so we have we have a great deal of confidence here.
Okay. Okay. That's helpful.
In terms of like.
Rent growth seems to be decelerating everywhere.
A lot of markets.
Can you provide a little bit.
Additional color in terms of.
Even your new.
New lease and renewal rate growth.
Decelerating.
Through October so far.
What is it like in terms of the competitive landscape right. Now are you still seeing the same flow of new lease applications coming in or how are you planning on making.
Occupancy through the end of the year.
Yes, as we stated we're we're going to put more heads in beds.
That's planned through the seasonally.
Less active traffic season.
We are still seeing great demand.
We do think that there is a little bit of a hit to consumer confidence across the board.
With all of the recession fears and talk.
Sure.
I think that can be accounting for some of the lower demand in our numbers, but recall our numbers are.
Against pretty tough comps.
<unk> really started to accelerate in Q2, and Q3 of last year and so I was trying to make that point on the cumulative growth.
Being almost 30% that didn't trough.
To kind of still.
Account for some of the tougher comp, but overall the leasing activity is really strong.
I'd say at this point in time.
Inflation that we're seeing across contract labor for example in other and other trades is really kind of helping or hurting.
Hurting.
On the one hand on our expenses, but.
These jobs are primarily our renter types. So there it's kind of the the time for blue collar to shine a little bit so we're seeing.
We're seeing the ability to keep pushing those rents in the double digits.
As I said I feel pretty good about double digits into next year.
Okay.
I appreciate that if I can sneak one last one.
Theres just a striking disconnect right now between public market perception of where cap rates are headed or maybe where they are at currently versus kind of the numbers you guys are quoting and maybe what youre seeing in the bidding process.
For for your assets right now.
What do you think.
Explaining that.
Connect.
And does.
Does it make sense, if you have a high degree of confidence.
Youre.
Correct.
Sense to further accelerated stock repurchases with some of the refinancing proceeds.
Yes, that's a great question.
I think if you look at all the long term analysis of cap rates, it's really driven by capital flows and GDP growth.
Less on long term interest rates.
But in the short term interest rates do affect transaction activity, and especially with the velocity with which we've seen the fed raise here, causing really just a shock in transaction activity, it's really really down so theres not a true.
Although we have our Houston process going on Theres, not really a true transaction environment, where people are.
Our wanting to sell if they don't have to sell they are not selling sort of pushing off.
Sales to next year, unless there's a fund the life or a maturity issue.
For us I think that the disconnect is a little bit more pronounced through the leverage profile, which we're trying to.
Trying to remediate here and think we have that being said with the proceeds from Houston.
The first thing we're going to do is pay off the revolver and then if we wanted to lever.
Backup or sell more I think you'd probably see some more assets to buy back stock rather than levering up on the facility it's kind of.
Shooting ourselves.
Again, so I think thats the use of proceeds.
The pay down of the credit facility.
Again on the on the cap rate differential I think we sit at a six three years six four implied cap rate.
Sure.
The big the big institutional investors that we speak with.
The Blackstone Starwood.
Fields. They are now starting to get a little bit more.
Into the Unlevered return profile, they're starting to look at what at what level do we get back.
Into the market and just just don't even use leverage because those groups have had the ability to finance assets that others don't.
I think that informs RNA b because our our.
<unk> is really really hard to replicate we have the 211 fastest job growth job growth markets scale in each of those markets.
Affordable price point with value add potential.
Our belief is that our NAV should gathered at four 3% to $4 seven right now on a spot cap rate basis.
Even in this environment.
Hey, Paul It's Brian I would also note that the board increased our share buyback to $100 million.
Got it.
Very helpful guys I appreciate the color.
Thanks, Bob.
Thank you, we'll now move on to our next question from Rob Stevenson of Janney. Your line is open. Please go ahead.
Good morning, guys have you seen any uptick in bad debt or delinquencies over the last few months.
Not realized bad debt there are.
Say over the past quarter or two theres, a little bit more slow payers, but ultimately there.
I'd say, it's not meaningful those 40 ish basis points 2500 40 basis points.
Okay, and then we've been hearing from some of the smaller private operators at some third party property managers have been trying to push up their fees given the inflationary cost pressures are you seeing this with your property management company is there any increase there going to happen there going forward.
You obviously are bigger in size.
We've maintained that.
Okay.
We don't.
Any increase.
Okay, and then the dividend increase what are you up against taxable earnings.
Or should we do that or was that just something the board wanted to do.
It's something we've done every year during this quarter and so we wanted to maintain that consistency.
Yes.
However, our coverage.
Sure.
Ed.
Okay. How did you guys evaluate increasing the dividend versus using those pros those funds to buy back stock.
Yes.
I think the.
Given the kind of the dollar the nominal dollar amount.
The tenants of our of our company, we thought the risk reward was to continue to show dividend growth and then to the extent that we wanted to.
Buy back stock that the Houston in further dispositions.
Dispositions are going to fuel that versus couple.
A couple of million here or there.
Okay. Thanks, guys I appreciate it you got it.
Okay.
Thank you once again, ladies and gentlemen, if you would like to ask a question. Please press.
One other color from Keybanc.
Thank you. Our next question from Michael Lewis of Trust Securities. Your line is open. Please go ahead.
Great. Thank you.
Some questions about.
Interest expense in the refinancing so.
First in the third quarter. Your interest expense was about $11 $8 million it looks like your guidance for <unk> and $18 million.
Assuming maybe that $80 million include swaps.
Swaps are.
He is with the new loan how do I, how do I reconcile those two numbers.
Well I think there is also the value of the swaps thats flowing through into SFO.
You are getting at.
Yes.
I would I would guess right that the $11 8 million in <unk>, there's a benefit there from the swaps that's offsetting it so that was that was.
Considerably lower than you guys guided to.
And then the $18 million for <unk>.
I don't think that the run rate, but how much whats in that $18 million or <unk> are there other one time costs in that.
Yes, let us look into that and come back to it I don't want to give a wrong answer.
Okay and then.
Just on the all in cost of the refinancing after the swaps.
Youre talking about your weighted average cost of debt down to something with a two handle.
When I look at the refinancing rate plus 155, that's that's all in above 5% I don't know what caught with swaps cost but.
Maybe help me out there because that sounds like a pretty low ex that trait refinancing, especially in this environment.
Yes.
Recall the swaps that we have in place are.
Not really tight.
Tied to any specific deal there just kind of corporate level swaps.
There were paying forward rates that we locked in the years ago.
At.
I think an average of.
One ish percent.
Okay.
Yes.
Okay.
Not putting or you're not putting a new swap on for Paul.
Yes.
Let's see the swaps swaps remain in place and given the lack of financing going on in the second quarter and third quarter.
Freddie and Fannie are both behind their production caps and so.
Theres not theres not a ton of borrowers out there looking for floating rate debt and the rising short term interest rate environment. So the spreads we were able to negotiate down and still have the benefit of our swaps which are <unk>.
Our company only so we were able to kind of arb.
Our spread against the industry rate that we have in place to generate that sub 3% all in interest rate for the next few years.
Okay.
Follow up on the on the <unk> interest expense and then just lastly, I wanted to ask you.
And about higher expenses than you, specifically and other repairs and maintenance.
People ask me about insurance costs after the hurricane.
Any any other color you could add on.
Expense pressures.
Yes.
Our biggest expense pressure right now is contract labor.
On the R&M and turn it over to side finding qualified trades.
When you need them is the hardest part.
That we see right now those that specific category as the leader in expense inflation for us at 25 plus percent. So.
That's driving a lot of those.
R&M and turnover costs are our insurance.
Ill, let ed speak to but I think it's fairly clear.
Fairly locked in.
We just renewed.
Earlier this year, you got pretty favorable rates.
Consider restarting the renewal process for next year.
It doesn't look like it is.
Going to be out of control.
Working through that process for 2023.
Okay, great. Thank you guys you bet.
Thank you we have no further questions in the queue as a final reminder, if you would like to ask the question Crestar one okay. Thank you.
Alright.
It sounds like we're done again apologize for the technical difficulties here switch companies in.
I don't know a hiccup, but I appreciate everyone joining.
Thank you very much ladies and gentlemen. This concludes today's call. Thank you for joining today's call you may now disconnect.