Q3 2024 NexPoint Residential Trust Inc Earnings Call
Mark: 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 Annex Art EQ32024 earnings call. To the school, this being recorded.
Mark: Online sub-inplace on mute from Ed Any Blackhound Nice. After this speaker's remark, there will be a question and answer session.
Mark: If you would like to ask a question during this time's interview press, start followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would no like to turn the call over to Kristen, up in Reservalision. Kristen, your lines now open.
Kristen: Thank you, good day everyone and welcome to the next point residential trust conference call to review the company's results for the third quarter in the September 30, 2024.
Speaker Change: Executive Vice President and Chief Financial Officer, Matt McGraner, Executive Vice President and Chief Investment Officer, and Bonner McMurray Vice President, Asset and Investment Management.
Speaker Change: As a reminder, this is Call of the In-WaveCraftsuit company's website at nxherp.net.com
Speaker Change: Before we begin, I would like to remind everyone that this conference call contains forward-looking statements within the meetings of the private security litigation form act of 1995 that are based on management's current expectations of some family.
Speaker Change: [inaudible]
Speaker Change: The statements made during this conference call speak only as of today's date, and as required by law, NXRT does not undertake any obligation to publicly update or revise any forward-looking statement.
Speaker Change: This conference call.
Speaker Change: also includes an analysis of non-GAAP financial measures.
Speaker Change: For a more complete discussion of these non-GAAP financial measures, see the company's earnings release that was filed earlier today.
Speaker Change: 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 McDermott.
Speaker Change: 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 Bonner to discuss specifics on the Louisiana environment and metrics.
Speaker Change: driving our performance and guidance.
Speaker Change: Results for Q3 are as follows. Net loss for the third quarter 2024 total $8.9 million for a loss of $0.35 per diluted share which includes $24.6 million depreciation and amortization.
Speaker Change: This compared to net income of $33.7 million, or a gain of $1.28 per diluted share for the third quarter of 2023, which included $23.8 million of depreciation and amortization.
Speaker Change: For the third quarter, 24 NOI was $38.1 million on 36 properties compared to $42.1 million for the third quarter, 23 of 40 properties.
Speaker Change: For this quarter, same-store rent decreased 1.8% while same-store occupancy grew to 94.9%.
Speaker Change: This, coupled with an increase in same-store revenues of 1.7%, offset by an 8.2% increase in same-store operating expenses, led to a 2.4% decrease in same-store NOIs compared to Q3 of 2023.
Speaker Change: As compared to Q2 of 2024, rents for this quarter on a same-store portfolio were down 1.2 percent or $18 sequentially, while occupancy grew by 70 basis points to 94.9 percent.
Speaker Change: reported Q3 core FFO of 17.9 million or 69 cents per diluted share compared to 69% per diluted share for same quarter last year.
Speaker Change: 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.
Speaker Change: Since inception for the properties currently in the portfolio, we've completed 8,316 full and partial upgrades.
Speaker Change: $4,704 kitchen and laundry appliance installs and $11,389 technology package installations resulting in $175, $48, and $43 average monthly rental increases.
Speaker Change: per unit, and a 20.8%, 61.9%, and a 37.2% ROI, respectively.
Speaker Change: XRT paid a third quarter dividend of 0.46 cents per share upon stock on September 30th.
Speaker Change: Since we've increased our dividend 124.5% since inception. The second quarter our dividend is 1.48 times covered by core FFO with a payout ratio of 68% of core FFO.
Speaker Change: Yesterday the board approved a quarterly dividend of 51 cents per share, which represents a 10.3% increase from the prior dividend.
Speaker Change: Since inception, NXRT has increased the dividend per share by 147.6%.
Speaker Change: As of September 30th, we had $17.4 million in cash and $350 million of available liquidity on a corporate credit facility.
Speaker Change: Let me cover a couple of events that have happened subsequent to the quarter. On October 1st, the company entered into 17 loan agreements and expects to enter into 17 additional new loan agreements.
Speaker Change: on November 29th for total gross proceeds of $1.67 billion.
Speaker Change: which, in aggregate, represents 97.7% of the company's total outstanding debt.
Speaker Change: Notably, NXRT agreed to refinance interest rates, improve pricing from our prior terms. Those rates are SOFR plus 109 basis points.
Speaker Change: This refinancing activity extends the company's weighted average debt maturity schedule to approximately seven years.
Speaker Change: 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% before the impact of interest rate swap contracts are factored in.
Speaker Change: Accounting for the hedging impact 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.
Speaker Change: Also on October 1st, we sold Stone Creek at Old Farm in Houston, which is a 190-unit property built in 1998.
Speaker Change: 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 follows.
Speaker Change: $48.77 on the low end.
Speaker Change: $59.89 on the high end for a midpoint of $54.33.
Speaker Change: These are based on average cap rates ranging from 5.25% on the low end to 5.75% on the high end.
Speaker Change: which we held static quarter over quarter based on recent market intelligence and transaction activity.
Speaker Change: Going to our guidance, we are updating 2024 guidance range as follows.
Speaker Change: for Earnings Per Diluted Share.
Speaker Change: We got into a one-cent loss.
Speaker Change: on the low end, $0.07 gain on the high end for a midpoint $0.03 per share.
Speaker Change: for CORE FFO, per-deleted share.
Speaker Change: $2.74 on 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.
Speaker Change: for Revenue, Expenses, and Same-Store NOI, we're reaffirming prior guidance as follows.
Speaker Change: For revenue, 1.3% increase on the low end, 2.2% increase on the high end, or a midpoint of 1.7%. For expenses, increase of 4.4% on the low end.
Speaker Change: 3% on the high end, for a midpoint it's 3.7%.
Speaker Change: And for Same Store NOI, we are guiding for a negative 0.6% on the low end.
Speaker Change: 1.6% on the high end and 0.5% at the midpoint.
Speaker Change: For acquisitions, we're guiding no acquisitions versus $50 million from the prior quarter. For dispositions, essentially the same at $167 million versus $175 million previously.
Speaker Change: 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.
Speaker Change: instead of those solely related to short-term debt financing, as we previously did, and secondly, to adjust the marked mark gains or losses related to interest rate caps, not designate as hedges for accounting purposes.
Speaker Change: Prior periods have been recast to conform to the current presentation.
Speaker Change: 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 non-cash interest expense items will better reflect ongoing operations of the company.
Speaker Change: So with that, that completes my prepared remarks. I'll now turn it over to Matt for his commentary.
Matt: Yeah, thanks Brian
Matt: Let me start by going over our third quarter same SOAR operational results.
Matt: 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
Matt: Total same-store revenues were up 1.7% year-over-year for the quarter.
Speaker Change: Third quarter, same-story NOI growth portfolio average, as Brian said, down to negative 2.4 percent. Raleigh and Las Vegas led all NOI growth in the quarter with 49.5 percent and 12.7 percent growth, respectively. Raleigh's growth was driven by positive tax recruitment adjustments as a result of successful protests.
Speaker Change: Our Q3 same-store NOI margin remains strong at 59.7% and are in a well-positioned to finish the year strong on that metric.
Speaker Change: Operationally, the portfolio experienced continued positive revenue growth in Q3 2024.
Speaker Change: with 6 out of our 10 markets achieving growth at 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 Change: 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 rates growth of at least 2.5%. Charlotte, South Florida, Phoenix, Las Vegas, and Raleigh all exceeded 2% growth.
Speaker Change: On the occupancy front, the portfolio registered 94.9% occupancy as of the close of the quarter. As of this morning, it is 94.7% occupied, 96.2% leased, and has a healthy trend of 92%.
Speaker Change: 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.
Speaker Change: Marketing and Utilities were bright spots in the categories that saw modest expense growth for the quarter at 0.9% and 1.8% respectively.
Speaker Change: Current October leasing is in line with Q3 so far and we expect new leases to be down in the fourth quarter four and a half to five to four or five percent and renewals to be a positive two to three percent averaging to a slightly positive blended number for the quarter at the end of the year.
Speaker Change: On the supply side, according to our market research and our own intelligence,
Speaker Change: 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 Change: We expect to reach peak supply across the three 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 that should sustain growth and stronger performance through 2027.
Speaker Change: Thus, our operational strategy will likely remain defensive over the next quarter or two, 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.
Speaker Change: This outlook, coupled with our refinancing activities, led to management recommending the dividend increase approved by the board yesterday.
Speaker Change: 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 forecast to provide 15 to 20 cents of earnings annually.
Speaker Change: The cash from the expected sale of Stone Creek and available cash on the balance sheet gives us the ability to have roughly $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.
Speaker Change: 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.
Speaker Change: And at today's price, our implied cap rate is roughly 6%.
Speaker Change: As we've routinely done in the past, to the extent we stay at these levels, we use our NAB as our guideposts to utilize free cash flow and or to look to sell assets to free up liquidity and buy back our stock at a discount.
Speaker Change: 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 prepared remarks. Thanks to the teams here at NexPoint and BH for continuing to execute. Brian.
Brian Mitts: Thanks, Matt. Let's open it up for questions, please.
Speaker Change: To begin the question and answer session, if you would like to ask a question please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.
Speaker Change: Your first question comes from the line of Amatayo Kusanya with Doja Bank. Amatayo, your line is now open.
Amatayo Kusanya: Yes, good morning everyone.
Amatayo Kusanya: net effective rent down 1.8. It doesn't quite map out to the 1.7. So just kind of curious kind of what else may have happened during the quarter, whether it's, you know, bad debt or something else that maybe we just haven't considered in that overall same store revenue growth number.
Speaker Change: Yeah, it's great. It's an honor. I think that the two things that were really impactful this quarter, you know, driving, continuing to drive auction to growth. So, you know, we saw the quarter, the, you know, financial actions, we got 94.5, we closed the quarter at 94.9.
Speaker Change: That was
Speaker Change: 140 basis points year-over-year.
Speaker Change: So, you know, 1.4% over the last third quarter on a financial activity perspective and then on bad debt, bad debt continues to trend down for us.
Speaker Change: 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 those two lines really drove the increase in rental revenue.
Speaker Change: Okay, that's very helpful. And then in the quarter as well, 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 down to the property level, so it can be lumpy.
Speaker Change: But just trying to understand what happened in M3Q and if that's sustainable going forward.
Speaker Change: Yeah.
Speaker Change: Hi, it's Matt. You know, we continue to utilize, you know, AI and reduce leasing staff on-site as, you know, the whole, you know, guided tours seems to be waning and having less on-site staff.
Speaker Change: Yeah, we do think that it is a sustainable path, but honestly, I don't think that's it.
Speaker Change: Yeah, I think we're happy with where G&A, Property G&A turned out for the quarter.
Speaker Change: in a very little growth in market sense.
Speaker Change: very little growth in utilities overall. I think we've been, you know, really focused on, you know, ways we can trim expenses. Obviously, in a, you know, tougher leasing environment, you know, controllable expenses is really important for us. So, continued focus, you know, we're in the 25 budgets and.
Speaker Change: you know, continuing to look very hard at, you know, ways we can continue to control those lines.
Speaker Change: That's helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: Again, if you would like to ask a question, simply press star, or on your telephone keypad.
Speaker Change: Your next question comes from the line of Michael Lewis with Trivia Securities. Michael, your line is now open.
Michael Lewis: 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. Does this have to do with the definitional change of core FFO or is there something else?
Michael Lewis: Yeah, Michael, hey it's Matt. Yeah, it's not only a definitional change, frankly, but it's the impact of the refinancings, right? So we're, you know, redoing all the debt.
Michael Lewis: and then removing the mark-to-market impacts, which, you know, have troubled, you know, 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 billion-floor refinancing, incrementally positive, is the result.
Michael Lewis: Okay, that's what we thought. It's really, I mean all said and done, it's really an interest expense. Correct.
Speaker Change: Gotcha. And then, you know, what do you expect to do from, you know, 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.
Speaker Change: Do you ride this a little bit? 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 them?
Speaker Change: Yeah, it's a good question. We, you know, we, I guess, holistically looked at this, you know, back when the five-year was, you know, three, three, three, three, four, and thought that, you know, that that could be a good level to start, you know, at layering in some swaps, and then kind of concurrently with that, we,
Speaker Change: You know, we got this refinancing done, which, you know, bought us a little bit of time, in our view.
Speaker Change: And then, you know, the work that we've done, you know, today, we think that as long as we can earn a 3% compounded annual gross return, excuse me, on the same store basis through 2027.
Speaker Change: That really offsets all the interest expense increase due to the expiration of the swaps.
Speaker Change: So that's the positive. The good news is we'll see what happens with the election and interest rates, but we are going to actively look to return to layering in swaps.
Speaker Change: We don't want to cannibalize that number, obviously, at these levels. We do think that the short term, or the short...
Speaker Change: short end does come down you know somewhat materially here so you know that's the that's the long-winded answer the short answer is we're going to look to you know take advantage of the interest rate environment to the extent that you know we get relief on the five-year
Speaker Change: Gotcha. And then just lastly for me, did you share the new and renewal rat spreads for the quarter?
Speaker Change: yeah
Speaker Change: Thank you for joining us.
Speaker Change: On a blended basis, new leases were down minus 6.43%.
Speaker Change: It's 93 bucks on 1730 leases. Renewals on 2040 leases were up 2.2% or about 31 bucks.
Speaker Change: Perfect, thanks.
Speaker Change: You bet.
Speaker Change: Your next question comes from the line of Amatayo Kasanya again with the Wishe Bank. Amatayo, your line is now open.
Speaker Change: Alright, so there's no further question at this time. I will not turn the conference back over to the management for closing remarks.
Speaker Change: Yeah, thank you. Appreciate everyone's time and questions and hopefully we'll see everybody in May right here in a few weeks. Thank you.