Q4 2024 NexPoint Residential Trust Inc Earnings Call

Speaker Change: April 28, 2017 April 28, 2017 2014 April 8, 2016 2015 2015

Kelvin: Good morning ladies and gentlemen and thank you for standing by. My name is Kelvin and I will be your conference operator today. At this time I would like to welcome everyone to the Next Point Residential Trust Q4 2024 earnings call. All lines have been placed on mute to prevent any background noise.

Kelvin: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.

Speaker Change: If you would like to withdraw your question, simply press the pound key or star 2. Thank you. I would now like to turn the call over to Kristen Griffith Investor Relations. Please go ahead.

Kristen Griffith: Thank you. Good day, everyone, and welcome to NETSWA Residential Trust Conference Call to review the company's results for the fourth quarter.

Speaker Change: and December 31, 2024. On the call today are Paul Richards, 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.

Speaker Change: Before we begin, I would like to remind everyone that this conference call contains forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995 that are based on management's current expectations, assumptions, and beliefs.

Speaker Change: 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-K 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.

Speaker Change: 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 board-looking statements.

Speaker Change: 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.

Speaker Change: I would now like to turn the call over to Matt McGraner. Please go ahead, Matt. Thanks, Kristen. And before we dive into our prepared remarks, I want to take a moment to congratulate Brian Mitts on his well-earned retirement.

Speaker Change: which officially took effect on December 31st, 2024. We're incredibly grateful for his years of dedication, the countless long days he put in, and the instrumental role he played in shaping NXRT into what it is today.

Speaker Change: While Brian has stepped back from day-to-day operations, we're fortunate that he remains a valued member of our board, continuing to provide guidance and insight as we move forward.

Speaker Change: At the same time I'm pleased to officially welcome Paul Richards as our new CFO.

Speaker Change: and having worked closely with Brian and me for over a decade.

Paul deeply understands our strategy and our approach to execution.

Speaker Change: He's a strong leader and I have full confidence in his ability to drive sector-leading long-term results for our shareholders. And with that, I'll turn the call over to Paul to walk us through our fourth quarter and full year 2024 financial results.

Paul Richards: Thanks Matt and thanks Kristen and welcome to everyone joining this morning. I look forward to our conversation and we appreciate your time

Paul Richards: I'll kick off the call and cover our Q4 and full year results and highlights, update our NAP calculation, and then provide initial 2025 guidance. I'll then turn it over to Matt and Bonner to discuss specifics on the leasing environment and metrics driving our performance and guidance, and details on the portfolio.

Paul Richards: Let me start with results from the fourth quarter, which are as follows.

Paul Richards: Net loss for the fourth quarter was $26.9 million, or $1.06 per diluted share, on total revenue of $63.8 million as compared to net income of $18.4 million, or $0.70 per diluted share, in the same period in 2023, on total revenue of $68.9 million.

Paul Richards: For the fourth quarter, net operating income was $38.9 million on 35 properties compared to $42.2 million on 38 properties for the fourth quarter of 2023, a 7.6% decrease in NOI.

Paul Richards: For the fourth quarter, same-store rental income increased 90 basis points, and same-store occupancy remained stable at 94.7%. This, coupled with an increase in same-store expenses of 2.2%, led to a decrease in same-store NOI of 40 basis points as compared to Q4 2023.

Paul Richards: Rental income for the fourth quarter 2024 on the same store portfolio was up 20 basis points quarter over quarter

Paul Richards: We reported Q4 2024 core FFO of $17.7 million or $0.68 per diluted share compared to $0.75 per diluted share in Q4 2023.

Paul Richards: We continue to execute our value-added business by completing 58 full and partial renovations during the quarter, and lease 31 renovated units, achieving an average monthly rent premium of $150 and 19.2% return on investment.

and Sachin Adeye.

Paul Richards: In the current portfolio, as of year-end, we have completed 8,348 full and partial upgrades.

Paul Richards: 4,730 kitchen and laundry appliance installations and 11,389 technology package installations, resulting in $175, $50, and $43 average monthly rental increase per unit and 20.8% 64.8%

64.8% and 37.2% return on investment, respectively.

Paul Richards: Moving to the full year, full year results are as follows.

Paul Richards: Net income for the year ended December 31st was 1.1 million or income of 4 cents per diluted share Which included a gain on sales of real estate of 54.2 million and 97.8 million of depreciation and amortization expense

Paul Richards: This compared to net income of $44.3 million, or income of $1.69 per diluted share, for the full year 2023, which included gain on sales of real estate of $67.9 million and $95.2 million of depreciation and amortization expense.

Paul Richards: For the year, NOI was $157 million on 35 properties, as compared to $167.4 million on 38 properties for the same period in 2023, or a decrease of 6.2%.

Paul Richards: For the year, same-store rental income increased 2.3%, and same-store occupancy remained stable at 94.7%. This, coupled with an increase in same-store expenses of 3.3%, led to an increase in same-store NOI of 90 base points as compared to the full year in 2023.

Paul Richards: We reported core FFO in 2024 of $73.1 million, or $2.79 per diluted share, compared to $2.92 per diluted share for 2023.

Paul Richards: Since inception of the business in 2015, NXRT has generated 10.8% compound annual growth in core FFO.

Paul Richards: Turning to our NAV estimate, based on our current estimates of cap rates in our markets at Ford and NOI, we are reporting a NAV per share range as follows.

$58.52 on the high end and $51.54 at the midpoint.

Paul Richards: These are based on average cap rates ranging from 5.25% on the low end to 5.75% on the high end, which remain the same as last quarter and have remained flat over the last year, reflecting stability in capital markets and cap rates in our markets.

Paul Richards: For the fourth quarter, NXRT paid a dividend of $0.51 per share on December 31st. Since inception, we have increased our dividend 147.6%. For 2024, our dividend was 1.47x covered by Core FFO with a payout ratio of 68% of Core FFO.

Paul Richards: Finally, before discussing guidance, I'd like to touch on our 2024 transaction activity and subsequent events. NXRT disposed of Old Farm on March 1st, 2024. Radhorn Lake.

Paul Richards: on April 30th, 2024, and Stone Creek at Old Farm on October 1st, 2024.

These sales generated 20.2 levered IRR.

Paul Richards: $2.96 multiple on invested capital and $92.4 million on net sales proceeds.

Paul Richards: which we used $24 million to pay down and draw a balance on the credit facility. In the first half of 2024, we retired $14.6 million of common stock at a weighted average price of $33.19 which represented a 37% discount to the midpoint of our Q1 2024 NAB range.

Paul Richards: In two closings on October 1st, 2024, and November 29th, 2024, the company entered into 34 loan agreements for total gross proceeds of $1.466 billion, which is in aggregate representative of 97.7% of the company's total outstanding debt.

Notably, NXRT agreed to refinance at an interest rate.

Paul Richards: pricing improved from prior terms. This refinancing activity extended the company's weighted average debt maturity schedule to seven years.

Paul Richards: Holistically, these refinancings reduced NXRT's weighted average interest on the total debt by 48 basis points to 6.21% before the impact of interest rate swap contracts.

Paul Richards: Accounting for the hedging impact of the swaps, NXRT's adjusted weighted average interest rate was reduced from 3.64% to 2.96% as of December 31st, 2024. With the completion of these refinancings, the company has no meaningful debt maturities until 2028.

Paul Richards: On February 24th, 2025, the company's board of directors declared quarterly dividend of 51 cents per share, payable on March 31st, 2025, to stockholders of record on March 14th, 2025.

Paul Richards: Going to our guidance for 2025, we are issuing initial guidance as follows.

Paul Richards: For core FFO per diluted share, $2.83 at the high end, $2.56 at the low end, with a midpoint of $2.70. For same-store revenue, 1.3 increase on the high end.

Paul Richards: 20 basis points decrease on the low end with a midpoint, a 50 basis point increase.

Paul Richards: Same store expenses, an increase of 2.4% on the high end, 4.9% on the low end, and 3.7% increase for the midpoint, which results in same store NOI of a 50 basis point increase on the high end, a 3.5% decrease on the low end,

and a negative 1.5 decrease at the midpoint.

Paul Richards: And with that, I'll turn it over to Matt for commentary on the portfolio.

Thank you, Paul.

Matt McGraner: Let me start by going over our fourth quarter same-store operational results. Occupancy ended 2024 at 94.7% stable year-over-year. We saw sizable occupancy growth in DFW and Charlotte.

Matt McGraner: finishing the year 96.3% and 97% respectively. Orlando, Tampa, and South Florida remain strong, finishing the quarter at an average occupancy of 94.9%.

Matt McGraner: Key four, same-story and OI growth was a negative 40 basis points, driven by 90 basis points of growth in rental revenue and 60 basis points growth in total revenues. Operating expense growth finished the quarter at 2.2 percent, maintaining the moderate growth we've seen over the last several quarters.

Matt McGraner: Renewal conversions were 55.4% for the quarter and 2025 retention has started off strong with both January and February over 53.3% and March is projected to finish at the same clip.

Matt McGraner: Bad debt continued to trend down, finishing Q4 at 90 basis points, and for the full year we averaged 1.3%, which was down from 2023's average of 2.7%.

Matt McGraner: Operationally, for the quarter, payroll declined 30 basis points year-over-year. R&M expense growth was 4.3% in the quarter, continuing to moderate off of an elevated post-COVID comp in 2022-2023.

Matt McGraner: Real estate taxes have also moderated, and True Up spoke in Q4, reflect a reduction to our overall real estate tax for the year, ending at negative 6.5 percent growth.

Matt McGraner: On the occupancy front, we're pleased to report the Q4 same-store occupancy was 94.7%, positioning us well for 2025, and as of this morning, the portfolio is still 94.7% occupied with a 60-day trend of 96.3%.

Matt McGraner: Our four-year 2024 same-store and OI margin was a healthy 61 percent. Same-store revenues for the year increased by 2 percent, while same-store and OI improved by 90 basis points despite the impact of record deliveries in our markets.

Matt McGraner: Indeed, 5 of our 10 same-store markets grew in OI by at least 3%. Those notable growth markets for the year were Las Vegas at 8.6%, Orlando at 6.6%, Raleigh at 5.2%, and Atlanta at 3.5%.

Paul Richards: Turning to 2025 guidance, as Paul said, we're guiding between a 3.5 percent decline and a 50 basis point increase in same-store and OI growth for the 2025, with a midpoint projecting a 1.5 percent reduction year-over-year.

Paul Richards: Across the portfolio, we are forecasting a negative 0.5% to 1% rental income growth that assumes a 94 to 94.3% physical occupancy with peak occupancy model for Q1 and moderating slightly as we focus on rent growth in the back half of the year.

Paul Richards: It also assumes a negative 90 basis point earn out from lease trade outs and gain to lease inversion in 2024.

also includes a 1.5% market rent growth in 2025.

Paul Richards: also includes a 50-basis-point top-line growth attributable to our value-added activities and ROI CapEx spending.

Paul Richards: We're also forecasting a negative 30 basis point reduction in financial occupancy from 92.3% to 92.3% from 92.7% at the midpoint.

Paul Richards: Finally we're assuming a 30 basis points increase in bulk Wi-Fi and other rent charges. From a market perspective, we're expecting our top performing revenue markets will be South Florida, Las Vegas, Raleigh, Nashville and Atlanta, each expecting roughly two to four percent growth in these markets.

Paul Richards: On the expense front for the year, we're forecasting a 50-basis-point controllable expense decline.

Paul Richards: within that number is a negative 1% R&M and turn cost growth assumption, a 3% labor growth increase.

Paul Richards: A negative 3.8% growth in advertising and a negative 2.6% growth in G&A expense.

Paul Richards: On a non-controllable front, we're forecasting a 2.4% to 4.9% total expense growth.

Paul Richards: The components of this are a 4.1% utility expense growth, a 7% insurance growth, assuming a 5% target growth on our April 1 renewal, and an 8.6% real estate tax expense growth, which we expect to, which we're hoping to achieve better results.

Paul Richards: This all equates, as Paul mentioned, to negative 3.5% to 5% same-store and OIG growth.

Paul Richards: We continue to be an internal growth business at our core, and to that end, our guidance includes the following assumptions regarding our value-add programs, still aligned with our historical 15 to 20 percent targets, in which we anticipate to accelerate as the year progresses amid declining supply.

Paul Richards: We expect to complete 425 full interior upgrades at an average cost of $18,000 per unit, generating a $269 average monthly premium.

Paul Richards: We expect to complete 326 partial interior upgrades at an average cost of $5,200 per unit.

generating a roughly $86 average monthly premium.

Paul Richards: These partial upgrades include varying bespoke additions such as new stainless steel appliances.

Paul Richards: hard surface countertops, updated tub enclosures and private yards, among other aspects. These partial and bespoke rehab initiatives are strategically tailored by property to drive rent growth where we see opportunities among competing properties.

Paul Richards: Finally, we also plan to install 661 washer and dryers at an average cost of $1,000 per unit, generating $53 in average monthly premium or a 64% ROI.

Paul Richards: On the acquisition and disposition guidance, we will continue to underwrite the limited value add pipeline of opportunities out there in the first half, but we do expect the volume of opportunities to potentially increase later in Q2 and into the second half of the year as prospective buyers can finally underwrite rent growth.

Paul Richards: On the capital markets and balance sheet and liquidity front, NXRT today has $23.1 million of unrestricted cash and $350 million of excess capacity on our unsecured corporate credit facility, giving the company $373 million of available liquidity as we head into 25.

Paul Richards: In June, we expect to finalize a recasting of the corporate credit facility, and we're well down the path to finalize an agreement with a strong syndicate of banks to continue to provide liquidity and flexibility on our balance sheet. We appreciate that partnership and look forward to welcoming new relationships to the platform.

Thank you.

Paul Richards: So far in 2025, we're off to a good start prioritizing margin expansion and increased resident satisfaction and retention.

Paul Richards: We are excited to execute on our strategy this year and initiatives. We expect to see a transition year leading to outside growth in 2026 and 2027.

Paul Richards: specifically in the second half of the year supply begins to wane. Indeed Q4 saw another sharp pullback in starts to just 37,000 quarterly units in the quarter. That's the lowest level since Q4 2011.

Paul Richards: That's all I have for prepared remarks. Thanks to our teams here at NextPoint and BH for continuing to execute. With that, we'll turn the call over to the operator for questions.

Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. At this time, I would like to remind everyone to ask a question, press the star button followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key or star two. One moment, please, for your first question.

Kyle Katarunsek: Your first question comes from the line of Kyle Katarunsek of Janie. Please go ahead.

Kyle Katarunsek: Hey, good morning guys. Total rental income for Atlanta was up 160 basis points quarter over quarter, but average effective rent was negative 10 basis points and occupancy was negative 160 basis points. So what shows a positive result there?

Yeah, I think in Atlanta, we've had,

Kyle Katarunsek: A little bit, a little bit higher. I should be there.

Kyle Katarunsek: You know, pulling up pulling up exactly what you're looking at.

Thank you.

Kyle Katarunsek: The other benefit that we've added to total revenue in Atlanta here recently is bulk Wi-Fi. We've rolled that out across the three assets over Q4 and Q1. So you see some total revenue growth there. That, I think, is a benefit we're getting.

Kyle Katarunsek: One gig fiber retrofit in units And so that's that's offsetting some of the laws and downward pressure and both actions in that

Speaker Change: In 2025, just to add to Bonner's point, the bad debt we're expecting and have seen bad debt improvement in the market underwriting a positive inversion this year of almost a quarter million bucks. That's improving to 1.8 percent in 2025 versus 2.6 percent in 2024. So that's another impact.

Speaker Change: Okay, thank you. And then, can you please provide some color on what drew up the 290 basis point decrease in occupancy in the Raleigh-Durham market?

Speaker Change: yeah I think I think in Raleigh we're you know it's one of the larger supply and expansion markets for us we've seen some pressures

Speaker Change: particularly in the Morrisville submarket our high house asset was under a little bit more pressure. We're better today and we stayed last rate.

Speaker Change: We also had a little bit of personnel change there, so I think it's something that we've dealt with and are moving forward on. We still love the Raleigh market, and I think that supply, that picture gets better, particularly toward the back half of the year.

Speaker Change: Okay, thank you. And then one more, I know you guys mentioned a little bit about the full interior upgrades, but early in 2024, you mentioned there was about 5,000 to 5,500 units left there, and that you, you know, like you mentioned, your prepared remarks for Q24 and into 25, you'd start to ramp up that as supplies started to dissipate. Any changes, material changes to that plan based on current market conditions, and any markets you're focusing the upgrades on?

Speaker Change: Yeah, we're prioritizing the renovations largely in places where we can still push rates so that that that's largely South Florida You know Raleigh in the second half of the year and then you know Vegas

the upgrades in Atlanta that Bonner just mentioned.

Speaker Change: You know, I'd say that the revenue, or excuse me, the rehab output this year, we're pleased that it's double the output of last year. And it's still not, you know, at our three to 400 a quarter pace that we were, you know, that's historically done since 2015. Our goal and our hope is.

Speaker Change: is to re-evaluate this output every quarter and hopefully as, you know, the industry is expecting an inversion in rate in the second half of the year that we can add additional output to the rehab pipeline and, you know, have some upside in this guidance. So that's the goal.

Awesome, thanks guys, appreciate it.

Thank you.

Speaker Change: Your next question comes from the line of Omotayo Okusanya, Deutsche Bank. Please go ahead. Hi, yes, good morning everyone. Could you please walk us through how would you think about the interest expense in 2025 given, again, some of the stock maturities and the relatively higher level of variable risk debt and some of what's still interdicted in regards to, I don't know, capital gains? Fine, I know.

Matt McGraner: Yeah, sorry, it's Matt. I'm having a difficult time hearing you. I think one question or part of the question was...

Matt McGraner: how the swap expiration plays in to the guidance. Is that fair? Yes, that's it. Can you hear me? Yeah, I can hear you better now, sorry. Yeah, so we have a quarter, we have roughly a quarter million of our swaps you know expiring in June and then we

You know, we're

Matt McGraner: we've had a 50 basis point decline in our spread. So, um, yeah, that that is as a component of our guidance is actually a 12 cent benefit for 2025.

This is 160 basis points to 109 basis points.

Matt McGraner: reduces the total interest expense. Now, we have to take some assumptions on higher for longer. And if we do see Fed cuts in the second half of the year or any more that's baked in, we do think there's upside in the core numbers. But we're being, I think, appropriately conservative at this juncture.

Great, thank you.

Thank you.

Speaker Change: There are no further questions at this time. With that, I will now turn the call back over to the NextPoint management team for final closing remarks. Please go ahead.

Speaker Change: Alright, thanks everyone for calling in and we look forward to speaking to you next quarter. Have a great day.

Speaker Change: Ladies and gentlemen, that concludes your conference call. We thank you for participating and ask that you please disconnect your lines.