NexPoint Residential Trust, Inc. Q4 FY2024 Earnings Call

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 NexPoint Residential Trust, Inc. Q4 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. If you would like to ask a question during this time, simply press star followed by the number one on the telephone keypad. If you would like to withdraw your question, simply press the pound key or star two. Thank you. I would now like to turn the call over to Kristen Griffith, Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to NexPoint Residential Trust, Inc.'s conference call to review the company's results for the fourth quarter ended 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 McDermett, Vice President, Asset and Investment Management. As a reminder, this call is being webcast through the company's website at nxrt.nexpoint.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. 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 its more complete discussion of risks and other factors that could affect any forward-looking statements. The statements made during this conference call speak only as of today's date and, except as required by law, NexPoint Residential Trust, Inc. 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 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, which officially took effect on December 31, 2024. We are incredibly grateful for his years of dedication, the countless long days he put in, and the instrumental role he played in shaping NexPoint Residential Trust, Inc. into what it is today. While Brian has stepped back from day-to-day operations, we are fortunate that he remains a valued member of our board, continuing to provide guidance and insight as we move forward. At the same time, I am pleased to officially welcome Paul Richards as our new CFO. Having worked closely with Brian and me for over a decade, Paul deeply understands our strategy and our approach to execution. He is 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. Thanks, Matt. And thanks, Kristen. And welcome to everyone joining this morning. Look forward to our conversation and we appreciate your time.

I'll kick off the call and cover our Q4 and full year results and highlights, update our NAV calculation, 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. Let me start with results from the fourth quarter, which are as follows. 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. For the fourth quarter, net operating income (NOI) was $38.9 million on 35 properties, compared to $42.2 million on 38 properties in the fourth quarter of 2023, a 7.6% decrease in NOI. 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. Rental income for the fourth quarter of 2024 on the same-store portfolio was up 20 basis points quarter over quarter. 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. We continue to execute our value-add business by completing 58 full and partial renovations during the quarter, at least 31 renovated units, achieving an average monthly rent premium of $150 and a 19.2% return on investment. Inception to date in the current portfolio, as of year-end, we have completed 8,348 full and partial upgrades, 4,730 kitchen and laundry appliance installations, and 11,389 technology package installations, resulting in $175, $50, and $43 average monthly rental increases per unit, respectively. And 20.8%, 64.8%, and 37.2% return on investment, respectively. Moving to the full year, full year results are as follows. Net income for the year ended December 31 was $1.1 million, or income of $0.04 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. This compared to net income of $44.3 million, or income of $1.59 per diluted share, for the full year 2023, which included a gain on sales of real estate of $67.9 million and $95.2 million of depreciation and amortization expense. 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, a decrease of 6.2%. 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 basis points as compared to the full year in 2023. 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. Since inception of the business in 2015, NexPoint Residential Trust, Inc. has generated 10.8% compound annual growth in core FFO. Turning to our NAV estimate, based on our current estimates of cap rates in our markets at forward NOI, we are reporting a NAV per share range as follows: $44.56 on the low end, $58.52 on the high end, and $51.54 at the midpoint. 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 remained flat over the last year, reflecting stability in capital markets and cap rates in our markets. For the fourth quarter, NexPoint Residential Trust, Inc. paid a dividend of $0.51 per share on December 31. 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. Finally, before discussing guidance, I'd like to touch on our 2024 transaction activity and subsequent events. NexPoint Residential Trust, Inc. disposed of Old Farm on March 1, 2024; Radbourne Lake on April 30, 2024; and Stone Creek at Old Farm on October 1, 2024. These sales generated a 20.2% levered IRR, a 2.96x multiple on invested capital, and $92.4 million in net sales proceeds, of which we used $24 million to pay down the drawn balance on the credit facility. In the first half of 2024, we retired $14.6 million in common stock at a weighted average price of $33.19, which represented a 37% discount to the midpoint of our Q1 2024 NAV range. In two closings on October 1, 2024, and November 29, 2024, the company entered into 34 loan agreements for total gross proceeds of $1.466 billion, which in aggregate represent 97.7% of the company's total outstanding debt. Notably, NexPoint Residential Trust, Inc. agreed to refinance at improved interest rate pricing from prior terms. The refinancing activity extended the company's weighted average debt maturity schedule to seven years. Holistically, these refinancings reduced NexPoint Residential Trust, Inc.'s weighted average interest on total debt by 48 basis points to 6.21% before the impact of interest rate swap contracts. Accounting for the hedging impact of the swaps, the company's adjusted weighted average interest rate was reduced from 3.64% to 2.96% as of December 31, 2024. With the completion of these refinancings, the company has no meaningful debt maturities until 2027. On February 24, 2025, the company's board of directors declared a quarterly dividend of $0.51 per share, payable on March 31, 2025, to stockholders of record March 14, 2025. Going to our guidance for 2025, we are issuing initial guidance as follows. 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: a 1.3% increase on the high end, a 20 basis point decrease on the low end, with a midpoint of a 50 basis point increase. Same-store expenses: an increase of 2.4% on the high end, 4.9% on the low end, and a 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. And with that, I'll turn it over to Matt for commentary on the portfolio. Thank you, Paul.

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 Dallas-Fort Worth and Charlotte, finishing the year at 96.3% and 97%, respectively. Orlando, Tampa, and South Florida remained strong, finishing the quarter with an average occupancy of 94.9%. Q4 same-store NOI growth was 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%, maintaining the moderate growth we've seen over the last several quarters. Renewal conversions were 55.4% for the quarter. In 2025, retention has started off strong with both January and February over 53.3%, and March is projected to finish at the same clip. Bad debt continued to trend down, finishing Q4 at 90 basis points. For the full year, we averaged 1.3%, which was down from 2023's average of 2.7%. Operationally for the quarter, payroll declined 30 basis points year over year. Repair and maintenance expense growth was 4.3% in the quarter, continuing to moderate off of an elevated post-COVID comp in 2022 and 2023. Real estate taxes have also moderated, and true-ups booked in Q4 reflect a reduction to our overall real estate tax for the year, ending at negative 6.5% growth. On the occupancy front, we're pleased to report that 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%. Our full year 2024 same-store NOI margin was a healthy 61.61%. Same-store revenues for the year increased by 2% while same-store NOI improved by 90 basis points despite the impact of record deliveries in our market. Indeed, five of our ten same-store markets grew by at least 3% year over year. Those notable growth markets for the year were Las Vegas at 8.6%, Orlando at 6.8%, Raleigh at 5.2%, and Atlanta at 3.5%. Turning to 2025 guidance, as Paul said, we are guiding between a 3.5% decline and a 50 basis point increase in same-store NOI growth for 2025, with the midpoint projecting a 1.5% reduction year over year. Across the portfolio, we are forecasting negative 0.5% to 1% rental income growth. That assumes a 94% to 94.3% physical occupancy with peak occupancy modeled for Q1 and moderating slightly as we focus on rent growth in the back half of the year. It also assumes a negative 90 basis point earn-out from lease trade-outs and gain-to-lease inversion in 2024. It includes a 1.5% market rent growth in 2025 and also includes a 50 basis point top-line growth attributable to our value-add activities and ROI CapEx spending. We are also forecasting a negative 30 basis point reduction in financial occupancy from 92.7% to 92.3% at the midpoint. Finally, we're assuming a 30 basis point increase in bulk WiFi and other rent charges. From a market perspective, we expect our top-performing revenue markets will be South Florida, Las Vegas, Raleigh, Nashville, and Atlanta, each expecting roughly 2% to 4% growth in these markets. On the expense front for the year, we're forecasting a 2.4% to 4.9% total expense growth. The components of this are 4.1% utility expense growth, 7% insurance growth (assuming a 5% target growth on our April 1 renewal), an 8.6% real estate tax expense growth which we expect to manage for better results. This all applies as Paul mentioned to the negative 3.5% to a 0.5% same-store NOI growth range. We continue to be an internal growth business at our core. To that end, our guidance includes the following assumptions regarding our value-add programs, still aligned with our historical 15% to 20% targets, which we anticipate accelerating as the year progresses amid declining supply. We expect to complete 425 full interior upgrades at an average cost of $18,000 per unit, generating a $269 average monthly premium. We expect to complete three partial interior upgrades at an average cost of $5,200 per unit, generating a roughly $86 average monthly premium. These partial upgrades include varying bespoke additions such as new stainless steel appliances, 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. Finally, we also plan to install 661 washers and dryers at an average cost of $1,000 per unit, generating a $53 average monthly premium or 64% ROI. On the acquisition and disposition front, we will continue to underwrite the limited value-add pipeline of opportunities out there in the first half. 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 more confidently underwrite rent growth. On the capital markets, balance sheet, and liquidity front, NexPoint Residential Trust, Inc. 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 2025. In June, we expect to finalize recasting of the corporate credit facility, and we're well down the path finalizing 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. So far in 2025, we're off to a good start, prioritizing margin expansion, and increased resident satisfaction and retention. We are excited to execute on our strategy and initiatives this year. We expect to see a transition year leading to outsized growth in 2026 and 2027, specifically in the second half of the year as applied against demand. Indeed, Q4 saw another sharp pullback in starts to just 37,000 quarterly units in the quarter. That's the lowest level since Q4 of 2011. That's all I have for prepared remarks. Thanks to our teams here at NexPoint Residential Trust, Inc. and BH for continuing to execute. With that, we'll turn the call over to the operator for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star then one. One moment please for your first question. Your first question comes from the line of Kyle Katorincek of Janney. Please go ahead.

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 drove the positive result there?

Yeah. I think in Atlanta, we've had a little bit higher total revenue contribution, including bulk WiFi. We rolled bulk WiFi out across the three assets over Q4 into Q1, so you see some total revenue growth there. We're getting one gig fiber retrofitted units, and so that's offsetting some of the downward pressure. In 2025, just to add to Bonner's point, bad debt has improved in the market, and we were expecting and have seen bad debt improvement, which underwrote a positive inversion this year of almost a quarter million dollars. That's improving to 1.8% in 2025 versus 2.6% in 2024. So that's another impact to the positive total rental income growth.

Okay. Thank you. And then please provide some color on what drove the 290 basis point decrease in occupancy in the Raleigh-Durham market.

Yeah. I think in reality, it's one of the larger supply and expansion markets for us. We've seen some pressures particularly in the Morrisville submarket; our higher‑density asset was under a little bit more pressure. We're better today and we are stabilizing rent. 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 the supply picture gets better, particularly toward the back half of the year.

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 were about 5,000 to 5,500 units left, and that you'd start to ramp up as supply started to dissipate. Any material changes to that plan based on current market conditions and any markets you're focusing the upgrades on?

Yeah. We're prioritizing the renovations largely in places where we can still push rates, so that's largely South Florida, Raleigh in the second half of the year, and then Las Vegas and Atlanta. The upgrades in Atlanta that Bonner mentioned earlier are part of that plan. I'd say that the rehab output this year we're pleased is double the output of last year, and it's still not at our 300 to 400 a quarter pace that we've historically run since 2015. Our goal is to reevaluate this output every quarter and hopefully, as the industry sees rate inversion in the second half of the year, we can add additional output to the rehab pipeline and have upside to this guidance. That's the goal.

Awesome. Thanks, guys. Appreciate it.

Thank you.

Your next question comes from the line of Omotayo Okusanya of Deutsche Bank. Please go ahead.

Yes. Good morning, everyone. Could you please walk me through the impact of swap expirations on interest expense in 2025 and how that plays into guidance?

Yeah. Sorry, it's Matt. I can take that. We have roughly $250 million of our swaps expiring in June. As a component of our guidance, that's actually about a $0.12 per share benefit for 2025. We also assumed a modest decline in our spread, so the net effect reduces total interest expense in our guidance. That said, we have taken conservative assumptions around 'higher for longer' rates. If we do see Fed cuts in the second half of the year, we believe there's upside to the core numbers, but we aren't assuming that in our base-case guidance.

Okay. Thank you. Thank you.

There are no further questions at this time. With that, I will now turn the call back over to the NexPoint Residential Trust, Inc. management team for final closing remarks. Please go ahead.

All right. Thanks, everyone, for calling in. We look forward to speaking to you next quarter. Have a great day.

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