Earnings Call Transcript - NXRT Q3 2025

Operator, Operator

Hello, and thank you for joining us. My name is Lacey, and I will be your conference operator today. I would like to welcome everyone to the NexPoint Residential Trust Third Quarter Earnings Call. Thank you. I will now turn the conference over to Kristen Griffith, Investor Relations. You may begin.

Kristen Thomas, Investor Relations

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust's conference call to review the company's results for the third quarter ended September 30, 2025. 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 meanings 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 a 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, 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 Paul Richards. Please go ahead, Paul.

Paul Richards, CFO

Thank you, Kristen, and welcome, everyone, joining us this morning. We appreciate your time. I'll kick off the call and cover our Q3 results, updated NAV and guidance outlook for the year. I will then turn it over to Matt to discuss specifics on the leasing environment and metrics driving our performance and guidance. Results for Q3 are as follows: Net loss for the third quarter was $7.8 million or a loss of $0.31 per diluted share on total revenues of $62.8 million. The $7.8 million net loss for the quarter compares to a net loss of $8.9 million or $0.35 loss per diluted share for the same period in 2024 on total revenue of $64.1 million. For the third quarter of 2025, NOI was $38.8 million on 35 properties compared to $38.1 million for the third quarter of 2024 on 36 properties. For the quarter, same-store rent and occupancy decreased 0.3% and 1.3%, respectively. This, coupled with a decrease in same-store revenues of 0.6% and same-store expenses of 6.2% led to an increase in same-store NOI of 3.5% as compared to Q3 2024. As compared to Q2 2025, rents for Q3 2025 on the same-store portfolio were down 0.2% or $3. We reported Q3 core FFO of $17.7 million or $0.70 per diluted share compared to $0.69 per diluted share in Q3 2024. During the third quarter, for the properties in the portfolio, we completed 365 full and partial upgrades, leased 297 upgraded units, achieving an average monthly rent premium of $72 and a 20.1% return on investment. Since inception, NXRT has completed installation of 9,478 full and partial upgrades, 4,925 kitchen and laundry appliances and 11,389 tech packages, resulting in $161, $50 and $43 average monthly rental increase per unit and 20.8%, 64% and 37.2% return on investment, respectively. NXRT paid a third quarter dividend of $0.51 per share of common stock on September 30, 2025. For Q3, our dividend was 1.37x covered by core FFO with a 73.2% payout ratio of core FFO. On October 27, 2025, the company's Board approved a quarterly dividend of $0.53 per share, a 3.9% increase from the previous dividend per share payable on December 31, 2025, to stockholders of record on December 15, 2025. Since inception, NXRT has increased the dividend per share by 157.3%. Turning to the details of our updated NAV estimate. Based on our current estimate of cap rates in our market and forward NOI, we are reporting a NAV range per share as follows: $43.40 on the low end, $56.24 on the high end and $49.82 at the midpoint. These are based on average cap rates ranging from 5.25% on the low end and 5.75% on the high end, which remained stable quarter-over-quarter. Turning to full year 2025 guidance. NXRT is reaffirming guidance midpoints for loss per diluted share, core FFO per diluted share, same-store rental income, same-store total revenues, same-store total expenses and same-store NOI and tightening guidance ranges for acquisitions and dispositions. Loss per share core FFO ranges are as follows: loss per diluted share of negative $1.22 at the high end, negative $1.40 at the low end, with the midpoint of negative $1.31 and for core FFO per diluted share, $2.84 at the high end, $2.66 at the low end with affirming the midpoint of $2.75. This completes my prepared remarks, so I'll now turn it over to Matt for commentary on the portfolio.

Matthew McGraner, CIO

Thank you, Paul. Let me start by going over our third quarter same-store operational results. Same-store total revenue was down 60 basis points, albeit with 5 of our 10 markets averaging at least 1% growth, with Atlanta and South Florida leading the way at a positive 2.8% each. We are also pleased to report continued moderation in expense growth for the quarter. Third quarter same-store operating expenses were down an impressive 6.3% year-over-year. Payroll and R&M declined 7.5% and 6.1%, respectively, with year-over-year and total controllable expenses down a meaningful 6%. Insurance was also favorable by 19%, driven by the team's efforts here and market improvement on the property casualty side. Real estate taxes also decreased 8.7% due to favorable protest outcomes, most notably in our Nashville portfolio. Third quarter same-store NOI growth continues to improve in our markets with the portfolio averaging a positive 3.5%. A remarkable improvement from down 1.1% last quarter. 7 of our 10 markets achieved year-over-year NOI growth of at least 2.5% or greater with Nashville and Atlanta leading the way at 26% and 7.8% growth, respectively. Our Q3 same-store NOI margin registered a healthy 62.2%. The portfolio experienced improved revenue growth also in Q3, with 5 out of our 10 markets achieving growth of at least 1% or better. Our top 5 markets were Atlanta and South Florida at 2.8%, Tampa at 2.4%, Raleigh at 2.1% and Charlotte at 1%. Renewal conversions for eligible tenants were 63.6% for the quarter, with all 10 markets executing positive renewal rate growth of at least 75 basis points or better. 646 renewals were signed during the quarter at an average of 1.81%. On the occupancy front, the portfolio registered a 93.6% occupancy as of the close of the quarter. Market competition from lease-up assets on down the spectrum remains our biggest challenge, but clear skies are forming ahead. As of this morning, our portfolio is 93.6% occupied and 95.8% leased with a healthy 60-day trend of 92%. Even though we saw elevated pressures to occupancy and concession utilization, top-line rent beat our internal forecast by 20 basis points for the quarter and bad debt continues to stabilize with a meaningful 32% year-over-year improvement for the quarter. Again, on expenses, they continue to moderate and finished the quarter down 6.4%. Payroll declined 7.6% this quarter and continues to trend downward as we implement centralized teams and AI technology. Our centralized platforms for renewals, screening, call centers, alongside AI applications deployed across various aspects of the resident experience are all driving greater efficiency and enabling reductions in on-site staffing, particularly within the leasing offices. As mentioned previously, we are now focused on optimizing our maintenance operations to drive similar efficiencies across our markets. Insurance, real estate taxes, R&M, and G&A were the other categories that saw meaningful year-over-year improvement for the quarter with all categories improving at least 6% or more. Now turning to our updated view on supply. We believe we're close to the end of a record national new multifamily supply cycle. CoStar sees annual net deliveries having peaked at 695,000 units in the trailing 12-month period ending Q3 2024 and Q4 2024. This compares to annual net delivered units of 351,000 on average in the prior 5 years that prior 5 years being Q3 '14 through Q3 '19 and 282,000 units on average since 2001. CoStar forecasts net deliveries to reach 697,000 units in 2024 and expects to be 508,000 units in 2025 before falling significantly year-over-year in 2026 by 49% and 2027 by an additional 20%, a critical Q3 for deliveries followed by a steeper drop-off. For Q3 of 2025, deliveries are 17% down quarter-over-quarter and is the last quarter with more than 100,000 units delivered. An increased expectation for Q3 '25 deliveries is followed by a significant drop-off to Q4 2025 deliveries that is now forecasted at just 69,000 units, down 52% year-over-year and 41% quarter-over-quarter. This ushers in the start of the lengthy period where deliveries are expected to be below the long-run average and a more bullish long-term forecast versus prior years. 2027 and 2028 delivery forecasts have also fallen. CoStar now expects 2027 deliveries of 234 units that compare to forecast from December of last year of 283,000 units and 231,000 units for 2028 that compares to prior forecast of 308,000 units. That's down 27%. On the whole, cautious optimism best fits our rental market outlook. Looking better in places still challenged, but we have come to the time where market fundamentals are coalescing to support a more bullish outlook for multifamily. We expect the rental market will take the lion's share of new household formation and outperform the for-sale market on the near term. While some markets still have supply issues, particularly in our fast-growing Sunbelt markets, demand is still there. We're absorbing units at a very strong clip right now, and part of that is due to the affordability challenge in the for-sale market. It's about twice as expensive on a monthly basis to own a home as it is to rent at the average apartment in the U.S. During the quarter, the team re-underwrote each of our assets as if we were to buy them new today with a particular view on the submarket competition for lease-ups. We tried to estimate based on historical lease-up trends when each of our submarkets that have supply pressures would indeed stabilize. We define submarket stabilization as 92% occupied with new construction deals being at least 70% leased. Our analysis showed that 5 of our 10 markets should stabilize in the first quarter, 6 of the 10 in the second and 8 of the 10 in the third quarter of next year with all markets stabilizing by year-end. Indeed, this could happen sooner as NXRT markets are littered with major job and corporate relocation announcements almost daily across finance, technology, defense, logistics, manufacturing and research. Billions of capital and thousands of jobs across names such as Align Data Centers, AllianceBernstein, Apple, Bell Textron, Fujifilm, Goldman, Intel, Microsoft, Oracle, TSMC, Wells Fargo have all hit our markets in the past 6 months alone. Again, more reason for cautious optimism. On the transaction front, buyer sentiment for multifamily purchasing continues to improve in Q3 according to CBRE and our own experiences. Institutional investor allocations to real estate are expected to tick up to 10.8% in 2026 according to Institutional real estate allocations monitor. Firms like Blackstone remain bullish on commercial real estate investments given muted supply growth and lower cost of capital in the form of lower rates and tightening spreads. Indeed, Blackstone, in particular, believes we're now approaching a steeper point in the price recovery, and we share that view. We continue to actively monitor the sales market for opportunities and stay close to any movements on cap rates in our markets. Many investors remain sidelined, but we see the opportunity to return to the market as fundamentals improve. We're expecting to recycle capital in the next couple of quarters against this transaction backdrop and are excited to announce that NXRT has been awarded the opportunity to acquire a 321-unit multifamily community in the high-growth suburbs of Northern Las Vegas. This asset features a unit mix focused on 2- and 3-bedroom floor plans ideal for young families and roommate situations. Recent large-scale developments have driven significant expansion, job growth and residential revitalization in North Las Vegas, which is now the Las Vegas Valley's most prominent industrial market. Nearby, over 15 million square feet of industrial space is currently under construction or planned, supporting the creation of approximately 8,000 jobs in this submarket alone. We have evaluated this asset to be structurally sound, well located and prime for value-add execution that is the best we have underwritten all year. We believe the asset has the potential to generate a 7% same-store NOI CAGR over the next 5 years. Our plan will be to acquire the asset in late Q4, utilizing available capacity on the facility. And then we expect to execute one or more sales transactions in the first half of 2026, utilizing tax-efficient 1031 reverse exchange mechanics, thereby initiating our capital recycling growth strategies as we head into 2026. We expect this strategy to modestly be accretive for 2026 while yielding stronger core FFO growth throughout the 2027 to 2030 period. Capital recycling to generate growth is our primary external objective, selling mature assets with limited potential into newer growth, nicer and higher growth assets within our familiar market geographies. Transforming the portfolio and unlocking gains for tax-efficient capital recycling into high conviction assets to grow NOI at an outsized rate is consistent with the company's historic execution. We expect to continue scouring the market for the best opportunities, but we will absolutely prioritize stock buybacks as well in the low 30s over the near term. To summarize and reiterate a couple of points. On the macro outlook, we see the market signaling a steeper recovery ahead. On operations, revenue is moderating but at a decelerating pace, and we continue to demonstrate strong expense control driven by R&M, labor, and insurance. We have stabilized bad debt and view the financial health of our tenant demographic as quite strong and resilient to market pressures. We have full conviction we can hit our same-store guidance expectations, and we are positioned for improved performance heading into 2026. On the balance sheet, we're cognizant of the swap maturity overhang on our earnings forecast, and we continue to monitor that daily for opportunities. We expect to act in replacing the swap book over the near term and certainly before any expirations. And on our path to growth, we see green lights ahead as it relates to our capital recycling strategy. Good deals are available. We are confident in our ability to underwrite, capitalize and execute on them, and our team will be heavily focused on doing just that heading into 2026 as well as, again, importantly, buying back stock in the low 30s. In closing, in the near term, we will continue to prioritize a balanced approach, driving occupancy, maintaining disciplined rent strategies, managing controllable expenses to support steady NOI growth while we look to accelerate our capital recycling strategy and portfolio transformation to drive external growth as conditions on the field are set to improve. Looking ahead, we are confident in the long-term fundamentals of our Sunbelt positioned workforce housing assets, which we see to be well positioned to outperform other geographies given our favorable trends in population migration, job creation, and wage growth. That's all I have for prepared remarks. I appreciate our team's work here at NexPoint and BH for continuing to execute. And that concludes our prepared remarks. So at this time, I will turn it back over to the operator and open up the call for questions.

Operator, Operator

Your first question comes from the line of Omotayo Okusanya with Deutsche Bank.

Omotayo Okusanya, Analyst

On the operating expense side, everything appears to be going very well. Can you discuss whether this level of performance will be sustainable moving forward? I ask this in the context of your full year guidance, where the midpoint suggests that FFO growth in the fourth quarter will be $0.61 compared to your current $0.70 run rate, which is being supported by better-than-expected expense control.

Matthew McGraner, CIO

Yes, I believe there are a few areas that are holding us back. We anticipate continued improvement in sustainability on the non-controllable side with insurance. We are also optimistic about the real estate tax protests and see potential for upside there. However, in terms of payroll and repair and maintenance, we don't expect any substantial changes and anticipate consistency in that area as well. Regarding core performance, we are cautiously optimistic that we will exceed expectations, as we always strive to manage expenses despite current supply pressures. Bonner, do you have anything to add?

Bonner McDermett, VP, Asset and Investment Management

Yes. I would just add, I think on the real estate taxes, we received one pretty significant settlement that's kind of one-time in Q3. So that's not necessarily the run rate for taxes there, but it does. If you'll remember, Nashville is on a 4-year revaluation cycle. So we fight this battle every 4 years that occurred last year. We've been in the process of litigating those. We've got court dates on a couple of the other deals, but we don't expect to see any dramatic shift there. So some of the real estate tax savings that you see in the quarter is more onetime in nature. But I agree with Matt, particularly on payroll and repair and maintenance expenses, those are heavy focuses for us controlling. So I do think that we can continue at least through the first quarter on the payroll run rate. We've made the strategic initiatives to centralize a lot of the operations. So most of that activity on the P&L hit kind of April 1 and going forward.

Omotayo Okusanya, Analyst

Got you. Can you quantify that one-time benefit in 3Q? How much that was?

Bonner McDermett, VP, Asset and Investment Management

Yes. The total there was about $820,000.

Omotayo Okusanya, Analyst

Got you. That's helpful. My second question is about your self-disclosed NAV. Whether you're at the low end or the high end depends on the cap rate you're using, but the stock has been consistently trading at a significant discount to NAV. Looking at this over a long-term period, if that gap isn't closed over time, how do you envision the future for NXRT and how will you work to create shareholder value if you continue to experience such a large discount to NAV? This isn't unique to you, as much of the sector is facing similar challenges, but I'm curious about your thoughts on this.

Matthew McGraner, CIO

Yes. We've clearly communicated since going public in 2015 that we see the company as a growth entity. However, we also have it structured to operate with floating rate debt. Our objective is to achieve $170 million of NOI by 2027, which is straightforward. We believe that the terminal value will always be significant. Our portfolio is difficult to replicate and scale, and we consider it offers the best exposure to the fastest job growth markets. If the current discount remains, we will work to close it. We hold 16.5% of the company, which aligns our interests. We recognize that even in a soft transaction market, there remains demand for multifamily properties. The transaction market is still performing at around a 5 cap rate, especially for assets like ours. While public markets are currently undervaluing multifamily stocks, we anticipate a significant change in 2026 as new lease pricing begins to rise. This shift will likely occur around the second quarter of 2026, which we believe will positively impact our stock. However, even if this does not happen, we are assured of a terminal value and interest in the company. Our aim is to continue growing our earnings stream, and we are optimistic about our ability to do so. But if we face challenges, we still have a demand for our company.

Operator, Operator

Your next question comes from the line of Buck Horne with Raymond James.

Buck Horne, Analyst

I apologize. Did you guys give out the splits on new lease rates, renewals and the blend for the quarter?

Matthew McGraner, CIO

No, we did provide that information in the supplement, but we'll update it for you. For the quarter, new leases decreased by 4.06% or $58. Renewals increased by 1.94% or about $29, nearly $30. This results in a blended negative 44 basis points.

Buck Horne, Analyst

Got it. Appreciate that. And by the way October?

Matthew McGraner, CIO

October is kind of trending the same way.

Buck Horne, Analyst

I got it right here.

Matthew McGraner, CIO

New leases were down 3.78% or $54. Renewals were up about 70 basis points or $10 for a blended down 1%.

Buck Horne, Analyst

Perfect. You already beat me to my next question. I appreciate that. Step ahead of me. I want to also touch a little bit on the CapEx spend, just kind of the maintenance CapEx, both recurring, nonrecurring, I think it added to about $9 million in the quarter. Do you see that starting to taper off anytime soon? Or is that kind of the run rate that you expect the portfolio to be on for at least a few more quarters?

Matthew McGraner, CIO

Yes, I think it's a bit elevated. The reason for that is that we haven't been able to recycle as much of the portfolio as we usually do. Therefore, there is a bit more maintenance capital expenditures involved. Bonner, do you have anything to add to that?

Bonner McDermett, VP, Asset and Investment Management

Yes. If you look at Page 22 of the supplement, you'll notice that the interior spending has increased, especially in the third quarter. While the amount is higher, it represents a smaller dollar improvement. Our market upgrade program does not include comprehensive premium upgrades like hard surface countertops. Instead, we are focused on average upgrades of around $4,000, targeting certain units that we have previously improved or that require updates to remain competitive. We are investing approximately $4,000, and in return, we are seeing a $70 premium. Although this isn’t the historical spending rate for interiors, it still reflects a 20% annual return, which we find reasonable in the short term, especially as pricing faces pressure. We also mentioned in the last call the significant refinancings we conducted with Freddie Mac, which led to new property condition assessments that necessitated some larger, nonrecurring capital expenditures, such as driveway milling and paving, siding repairs, and roofing work. Additionally, we are renovating a pool in Raleigh, resulting in some larger projects this year. Our focus moving forward is to streamline spending as we enter next year.

Matthew McGraner, CIO

And those are more one-time in nature anyway, so it should moderate.

Buck Horne, Analyst

That's great insight. Thank you for that. Also, congratulations on effectively managing expenses in this environment; it's a significant achievement. I want to revisit Omotayo's question regarding capital allocation and the NAV discount. The real question is, why pursue a new asset in Las Vegas now when the existing portfolio could likely be acquired at a similar or even better combined NOI yield and growth rate moving forward? Please help us understand the reasoning behind purchasing an asset at this time instead of buying the existing portfolio.

Matthew McGraner, CIO

Yes, I believe we can pursue both strategies. In the near term, until we finalize this deal, we will focus on buying back stock aggressively given our capital situation. However, we also recognize the need for external growth through capital recycling. We won't be engaging in indiscriminate acquisitions. The uniqueness of this deal lies in the asset's potential, which we expect to progress from a nearly 6% cap rate to around 7.5% or 8% during our three-year value-add campaign. Such opportunities are rare and require a precise investment approach. I don't see this interfering with our stock buyback efforts. Our free cash flow yield remains strong, and I stand by our goal of reaching $170 million in NOI by the end of 2027. Achieving that and applying the terminal cap rate will likely lead to positive outcomes for us all.

Operator, Operator

This concludes today's question-and-answer session. I would now like to turn it back over to the management team for closing remarks.

Matthew McGraner, CIO

Thank you very much for everyone's participation today and look forward to speaking to you all live in December at NAREIT. Thanks again.

Operator, Operator

This concludes today's call. You may now disconnect.