Earnings Call Transcript - NXRT Q3 2024

Operator, Operator

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 NXRT Q3 2024 Earnings Call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the call over to Kristen of Investor Relations. Kristen, your line is now open.

Kristen Thomas, Investor Relations

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust conference call to review the company's results for the third quarter ended September 30, 2024. On the call today are Brian Mitts, 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 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 Brian Mitts. Please go ahead, Brian.

Brian Mitts, CFO

Thank you, Kristen, and welcome to everybody this morning. I appreciate you joining the call. I'm Brian Mitts, and I'm joined today by Matt McGraner and Bonner McDermett. 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 and Bonner to discuss specifics on the leasing environments and metrics driving our performance and guidance. Results for Q3 are as follows. Net loss for the third quarter of 2024 totaled $8.9 million, or a loss of $0.35 per diluted share, which includes $24.6 million of depreciation and amortization. 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. The third quarter '24 NOI was $38.1 million on 36 properties compared to $42.1 million for the third quarter '23 out of 40 properties. For this quarter, same-store rent decreased 1.8%, while same-store occupancy grew to 94.9%. 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 NOI as compared to Q3 of '23. As compared to Q2 of 2024, rents for this quarter on the same-store portfolio were down 1.2% or $18 sequentially, while occupancy grew by 70 basis points to 94.9%. Reported Q3 core FFO of $17.9 million, or $0.69 per diluted share compared to $0.69 per diluted share for same Quarter last year. 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. Since inception, for the properties currently in the portfolio, we've completed 8,316 full and partial upgrades, 4,704 kitchen and laundry appliance installations, and 11,389 technology package installations, resulting in $175, $48 and $43 average monthly rental increases per unit and a 20.8%, 61.9% and a 37.2% ROI, respectively. NXRT paid a third quarter dividend of $0.46 per share of common stock on September 30th since we increased our dividend by 124.5% since inception. For the second quarter, our dividend was 1.48 times covered by core FFO with a payout ratio of 68% of core FFO. Yesterday, the Board approved a quarterly dividend of $0.51 per share, which represents a 10.3% increase from the prior dividend. Since inception, NXRT has increased the dividend per share by 147.6%. As of September 30th, we had $17.4 million in cash and $350 million of available liquidity on the corporate credit facility. 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 on November 29 for total gross proceeds of $1.67 billion, which in aggregate represents 97.7% of the company's total outstanding debt. Notably, NXRT agreed to refinance interest rates at an improved pricing from our prior terms. Those rates are SOFR + 109 basis points. This refinancing activity extends the company's weighted average debt maturity schedule to approximately seven years 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. 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. On October 1st, we sold Stone Creek at Old Farm in Houston, which is a 190-unit property built in 1998. Net proceeds from the sale were approximately $23.7 million, delivering a 14.8% levered IRR and a 2.19 times multiple on invested capital. Turning to our NAV estimate, based on our current estimate of cap rates in our markets and forward NOI, we are reporting a NAV per share range as follows: $48.77 at the low end, $59.89 on the high end for a midpoint of $54.33. These are based on average cap rates ranging from 5.25% from the low end to 5.75% on the high end, which we held static quarter-over-quarter based on recent market intelligence and transaction activity. Going to our guidance, we are updating 2024 guidance range as follows. For earnings per diluted share, we got into a $0.01 loss on the low end, $0.07 gain on the high end for a midpoint of $0.03 per share. For core FFO per diluted share, $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. For revenue, expenses, and same-store NOI, we're reaffirming prior guidance as follows. For revenue, a 1.3% increase on the low end, a 2.2% increase on the high end for a midpoint of 1.7%. For expenses, an increase of 4.4% on the low end, 3% on the high end for a midpoint of 3.7%. And for same-store NOI, we are guiding for a negative 0.6% on the low end, 1.6% on the high end, and 0.5% at the midpoint. For acquisitions, we are guiding no acquisitions versus $50 million from the prior quarter. And for dispositions, essentially the same at $167 million versus $175 million previously. Finally, before I turn it over to Matt and Bonner, I wanted to mention an adjustment we are making to core FFOs starting this quarter. The company's adjusted core FFO to remove the amortization of all deferred financing costs instead of those solely related to the short term debt financing as we previously did. And secondly, to adjust for the mark-to-market gains or losses related to interest rate caps not designated as hedges for accounting purposes. Prior periods have been recast to conform to the current presentation. 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. So with that, that completes my prepared remarks. I'll now turn it over to Matt for his commentary.

Matt McGraner, CIO

Thank you, Brian. I'll begin by discussing our third quarter same-store operational results. Same-store rental revenue increased by 2%, with five of our ten markets averaging at least 2.4% growth, led by Las Vegas and Raleigh with 11.6% and 5.4% growth, respectively. Overall, same-store revenues were up 1.7% year-over-year for the quarter. The average same-store NOI growth for the third quarter was down to negative 2.4%. Raleigh and Las Vegas were the top performers in NOI growth for the quarter, showing 49.5% and 12.7% increases, respectively. Raleigh's growth was boosted by favorable tax accrual adjustments due to a successful process. Our same-store NOI margin for Q3 remains strong at 59.7%, positioning us well for a strong finish to the year in that area. Operationally, the portfolio continued to show positive revenue growth in Q3 2024, with six out of our ten markets achieving growth of at least 2%. Our leading 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%. Renewal conversions for eligible tenants increased by 63% during the quarter, and five out of the ten markets surpassed a renewal rate growth of at least 2.5%. Charlotte, South Florida, Phoenix, Las Vegas, and Raleigh all exceeded 2% growth. On the occupancy front, our portfolio reached 94.9% occupancy at the end of the quarter, with current occupancy at 94.7%, 96.2% leased, and a healthy trend at 92%. Regarding expenses, they concluded the quarter at 8.2%. Repair and maintenance expenses rose due to increased turn costs compared to Q3 2023 and typical seasonality during this quarter. We anticipate these costs to decrease in Q4 as we maintain higher occupancy levels and lower lease turnover. Marketing and utilities expenses saw modest growth of 0.9% and 1.8%, respectively, during the quarter. Current leasing activity in October aligns with Q3 trends, and we expect new leases to decrease by 4% to 5% in the fourth quarter, while renewals should grow by 2% to 3%, resulting in a slightly positive blended number for the quarter and the year. Based on our market research, we believe that seven out of NXRT's ten markets have surpassed peak supply. Nine of those markets are expected to see occupancy growth over the next 12 months, and all ten should experience rent growth. We anticipate reaching peak supply in the final three markets—Charlotte, Phoenix, and South Florida—by the third quarter of 2025, which we believe will lead to a fundamental shift in our favor, supporting growth and stronger performance through 2027. Therefore, our operational strategy will likely remain cautious over the next quarter or two, but we are becoming increasingly positive about rent growth in the coming year. Additionally, as we explore value-add opportunities in 2025, we plan to significantly increase our rehabilitation output. This positive outlook, along with our refinancing efforts, has led management to recommend a dividend increase that the Board approved yesterday. Once we complete our refinancing activities in November, we will reduce our average floating rate spread from 158 basis points to 109 basis points and extend nearly all maturing debt to 2031. This full-year core earnings benefit is projected to provide an increase of $0.15 to $0.20 in annual earnings. The expected sale of Stone Creek, along with available cash on our balance sheet, gives us approximately $100 million of buying power going into 2025 to pursue accretive investments and continue the company's growth, especially with new rehabilitation projects. Regarding NXRT's NAV, we remain transparent about our insights and market observations. Our new midpoint is $54.34 per share, applying a 5.5% cap rate on our revised 2024 NOI. At current prices, our implied cap rate is about 6%. As we have previously done, if we maintain these levels, we will use our NAV as a guideline for utilizing free cash flow and/or selling assets to enhance liquidity and buy back our stock at a discount. In conclusion, I want to emphasize our excitement for the company's near-term outlook, and we will continue to strive for another quarter of substantial NOI and core earnings growth. That concludes my prepared remarks. I appreciate the ongoing efforts of the teams here at NexPoint and BH.

Brian Mitts, CFO

Thanks, Matt. Let's open it up for questions, please.

Operator, Operator

Your first question comes from the line of Omotayo Okusanya with Deutsche Bank. Omotayo, your line is now open.

Omotayo Okusanya, Analyst

Yes. Good morning, everyone. A couple of questions from my end. First of all, I wanted to focus on the same-store revenue for the quarter, kind of rental revenue up about 1.7% year-over-year, but again occupancy up 100 bps, net effective rent down 1.8%. It doesn't quite match out to the 1.7%. So just kind of curious, kind of what else may have happened during the quarter? Whether it's bad debt or something else that maybe we just haven't considered in that overall same-store revenue growth number?

Bonner McDermett, VP, Asset Management

Thanks, Tayo. This is Bonner. There were two significant factors contributing to our occupancy growth this quarter. We recorded a financial occupancy of approximately 94.5% for the quarter, closing at 94.9%, which represents an increase of 140 basis points or 1.4% compared to the same period last year. Additionally, our bad debt persisted in declining, with a rate of about 1.3% this quarter, which is slightly better than our projections. This is a decrease from last year's rate of 3.1%. These two aspects were key drivers in boosting our rental revenue.

Omotayo Okusanya, Analyst

Okay. That's very helpful. And then in the quarter as well, property G&A came down quite a bit. I know 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. But just trying to understand what happened in 3Q and if that's sustainable going forward?

Matt McGraner, CIO

Yeah. Tayo, this is Matt. We continue to utilize AI and reduce leasing staff on site as the whole guided tour seems to be waning and having less on-site staff. We do think that it is a sustainable path. But Bonner, if you have anything to add to that?

Bonner McDermett, VP, Asset Management

Yeah. I think we're happy with where G&A, property G&A turned out for the quarter. Very little growth in market spend. Very little growth in utilities overall. I think we've been really focused on ways we can trim expenses. Obviously, in a tougher leasing environment, controllable expenses are really important for us. So, continued focus. We're into '25 budgets and continuing to look very hard at ways we can continue to control those lines.

Omotayo Okusanya, Analyst

Okay. That's helpful. Thank you.

Bonner McDermett, VP, Asset Management

Thank you.

Operator, Operator

Your next question comes from Michael Lewis with Truist Securities. Michael, your line is now open.

Michael Lewis, Analyst

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?

Matt McGraner, CIO

Yes, it's Matt. The increase is not just due to the definitional change but also because of the impact from the refinancings. We are restructuring all the debts and eliminating the mark-to-market effects that have raised concerns for some analysts, including you. These two factors, along with smoothing the outcomes for this year and next and the positive influence of the $1.4 billion refinancing, contribute to the overall effect.

Michael Lewis, Analyst

Okay. That's what we thought. In the end, it's really an interest expense.

Matt McGraner, CIO

Correct. A little bit.

Michael Lewis, Analyst

Okay. Got you. And then what do you expect to do from 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. Do you ride this a little bit, right? 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?

Matt McGraner, CIO

Good question. We took a comprehensive approach when the five-year rates were around 3% to 3.4%, believing that would be a suitable point to begin incorporating some swaps. At the same time, we completed a refinancing that we think has given us some additional time. Based on our current efforts, we believe that if we can achieve a 3% compounded annual return on the same-store basis through 2027, it will effectively offset any rise in interest expenses due to the expiration of swaps. The good news is that we will monitor the outcomes of the election and interest rates. We plan to actively explore adding swaps again without compromising our targets at these levels. We anticipate the short-term rates will decrease significantly. In summary, we will aim to leverage the interest rate environment if we see any relief on the five-year rates.

Michael Lewis, Analyst

Got you. And then just lastly for me, did you share the new and renewal rent spreads for the quarter?

Matt McGraner, CIO

Yeah. On a blended basis, new leases were down 6.43%, that's $93 on 1,730 leases, renewals on 2,040 leases were up 2.2% or about $31.

Operator, Operator

Your next question comes from the line of Omotayo Okusanya again with Deutsche Bank. Omotayo, your line is now open. Omotayo? All right. So there is no further questions at this time. I will now turn the conference back over to the management for closing remarks.

Brian Mitts, CFO

Yeah. Thank you. Appreciate everyone's time and questions. And hopefully we'll see everybody in NAREIT here in a few weeks. Thank you.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.