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spk06: Thank you for standing by. At this time, I would like to welcome everyone to the next Point Residential Trust Q1 2023 conference call. All lines have been placed on mute to prevent any background noise. 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 one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Kristen Thomas, you may begin your conference.
spk05: Thank you. Good day, everyone, and welcome to Next Point Residential's conference call to review the company's results for the first quarter, March 31st, 2023. On the call today are Brian Mitt, Executive Vice President and Chief Financial Officer, Matt McGrainer, Executive Vice President and Chief Investment Officer, and Bonner McDermott, Vice President, Asset Investment Management. As a reminder, this call is being webcast through the company's website at nxrt.nextpoint.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 a more complete discussion of risk and other factors that could affect any forward-looking statements. The statements made during the conference call speak only as of today's date and accept as required by law NSRT 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.
spk01: Thank you, Kristen. Welcome to everyone joining us this morning. Appreciate your time. I'm Brian Mitz. As Kristen mentioned, I'm joined here with Matt McGrainer and Bonner McDermott. I'm going to kick off the call and cover our Q1 results, give our updated NAV, and then update our guidance for the remainder of the year. I'll turn it over to Matt and Bonner after that to discuss specifics on the Leasing environment and metrics driving our performance and guidance. So let's start with the Q1 results, which are as follows. Net loss for the first quarter was $3.9 million or $0.15 per diluted share. A total revenue of $69.2 million as compared to a net loss of $4.7 million or $0.18 per diluted share in the same period in 2022. on total revenue of $60.8 million, which represents a 14% increase in revenue. For the first quarter, NOI was $41.1 million on 40 properties, which compared to $36.7 million for the first quarter of 2022 on 39 properties, representing a 12.2% increase in NOI. For the quarter, year-over-year rent growth on renewals averaged 4.8% across the portfolio, And year-over-year rent growth on new leases averaged 2.8%. Given where rental rates are in our markets for Class B apartments and equivalent SR product, we believe there's still room for future outsized rent growth for the remainder of the year. For the corridor, same-store rent increased 13.3%, and same-store occupancy was down 3% to 94%. This coupled with an increase in same-store expenses of 15.1%, led to an increase in same-store NOI of 9.4% as compared to Q1 of 2022. Compared to Q4 2022, rents for this quarter on the same-store portfolio were up 0.6% quarter-over-quarter. We reported Q1 core FFO of $18.5 million, or $0.71 per diluted share, compared to $0.77 per diluted share in Q1 2022. For the quarter, we completed 494 full and partial renovations and leased 565 renovated units, achieving an average monthly rent premium of $153 and 21.2% PRI during the quarter. Inception to date in the portfolio, we've completed 8,127 full and partial upgrades, which represents 54% of our current units. 4,914 kitchen upgrades and washer and dryer installments, and 10,423 technology package installations, achieving an average monthly rent premium of $153, $47, and $45, respectively, and an ROI of 21.8%, 65.6%, and 37.4%, respectively. During the first quarter, we refinanced the venue on Camelback and paid down $17.5 million of the corporate credit facility through the refinancing proceeds and available cash. As of March 31st, the balance on the corporate credit facility is $57 million. With the sales of Old Farm and Stone Creek in Houston, which we expect this quarter, we'll use some of those expected net proceeds of $63 million to pay down the remainder of the corporate facility. Moving to NAV, based on our current estimates of cap rates in our markets and forward NOI, we are reporting a NAV range per share as follows. $66.66 on the low end, $76.82 on the high end, and $71.74 at the midpoint. These are based on average cap rates ranging from 5% on the low end to 5.3% on the high end, which remains flat from last quarter and has increased approximately 65 basis points from Q3 of 2022. Moving to full-year guidance, we're updating guidance as follows. On core FFO, we are guiding $2.92 on the low end, $3.20 on the high end, with a midpoint of $3.06. For rental income, we're estimating 10.5% increase on the low end, 12.1% increase on the high end for midpoint, 11.3% increase. For same-store NOI, we are estimating 9.2% growth on the low end, 12.8% growth on the high end, and 11% for the midpoint. And then to add some additional transparency and clarity and information, we are showing the components to interest expense, as that's obviously driving some of our results and our guidance. We estimate total interest expense for the year. It's $65.2 million on the low end, $63.2 million on the high end, and $64.3 two million at the midpoint. So with that, that completes my remarks. I'll turn it over to Matt and then Bonner for some commentary on the portfolio and lease environment.
spk03: Thanks, Brian. Let me start by going over our first quarter same store operational results. Rental revenue growth continued to outperform across the board with year-over-year growth in Dallas, Phoenix, Atlanta, and our Florida markets in the 12% to 17% range, with Tampa notching growth north of 20%. First quarter same-store NOI growth continued at a strong pace in our markets, with the portfolio averaging 9.4%, driven by 11.6% growth in total revenues. We have started to see expense growth moderate also, with controllable expense up just 40 basis points quarter-over-quarter, and total operating expenses of 2.2% quarter-over-quarter. Six of our ten same-store markets achieved year-over-year NOI growth of 8.4% or greater, with our Q1 same-store NOI margin registering a healthy 59.8%. The portfolio experienced continued positive revenue growth in Q1, with nine out of our ten markets achieving growth of at least 7.5% or better. Our top five markets were Tampa at 20.9%, South Florida at 15.3%, Nashville at 13.3%, Phoenix at 13.1%, and Orlando at 12.6%. Renewal conversions were 60.5% for the quarter, with six out of our 11 markets executing renewal rate growth of at least 3.5%. Our top five markets were Raleigh at 7.7%, Dallas-Fort Worth at 6.9%, South Florida at 6.6%, Tampa at 5.8%, and Orlando at 5.7%. On the occupancy front, we're pleased to report, as Brian mentioned, that Q1 same-store occupancy remained over 94%, positioning us well as we enter the peak leasing season. And as of this morning, the portfolio is 96.5% leased with a healthy 60-day trend of 91.6%. Year-to-date in 2023, market conditions have continued to spur our shift in operational focus towards maximizing resident retention, reducing our exposure to rising turnover costs, and further centralization of our labor. Through Q1 2023, we have seen new supply, albeit primarily within the Class A stock, continue to deliver in our markets. We are encouraged by the placement of our assets relative to the submarkets most directly hit with this new competition. And RealPage projects supply inventory for our markets over the next three years to rise by just 7.5%, with most of that delivering this year and early next. Deliveries peak in 23 and then start to moderate in 24, and then literally fall off a cliff thereafter to just 2,700 units estimated in 2025 in our submarkets. We illustrate this supply picture on page five of our supplemental. Our internal conclusion is we are currently still enjoying relative pricing power between our upgraded housing product versus new supply and or SFR assets and expect this paradigm to be particularly acute in the second half of 24 and 25 when deliveries significantly drop. On the transaction front, we expect to complete the disposition of old farm in Stone Creek during the quarter. As previously mentioned, we'll use the sales proceeds to retire the full remaining balance on the revolver. We continue to actively monitor the capital markets for opportunities and to stay close to any movements on cap rates in our markets. We continue to see many institutional investors on the sidelines, and we will wait for clarity around the interest rate environment, and more recently, the regional banking stress. We've seen cap rate expansion, however, flatten over the last several months. On average, we're seeing nominal cap rate ranges between 4.75% and 5%, depending on class, location, and vintage. We're also monitoring a couple of large acquisitions expected to clear a 4.9 cap for a large portfolio of assets similar to NXRTs, which is a positive read-through to our NAV of 70 to 75 share versus the current market price in the low 40s. In closing, we're off to a strong start in 2023 through late April. We are expecting to see continued strength in middle market rental housing, particularly in our markets. And we maintain optimism that 2023 will further demonstrate our ability to produce outsized growth in NOI earnings and dividend growth. That's all I have for prepared remarks. Thanks to our teams here at NextPoint and BH for continuing to execute. I'll turn it back over to you, Brian.
spk01: Yeah, let's go to questions.
spk06: To ask a question, please press star 1. Please limit yourself to one question and one follow-up. Your first question is from Omakeo Ocasayan of Credit Suisse. Please go ahead. Your line is open.
spk00: Yes, good morning, team. Just wanted to focus on guidance for a second. So your interest expense guidance, you kind of go up about $3. something million, which is about $0.13. But the midpoint of your guidance was only kind of lowered by $0.03. Could you just talk a little bit about where that remaining $0.10 is? where that pickup comes from, given that the midpoint of your things to NOI growth was essentially unchanged at 11%.
spk01: Well, I can speak to the interest side. You know, we've kind of talked about this on past calls and individually with Some of the analysts, there's kind of some noise that runs through this. You see on the guidance slide, we have a marked market that shows fair value of the rate caps. That's moving through there and obviously creates about a $3 million or so increase to interest expense for the quarter. I'll let Bonner talk about sort of where the remainder of that differential comes in. But, you know, we continue to see sort of changes in the mark-to-market piece of this, which we try to estimate to the best of our ability, just given the changes in the forward curve and volatility of interest rate movements makes it a little bit challenging. And so we're trying to to tighten that up and add a little transparency here. But, Vaughn, are you- Yeah, but- Go ahead.
spk02: Yeah, Ty, I'm happy to step in here. As we look at, you know, we essentially reaffirmed the midpoint of same-store NOI at 11%. As we look at, you know, the numbers here through, you know, almost the end of April, we have visibility through May and end of June on the renewal front. So we've got some line of sight there. We think that, you know, ultimately we're picking up a couple of cents a share from our original forecast on NOI. And then there's an accumulation of a few, you know, several smaller updates to our corporate forecast that offset that 13 cents on interest expense you're talking about. Lines, you know, corporategnas.com, deferred fines and cost amortization. We can, you know, we can dig in a little bit deeper offline and really give you the best, you know, best color there, but I think that A little bit stronger forecast for NOI for the year. We're seeing some swings. Obviously, the rate curve has gone pretty wild to start the year. We had a view two months ago of where rates were going. We continue to have our own view and then look at the forward curve as well, and that has an impact. But ultimately, I think that we feel good about hitting 11% this year. We're on track to hit... currently a little bit ahead of the midpoint there. So I think you're picking up a little bit of benefit from that.
spk00: So just to reiterate then, the pickup of that $0.10 to close the gap is mainly based on some improvement in kind of like the non-SIM store pool and as well as some G&A improvements?
spk02: There's another component here, too, that we should mention that the timing of the Houston dispositions, we're currently looking now towards, I think, a June close there. So we're picking up a couple additional months of NOI for those assets as well to get to the full year picture. So it's a bunch of little incremental improvements that offset that interest, that full picture on interest expense, which includes that mark-to-market at the fair value of the rate caps, which is the most most dramatic move of any of those in interest expense.
spk00: Okay. Thank you.
spk06: Your next question is from Carl Katarosek of JNE. Please go ahead. Your line is open.
spk04: Good morning, guys. Same store expense was 15.1% for the first quarter, and the midpoint of guidance is currently 10.6%. So that assumes each of the remaining quarters are going to average around 9%. Are you expecting significant property tax relief or any one-time items to positively impact expense growth in the remainder of 2023 or just easier comps?
spk03: Yeah, I'll start and follow you can add to this. We are expecting some real estate tax relief and then a moderation of turn costs. as we've turned a large part of the room roll in the first quarter. So we expect that to moderate in the back half of the year. Adding to that, too, is we did a little bit better on our insurance renewal than we thought just recently. I think we locked it in in the last month or so. Paul, do you have anything to add?
spk02: Yeah, just on that point. So we have an April 1 renewal. You know, it was a tough market out there. I think that, you know, we saw some pretty significant savings. We came into the year conservative on our assumptions there. And I think we're, you know, in the single digits on premium increase where we were, you know, modeling 20, 25%. So there's some savings for the back, you know, nine months of the year in interest expense. Additionally, as you look at Q1 same store, one of the most significant single line items in there is a 2021 tax settlement that impacted 2022's Q1 same store real estate taxes. We didn't get that same settlement here in 2023 yet. We still have several active cases litigation for 2022 values. And we are feeling better about our positioning in particular on taxes given the rise in rates, decline in values. I think that we have a better case for some tax relief this year. And then going back to your point, we really saw a run up in R&M and turn costs really in the second quarter last year. We started flowing through more of the evictions post-moratorium. So we've seen an elevation in that turn in R&M expense, but I think that as we get into the Q2 comp, we'll normalize more quarter over quarter. So we feel better about expense inflation for the balance of the year.
spk04: Okay, thank you for that. And then I also had a quick question. Quarter over quarter, you saw a 260 basis point drop in Charlotte occupancy. And then around the 170 basis point drop in Atlanta, what drove those markets?
spk02: So, in Atlanta, we had a fire at our Rockledge asset. So, that's a portion there. Additionally, at the preserve of Terrell Mill in Atlanta, we've been having just a little bit more difficult renewal discussions. I think that we've moderated pricing. You know, those are quarter-ending numbers as of 3-31. Our revenue management team's working to kind of backfill demand there at those assets. In Charlotte, our Timber Creek asset, it also dealt with a casualty event and has dealt with a little bit of waning demand. So we've been toggling revenue management, making sure that the pricing's dialed in to build that occupancy back up.
spk04: Okay. Thank you very much.
spk06: Your next question is from Ometeo Osakenia of Credit Suisse. Please go ahead. Your line is open.
spk00: Yes. Just going back to our ranks, again, for the quarter, taking a look at new ranks for some of your markets, and I've seen it's Vegas. It actually turned negative. Just kind of curious what kind of was going on in the markets. Is it like a lot of new supplies? Is it job growth slowing on the demand side? And kind of what made, you know, rent growth kind of turn negative in those markets?
spk03: Yeah. Hey, Ty, it's Matt. The Phoenix is a supply story. There's quite a bit of deliveries going on in Phoenix right now. That's a component. The other component is it's a really tough comp. Those rents last year, really first half of last year, we were seeing 15% to 25% increases. I think that's the story in Phoenix. Vegas is seasonality and weaker demand than we expected. There's several assets, particularly in around Bella Solara and Toriana that are giving heavy concessions to the market, so we had to buy some occupancy on those two assets.
spk04: Thank you.
spk03: You got it.
spk06: There are no further questions at this time. I will now turn the call over to the team for closing remarks.
spk01: Yeah, appreciate everyone's time and questions. Feel free to reach out to us if you have additional questions. Happy to answer them. And until then, we'll see you next quarter. Thank you.
spk06: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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