NexPoint Residential Trust, Inc.

Thank you for standing by and welcome to the NextPoint Residential Trust Q3 2023 conference call. I would now like to welcome Kristen Thomas, Investor Relations, to begin the call. Kristen, over to you.

Thank you. Good day, everyone, and welcome to NextPoint Residential Trust conference call to review the company's results for the third quarter ended September 30th, 2023. On the call today are Brian Mitts, 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 in our encouraged review of 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 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.

Thank you, Kristen. Welcome to everyone joining us this morning. joined here by Matt McGrainer and Vonna McDermott. I'm going to kick off the call and cover our Q3 and year-to-date results, walk through our updated NAV calculation, and then give our revised guidance. I'll then turn it over to Matt and Vonna to discuss specifics on the portfolio, leasing environment metrics, and the items driving our performance and guidance. So start with Q3. Results net income for the third quarter was $33.7 million or $1.28 per diluted share on total revenue of $69.8 million as compared to a net loss of $600,000 or $0.02 loss per diluted share in the same period in 2022 on total revenue of $68.1 million. A 2.5% increase in revenue on 39 properties versus 41 properties for the prior year period. For the third quarter, NOI was 42.1 million on 39 properties, as compared to 40 million for the third quarter of 2022 on 41 properties, a 5.3% increase in NOI. For the quarter, same-store rent increased 3.1%, and same-store occupancy dropped 10 basis points to 93.9%. This coupled with a 7.7% increase in other income and a 0.3% decrease in same-store expenses led to an increase in same-store NOI of 8% as compared to the third quarter of 2022. As compared to Q2 2023, rents for the third quarter on same-store portfolio were down 40 basis points to $1,529 per unit per month. We reported Q3 core FFO of $17.1 million, or $0.65 per diluted share, compared to $0.84 per diluted share in the third quarter of 2022. For the quarter, we completed 420 full and partial renovations and leased 330 renovated units, achieving an average monthly rent premium of $215 and 23.6% ROI. which is slightly higher than our long-term average ROI on renovations. Inception to date in the current portfolio, we've completed 8,671 full and partial upgrades, which represents approximately 60% of the total units, 4,812 kitchen upgrades and washer and dryer installments, and 12,285 technology-packaged installations. achieving an average monthly rent premium of $168, $49, and $44, respectively, and a return on investment of 21%, 65.3%, and 37.8%, respectively. NXRT paid a third quarter dividend of 42 cents per share on the common stock on September 29th. On October 30th, the board approved a 10.1% increase to the dividend 246.242 cents per share, payable beginning December 29th. Since our IPO in 2015, we've increased the dividend 124.5%. Moving on to year-to-date results, net income year-to-date was 25.9 million, or 99 cents per diluted share, on total revenue of 208.6 million, as compared to a net loss of $13 million or $0.51 per diluted share in the same period in 2022 on total revenue of $194.6 million for an increase of 7.2% in revenue. Year-to-date, NOI was $125.2 million on 39 properties as compared to $115.7 million on 41 properties for the same period in 2022 for an increase of 8.2%. Year-to-date per unit same-store rent increased 3% to $1,524, and same-store occupancy was down 10 basis points to 93.9%. This coupled with an increase in same-store other income 4.7% and an increase in same-store expenses of 6.7% led to an increase in same-store NOI of 9.5% compared to the same period in 2022. We reported year-to-date core FFO of $56.1 million, or $2.14 per diluted share, compared to $2.38 per diluted share in the nine months ended September 3, 2022. Moving on to our balance sheet, as of 9-30, we had $1.58 billion in mortgage debt, of which $112 million was held for sale, and $41 million was outstanding on our corporate credit facility. This compares to mortgage debt of $1.61 billion at 12-31-22, of which $68.2 million was held for sale and $74.5 million was outstanding in our corporate credit facility. This represents a 1.8% reduction in mortgage debt and a 45% reduction in our corporate debt year-to-date. Once we sell the four assets that we show as held for sale, we'll further reduce our mortgage debt by $112 million and our corporate debt by $41 million. representing a total 9.7% reduction in leverage. As of 9.30, we have swaps with an initial value of $1.17 billion, with fixed rates ranging from 2% on the high end to 57 basis points on the low end, with a weighted average fixed rate of 1.07%. Our swaps have a liquidation value of $98.6 million as of 9.30. As of 9-30, we had interest rate caps on $1.39 billion of notional debt, with the strike prices ranging from 6.82% on the high end to 2.7% on the low end, with a weighted average strike of 5.83%. As of 9-30, we had 13 caps that were above the reference rate of 5.32%, representing $408.4 million of notional value. For third quarter, our swaps and caps reduced our interest costs by approximately $13.5 million. NXRT is 98.1% effectively fixed when considering our swaps, caps, and fixed debt, being at current or higher rates, we're basically fully hedged. And one interesting point to make regarding the capital structure, in regards to the caps and how that will impact interest expense in a rising rate environment, which is to say that our interest will remain flat to decrease as rates rise. For example, if our reference rate increases 50 basis points, cash interest expense net of swaps and caps will remain flat. If the reference rate increases by 1%, our cash interest expense net of swaps and caps will decrease by 0.12%, as we'd effectively be 106.6% hedged as new caps come into the money. Moving on to NAV for share, based on our current estimates of cap rates in our markets and forward NOI, we're reporting an NAV per share range as follows. $48.77 on the low end, $60.14 on the high end, and $54.45 at the midpoint. These are based on average cap rates ranging from 5.5% on the low end and 6% on the high end. which represents a 60 basis point increase over the prior quarter as compared to 7,100 basis point movements in five and 10 year treasuries, uh, respectively. For guidance, uh, for the full year 2023, we're revising core, uh, FFO and same store NOI guidance as follows. For core FFO per diluted share, $2.95 in the high end, $2.81 in the low end with a midpoint of $2.88. For same-store numbers, we are guiding rental revenue to 7.7% on the high end, 7% on the low end with 7.3% in the midpoint. For same-store expenses, we're guiding to 4.8% on the high end, 5.7% on the low end with a midpoint of 5.2%. And this results in a guidance of same store NOI of 9.5% on the high end, 7.8% on the low end, and 8.7% at the midpoint. So with that, that completes my prepared remarks. We'll turn it over to Matt. Thanks, Brian.

Let me start by going over our third quarter same store operational results. Same store effective rents ended the quarter at $1,529 per unit per month. up 3.1% year-over-year. Seven out of our 10 markets averaged at least 3% growth, while our South Florida and Raleigh markets led the way at 8.1% and 5.5% growth, respectively. Same-store rental revenue growth was 4.6% for the period, with the Florida markets again facing the field at 10.3%, 8.2%, and 4.6%, respectively, for South Florida, Tampa, and Orlando. Dallas-Fort Worth also had strong showing at 7.3% growth. Total same-store revenues were up 4.6% year-over-year. And we're also pleased to report some welcome moderation in expense growth for the quarter. Third quarter same-store operating expenses were down 40 basis points year-over-year. Payroll growth was a mere 60 basis points in Q3, down from 15.3% and 6.9% in Q1 and Q2, respectively. R&M expense growth was 6.6% lower than the prior period off of an elevated post-COVID comp in 2022. Real estate taxes have also moderated, and true ups booked in Q3 reflect a reduction to our overall real estate tax forecast for the year. Year-to-date same-store tax growth was down to 6% year-over-year. Insurance expense growth stabilized at 6% in Q3 after a successful Q2 renewal negotiation as well. On the NOI side, the portfolio achieved strong third-quarter same-store NOI growth of 9.5%, while our NOI margin improved to 61.4%. Nominal NOI quarter-over-quarter also increased, as Brian mentioned, as our teams continue to operate more efficiently. In six of 10 same-store markets achieved year-over-year NOI growth of 8.7% or greater, with South Florida again setting the tone at a healthy 18.4%. Turning to operating performance in the go-forward strategy, while our average effective monthly rents per unit ended Q3 at $1,497 per unit, a 3.5% increase year-over-year, new leases did turn negative for the quarter by $60 per unit, or 4.6% on a lease-over-lease basis. As other Sunbelt peers reported, new supply skips and evictions and fraud are putting downward pressure on total financial occupancy for now. On the new supply front, given the strong job market and heavy concessions for merchant-billed product, consumers are expecting and demanding concessions across the board, even for Class B product, as Class B runners migrate to Class A product. And given the interest rate environment, even Class B owners are being more defensive in their operating strategies, prioritizing occupancy over revenues and awaiting the interest rate hikes. We do expect this to abate by the end of the first half of next year as Class C renters use their wage gains to upgrade their housing options, and both inflation and deliveries start to moderate. We expect to see pricing power return to Class B assets, sustained by continued net migration into the Sun Belt, and the fact that 67.5% of total U.S. households can afford to live in an NXRT community. Perhaps most importantly on the supply front, in 20 of NXRT's 39 submarkets, supply growth over the next three years is less than 6%. While deliveries have been notable in 2023, the forecasted full-year 2023 total is down 17% from RealPage's projection earlier in the year, most likely due to a difficult financing environment. In addition, we'll be exiting two of the few supply-heavy sub-markets after the two planned Charlotte dispositions I'll get to in a minute. As we noted last quarter, and as broadly reported by other Sunbelt-focused reads, skips and evictions remain a problem in a few key markets, most notably for us, Atlanta, Charlotte, and Las Vegas. The good news here is that Atlanta has started to work through their court backlogs, as has Las Vegas. And as for Charlotte, over 70% of the evictions are attributable to one asset, Timber Creek, which is under contract to sell with $1.5 million of non-refundable earnest money deposit. Given these momentary cross-currents, we will continue to focus on prioritizing occupancy closing the back door on skips and evictions, and targeting qualified traffic. The portfolio had registered 94% occupancy as of the close of the quarter, and as of this morning, is 96.24% leased, with a healthy 60-day trend of 93%, the highest it's been in a couple quarters as we enter the winter months. The good news also is our three-year same-store effective rent growth is now cagering at 9.6%, and same-store and OI growth will end the year in the high single digits. This growth, coupled with our continued focus on deleveraging, informed our view to recommend an eighth consecutive dividend increase to the board. If we are successful with these maneuvers, and we do believe we will be, we think earnings growth re-accelerates in 2024, pinning our core FFO payout ratio 64% for 2023 and sub-60% on preliminary 2024 estimates. Our confidence in our strategy also stems from our ability to still find liquidity at a time when there's not a lot of it. Given our debt is fully prepayable and our NOIs are growing, these assets are still very liquid. Our job as management and large shareholders is to maintain our focus on increasing NOI through our targeted value-add campaigns, preserving those gains, and maintaining a maximum liquidity profile. So when liquidity does return to the market, we can take advantage of it. For example, during the quarter, we were able to liquidate Silverbrook, one of the company's first acquisitions, for a 4.6% cap rate. The Silverbrook sale generated $19.5 million of net proceeds, a 34% levered IRR, and a 6.14 times multiple uninvested capital. We used $16 million of net sales proceeds to reduce the drawn balance on the credit facility to $41 million. As I alluded to earlier, Timber Creek in Charlotte is also under contract for sale at $49 million with a $1.5 million non-refundable earnest money deposit. Estimated net proceeds from this sale are $23.8 million, which would generate a 25% levered IRR and a 4.3 times multiple uninvested capital. We expect this sale to occur in Q4. Finally, we also expect to sell Old Farm in Houston this year. As you may recall, this asset fell out of contract in April. We have found a replacement buyer who is now under contract to purchase the asset for $103 million. The sale is forecasted to generate $47 million of net proceeds at a 22% levered IRR and a 2.9 times multiple on invested capital. The old farm and Timber Creek dispositions will retire the remaining balance on the credit facility and allow us to further delever the balance sheet, positioning us, as Brian mentioned, as fully hedged going into 2024. That's all I have for prepared remarks. I'd like to thank our teams for continuing to execute through this challenging environment. Thank you, Brian.

That's it. We got a little open up for questions.

And at this time, I'd like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile any questions. Again, if you'd like to ask a question, please press star 1 on your telephone keypad now. We have a question from the line of Kyle Katarzynek with Danny Montgomery Scott. Please go ahead.

Hey, good morning, guys. What drove the decision to raise the dividend by 10% versus buying back stock or paying down additional debt at this time?

Hey, Kyle. The incremental dividend on just a nominal dollar basis is $4 million, roughly, and at a current share price of $25, $26. It's $130,000 shares of stock to repurchase. Our strategy has always been to generate high single-digit, same-store NOI growth, earnings growth, and dividend growth, and we think that's an important aspect of our strategy. And given that we have these dispositions on tap for the Q4 and early Q1 to retire all the remaining unhedged debt and enter the 24 year with the ability to reaccelerate earnings. We just thought that was the better use of capital and just an effective tenant of our strategy for the last eight years.

Okay, thank you. And then related to the Atlanta slash Las Vegas markets, You had mentioned last quarter that Atlanta courts opened in 2Q. So where do those backlogs stand today versus where they were at last quarter?

I think the Atlanta backlog was 70,000-ish skips and evictions. Is that right, Barney?

Across the Atlanta market for the first seven months this year, they've done about 70,000 evictions. When you look at our AR balances and our actual net bad debt, We've seen, I think, the peak for net bad debt in June of this year. We think that that continues to moderate, and we closed the year sub-3% bad debt there. So it's getting better. It's also getting better in Vegas as well. We've seen, I think, a healthier area of balance there as well. You know, it's been a bit of a struggle, but we see some positive momentum, you know, heading into the end of the year in 24.

And then one last one for me. What has unit turnover been for this quarter and last quarter, and where is that compared to historical levels?

Yeah, it's been pretty consistent in the low 50 percent. or I guess turnover in the mid to high 40s, retention in the low 50s, and that's been pretty consistent. Our strategy going into Key 4 and Key 1 will continue to prioritize renewals, and as I mentioned in prepared remarks, keep the back door closed. Okay.

Thanks, guys. Appreciate it. Got it.

There are no further questions at this time. I would now like to turn it over to the management team for closing remarks.

Great, thank you. Appreciate everyone's time. I'll probably see some of you at NARIC in a few weeks. Thank you.

I would like to thank our speakers for today's presentation and thank you all for joining us. This now concludes today's call. You may now disconnect.