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7/30/2024
Thank you for standing by. My name is Christina and I'll be your conference operator today. At this time, I would like to welcome everyone to the NextPoint Residential Trust Second Quarter 2024 Earnings 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. And I will now turn the floor over to Kristen Thomas, Investor Relations. Kristen, you may begin the call.
Thank you. Good day, everyone, and welcome to Nextmont Residential Trust's conference call to review the company's results from the second quarter into June 30, 2024. On the call today are Brian Mitz, Executive Vice President and Chief Financial Officer, Matt McGrainor, Executive Vice President and Chief Investment Officer, and Bonner McDermott, Vice President, Asset and Investment Management. As a reminder, this call is being webcast through the company's website at nsrt.nextpoint.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, NSRC 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.
Thanks, Kristen. Welcome to everyone joining us this morning. Appreciate your time. I'm Brian Mitts. I will be joined today by Matt McGrainer and Bonner McDermott. I'll start the call and cover our Q2 results, updated NAV and guidance outlook for the year. Then I'll turn it over to Matt and Bonner to discuss some of the specifics in the leasing environment and metrics driving our performance and guidance. Results for the second quarter are as follows. Net income for the second quarter is $10.6 million, or 40 cents per diluted share, on total revenue of $64 million. This includes an $18.7 million gain on the sale of Radbourne Lake that was completed on April 30th. The $10.6 million net income for the quarter compares to a net loss of $4 million or $0.15 loss per diluted share for the same period in 2023 on total revenue of $69.6 million. For the second quarter of 2024, NOI was $38.9 million on 36 properties. compared to 42 million for the second quarter of 2023 on 40 properties. For the quarter, same-store rent decreased 1%, while same-store occupancy held stable at 94.1%. This, coupled with an increase in same-store revenues of 2.3%, led to an increase in same-store NOI of 2.4% as compared to Q2 2023. As compared to Q1 2024, rents for second quarter on the same store portfolio were up 0.4 percent or six dollars sequentially we reported q2 core ffo of 18 million or 68 cents per diluted share compared to 77 cents per diluted share in q2 of 23. during the second quarter for the properties in our portfolio we completed 59 full impartial upgrades and 36 or sorry at least 56 upgraded units achieving an average monthly rent premium of $240 and a 20.1% return on investment. Since inception for the properties currently in our portfolio, we've completed 8,271 full and partial renovations, 4,659 kitchen and laundry appliance installs, and 11,389 technology package installs. resulting in $175, $48, and $43 average monthly rental increase per unit and a 20.8%, 62.9%, and 37.2% return on investment, respectively. NSRT paid a second quarter dividend of $0.46 per share of common stock on June 28th. Since inception, we've increased our dividend 124.5%. For the second quarter, our dividend was 1.48 times covered by core FFO with a payout ratio of 68%. During the second quarter, NXRT completed the sale of Radbourne Lake for a sales price of $39.25 million. This generated $18.6 million of net sales proceeds and resulted in a 19.2% levered IRR and 3.6 times the multiple on invested capital. Second quarter, the company purchased and subsequently retired $14.6 million of its common stock. The retired stock was purchased at a weighted average price of $33.19 per share, which represented an attractive 37% discount to the midpoint of our Q1-24 NAV range. On June 27th, NXRT used cash on hand to retire the $15.3 million mortgage on the Stone Creek at Old Forum Property. As of June 30th, 2024, We had $21.3 million of cash and $350 million of available liquidity on the corporate credit facility. Turning to NAV, based on our current estimate of cap rates in our markets and forward NOI, we're reporting an NAV per share range as follows. $49.77 on the low end, $61.97 on the high end, and $55.87 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 revised down 25 basis points this quarter based upon recent market intelligence and transaction activity. NXRT is updating 2024 guidance range for core FFO prediluted share, same store revenue, same store expenses, and same store NOI as follows. Core FFO per diluted share, $2.66 on the low end, $2.79 on the high end, and a midpoint of $2.72. Total revenue, 1.3% increase in low end, 2.2% increase on the high end, and 1.7% increase at the midpoint. Total expenses, 4.4% increase on the low end, 3.7% or sorry, 3% increase on the high end and a midpoint of 3.7%. The same story, NOI, a negative 0.6% increase in the low end, or sorry, decrease, 1.6% increase on the high end and a 0.5% increase at the midpoint. That completes my prepared remarks. I'll now turn it over to Matt. Thanks, Brian.
Let me start by reviewing our second quarter same-store operational results. Same-store rental revenue was 2.6%, with 5 of 10 markets averaging at least 2% growth, while our Las Vegas and Atlanta markets led the way at 9.2% and 6.6% growth, respectively. Total same-store revenues for the portfolio were up 2.3% year-over-year. We're also pleased to report some continued moderation in expense growth for the quarter. Second quarter, same-store operating expenses were up just 1.2% year-over-year. Specifically, marketing and payroll declined 5.2% and 80 basis points, respectively. Year-over-year, R&M expense growth continued to moderate, up just 80 basis points from 2Q 2023. And we finalized several prior-year property tax appeals, resulting in 1.6% reductions year-over-year and are still inactive property tax appeals on 14 assets. Second quarter same-store NOI maintained a healthy growth in our markets, with the portfolio averaging 2.4%. Five of 10 markets achieved year-over-year NOI growth of 3.7% or greater, with Las Vegas and Atlanta leading the way at 12.3% and 9.6% growth, respectively. Our Q2 same-store NOI margin registered a healthy 61.1%, which was up 10 basis points from the prior year. Operationally on the income front, the portfolio experience continued positive revenue growth in Q2, with five out of our ten markets achieving growth of at least 2.3% or better. Our top five markets were Las Vegas at 8.4%, Charlotte at 6.8%, Atlanta at 5.5%, South Florida at 4%, and Raleigh at 2.4%. Renewal conversions for eligible tenants were 65% for the quarter, with 8 out of 10 markets executing renewal rate growth of at least 1.1%, and a blended average of 2.11%. On the occupancy front, the portfolio registered a healthy 94.1% as of the close of the quarter, and as of today, remains 94.1% occupied, 96.5% leased, and a healthy 60-day trend of 92%. Operationally, heading into the second half of the year, As Brian mentioned, we have bumped higher. While supply continues to be a challenge, demand outperformed expectations in the first half of the year and was really exceptional on a historic basis. Even so, we have still seen resistance to growing rents and a focus on occupancy to grow revenue. Demand has stayed resilient going into the second half of the year, but we expect seasonality to play a role as deliveries peak throughout the rest of 2024. Also positive, evictions continue to come down. We're optimistic that we will see bad debt surprise the upside in the second half of the year also. In addition, supply, demand, and balances continue to favor landlords as we will enter 2025 and beyond. Some notes on starts from our quarterly updates with RealPage and consultants, tracking starts and deliveries are as follows. Annual starts are now at their lowest level in 10 years, approximately 280,000 units on a run rate. The year-over-year drawdown in starts from 2023 is approximately 40%. Two Q2024 starts came in at just 38,000 units, which would represent an annual run rate of 150,000 units, or 50% of the trailing 10-year average. Trailing 12-month starts are way down from the peak across all major metros, including Sunbelt markets, down anywhere from 40% to 60% versus the 2020s peak, with Sunbelt markets down 54%. Finally, RealPage forecast a return of normal 2% to 4% annual rent growth in 2025. Turning to perhaps one of the bigger items, the balance sheet. On the heels of deleveraging and retiring the entire credit facility, and as we alluded to at NAREIT, we have been working to take advantage of the spread tightening in the real estate debt markets broadly. Today, we're pleased to announce we have signed an application with JP Morgan and Freddie Mac to refinance 17 properties at SOFR plus 109 basis points 49 basis points below the portfolio average spread of 158. We're also in agreement with Freddie to refinance the remaining portfolio at the same terms by the end of 2024, thereby refinancing the entirety of our first mortgage debt. By executing this strategy, we would bring our weighted average interest rate spread to 109 basis points. We expect the first tranche of refinancing to close by October 1st of this year, and the remaining assets will be refinanced shortly after their lockup period expires on November 1st. The four-year core earnings benefit is forecasted to provide 15 to 20 cents of earnings annually. One significant added benefit to this refinancing initiative, beyond extending maturity without another seven years, is to offset the expected impact of our interest rate swaps maturing over the next three years. As we project core FFO into the future, it is our expectation that we can, at a minimum, maintain our 2024 core performance throughout swap expirations by achieving at least a 3% compounded annual growth in NOI, a metric we have historically doubled over our operating history. We see this initiative bolstering our balance sheet, shoring up core FFO estimates in the out years and positioning the company for future success and growth. Importantly, these refinancings remain flexible and allow us to sell assets with minimal breakage fees and no defeasance and or yield maintenance penalties. And as always, we'll look to hedge this exposure opportunistically on a latter basis as inflation expectations moderate. Finally, on the NAV, as Ryan mentioned, our new NAV midpoint is $55.87 per share using a 5.5% cap rate on a revised 2024 NOI. We made a 25 basis point downward adjustment to our cap rate assumption to 5.25% to 5.75% based upon current knowledge of successful trades on comparable assets in our markets. In addition, the Blackstone AIRC deal and the Lennar transaction with KKR, both of which were struck in the low five to five and a quarter cap rate range. At today's prices, our implied cap rate is roughly 6.22%. As we've routinely done in the past and to the extent we stay at these levels, we use our NAB as our guideposts and utilize free cash flow and or look to sell assets to free up liquidity buyback stock at a discount, or purchase new assets utilizing a 1031 exchange. In closing, I'll just reiterate we're excited about the near-term outlook for the company, our current refinancings, and we'll work hard to generate another year of outperformance. That's all I have for prepared remarks. Thanks to our teams here at NextPoint and BH for continuing to execute. Brian?
Appreciate it, Matt. Let's open it up for questions.
Thank you. As a reminder, if you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that's star one to ask a question. And we'll pause for just a moment to compile the Q&A roster. Thank you. Your first question comes from the line of Kyle Katarzynsk from Jannie Montgomery Scott. Your line is open.
Hey, good morning guys. You noticed that Raleigh real estate taxes accounted for 33% of your total expenses year-to-date due to the four-year reassessment. Did that come in materially higher than you guys initially estimated?
Yeah, so right now in Raleigh, it's kind of a tale of two deals, right? The Six Forks asset, we actually came in ahead of our consultants' estimates. We're pretty satisfied with that outcome. The Mooresville asset, the high house asset, that one we're having to do a little bit more fighting. So you see us still accruing at a higher rate. We think that there's savings there. If you look at our spread for four-year numbers, there's about a half a million dollar range of outcomes. Matt referenced the 14 deals that are actively in protest for 2024. The high house asset there is one of those, and that could be one of the more material drivers if we can get that down. So we're still working on that. It certainly is a big impact, but as you mentioned, it's kind of a four-year opportunity by the Apple, and then it will be fixed for the next three. So we're going to do everything we can as a consultant to control that outcome, but hopefully have more to report come Q3. Okay.
And then, are there any other multi-year tax reassessments in the next 14 and into larger markets that are going to be coming up in the second half of 24?
No, that's the one. So, Charlotte, Mecklenburg County was last year, Nashville last year as well. So, those are the three with kind of odd tax situations, but we're dealing with rallies now. I think we're pleasantly surprised with Six Forks' outcome, and we think we can you know, through some sale pump data, some income approach, get the high house result down.
Okay, thank you. And then could you guys provide an update on the sales process with Stone Creek and Houston? Should we still expect it to close before year end 24?
Yeah, we're still marketing it and negotiating with a couple of different buyers. Do have offers, you know, attractive offers that we think we can execute on and, I believe we can transact before you're in.
Okay. Sounds good. Thanks, guys. Appreciate it. You bet.
And your next question comes from the line of Amatoya Akizana from Deutsche Bank. Your line is open.
Yes. Good morning, everyone. Just in terms of the refinancing of the debt, One, could you talk about any fees or prepayments you may have to deal with now as it pertains to kind of refinancing these assets, if that exists? And then second of all, the ongoing process to refinance. I know sometimes with HUD and GFC that it can take a while. There's a lot of paperwork. It can be very administrative. Just kind of talk us through a little bit about how easy that process will be to kind of get it done.
Yeah, hey, Teo, it's Matt. So the fees, because we're sticking with in our, you know, the Freddie Mac currently has, I think, all the debt on the portfolio. It's really considered a modification versus a complete, you know, refinancing for accounting purposes. There's going to be some breakage costs, but they're negligible, you know, 10, 15 million bucks that can be amortized over the life of the seven years. So that's that. And then the execution on the Freddie side with JP Morgan. JP Morgan's a current lender. And then Freddie Mac obviously is. We're a select sponsor with Freddie and have refinanced and financed with them, I think, over $6 billion in the history of the company. So we're in a very good cadence with them. We have signed applications. We'll be working through thirds over the next 30 days, third parties, and would like to and believe we can close by the end of the third quarter on the first tranche and work concurrently while we're doing the first tranche, work concurrently on the second tranche, and then close that a month later. And so we expect this to be pretty routine for us and, again, pretty excited about it.
That's helpful. And then the same-store revenue in second quarter, again, it seems like occupancy was somewhat flat this year over year. Rents, again, were kind of down a little bit. But your same-store revenue numbers, I think for the quarter, you were up a little bit. Just curious, again, is that ancillary income doing better? Is that bad debt doing better? Could you talk a little bit through that?
potential implications for the rest of the year yeah bar you can give me the specifics but i think a lot of it is is bad debt and as we go forward um the second half of the year uh we were underwriting a gpr reduction of roughly uh two million bucks um but also lower vacancy loss of about three hundred thousand dollars and then and then better bad debt of of upwards of eight hundred thousand and i think that's what drove the income total revenue for the first half.
Yeah, and I think one of the things that might get lost in translation here, so we report 630 physical occupancy in 94.1 for the same store pool. The full quarter effective financial occupancy was 94.9. We carried pretty strong occupancy end of the quarter, and the average occupancy throughout was higher. Overall, you know, we had a pickup and occupancy. We also have, you know, our bad debt is down about 1.7% year over year. So we, you know, we're pleasantly surprised there. I think we've, you know, done well to work through kind of the, you know, the eviction activity overhang from COVID. And so the, you know, quarter, we did 1.9% growth in revenue. A lot of that is in, you know, I think a pickup and occupancy and bad debt.
Thank you.
And once again, if you do have a question, you can press star 1 on your telephone keypad. Again, if you do have a question, please press star 1.
Thank you. With no further questions, I'll turn the floor back over to the management team.
Yeah, thank you. Appreciate everyone's time this morning. Talk to you again next quarter. Thank you.
Thank you. This does conclude today's conference call. You may now disconnect. Have a great day.