NexPoint Residential Trust, Inc.

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 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, press star one again. Thank you. I would now like to turn the call over to Kristen of Investor Relations. Kristen, your line is now open.

Thank you. Good day, everyone, and welcome to NextPoint Residential Trust's conference call to review the company's results for the third quarter ended September 30, 2024. On the call today are Brian Mintz, Executive Vice President and Chief Financial Officer, Matt McGrainer, 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 Security 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 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 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 Mitz. Please go ahead, Brian.

Thank you, Kristen.

And welcome to everybody this morning. Appreciate you joining the call. I'm Brian Mitz, and I'm joined today by Matt McGrainer and Bonner McDermott. 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 Bonner to discuss specifics on the Louisiana environment 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 for a loss of $0.35 per diluted share, which includes $24.6 million depreciation and amortization. This compared to net income of $33.7 million or a gain of $1.28 per diluted share The third quarter of 2023, which included $23.8 million of depreciation and amortization. The third quarter of 2024, NOI was $38.1 million on 36 properties, compared to $42.1 million for the third quarter of 2023 on 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, 1.7% offset by 8.2% increase in same store operating expenses led to a 2.4% decrease in same store NOIs 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%. We reported Q3 core FFO of $17.9 million, or 69 cents per diluted share, compared to 69% per diluted share for the 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 installs, 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. And XRT paid a third quarter dividend of 0.46 cents per share on the stock on September 30th, since we increased our dividend 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 29th 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 to improve pricing from our prior terms. Those rates are so far plus 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 rates for all contracts are factored in. Accounting for the hedging and packet 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. Also 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 best capital. Turning to our NAV estimate, based on our current estimate of cap rates in our markets, in forward NY, we are reporting NAV per share range as follows. $48.77 on 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 1 cent loss on the low end, 7 cent gain on the high end, for a midpoint of 3 cents per share. For core FFO per deleted 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, 1.3% increase in the low end, 2.2% increase on the high end for a midpoint of 1.7%. For expenses, 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're guiding no acquisitions versus $50 million for the prior quarter. For dispositions, essentially the same at $167 million versus $175 million previously. Finally, before I turn it over to Matt Bonner, I wanted to mention an adjustment we are making to core FFOs starting this quarter. The company has adjusted core FFO to remove the amortization of all deferred financing costs instead of those solely related to short-term debt financing as we previously did. And secondly, to adjust to 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.

Yeah, thanks, Brian. Let me start by going over our third quarter same-store operational results. Same-store rental revenue was up 2%, with 5 of 10 markets averaging at least 2.4% growth, with our Las Vegas and Raleigh markets leading the way at 11.6% and 5.4% growth, respectively. Total same-store revenues were up 1.7% year-over-year for the quarter. Third quarter, same-store NOI growth portfolio average, as Brian said, down to negative 2.4%. Raleigh and Las Vegas led all NOI growth in the quarter with 49.5% and 12.7% growth, respectively. Raleigh's growth was driven by positive tax-recrual adjustments as a result of the successful process. Our Q3 same-store NOI margin remained strong at 59.7% and we're in a well-positioned to finish the year strong on that metric. Operationally, the portfolio experience continued positive revenue growth in Q3 2024, with six out of our 10 markets achieving growth of at least 2% or better. Our top five 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%. Renewable conversions for eligible tenants were up 63% for the quarter, or were 63% for the quarter, excuse me, with five out of 10 markets exceeding renewal rate growth of at least 2.5%. Charlotte, South Florida, Phoenix, Las Vegas, and Raleigh all exceeded 2% growth. On the occupancy front, the portfolio registered 94.9% occupancy as the close of the quarter. As of this morning, it is 94.7% occupied, 96.2% leased, and has a healthy trend of 92%. On the expense side, expenses finished the quarter 8.2%. R&M expenses were driven by higher turn costs due to lower renovations when compared to Q3 2023 and typical seasonality in Q3 of this year. We expect these costs to moderate in Q4 as we maintain a higher occupancy and less lease turnover. Marketing and utilities were bright spots in the categories and saw modest expense growth for the quarter at 0.9% and 1.8%, respectively. Current October leasing is in line with Q3 so far, and we expect new leases to be down in the fourth quarter 4.5% to 5% and renewals to be a positive 2% to 3%, averaging to a slightly positive blended number for the quarter at the end of the year. On the supply side, according to our market research and our own intelligence, we think seven out of NXRT's 10 markets are past peak supply. Nine of those 10 markets are forecasted to grow occupancy over the next 12 months, and all of them, 10 out of 10, are expected to grow rents over the same period. We expect to reach peak supply across the three final markets, Charlotte, Phoenix, and South Florida by the third quarter of 2025, at which point, we expect to see a fundamental shift in our favor that should sustain growth and stronger performance through 2027. Thus, our operational strategy will likely remain defensive over the next quarter or two, but we are becoming incrementally more constructive on rent growth given the next 12-month outlook. In addition, as we underwrite the portfolio for value-add opportunities in 2025, we expect to increase the rehab output somewhat materially. This outlook, coupled with our refinancing activities, led to management recommending the dividend increase approved by the Board yesterday. As you may recall, upon completion of refinancing activity in November, we will have reduced our average floating rate spread to 109 basis points from 158 basis points and pushed out nearly all maturing debt to 2031. This full year core earnings benefit is forecast to provide 15 to 20 cents of earnings annually. The cash from the expected sale of Stone Creek and available cash on the balance sheet gives us the ability to have roughly $100 million of buying power going into 2025 to add accretive investments to the portfolio and continue the growth of the company, especially on the internal growth front with new rehabs. On the NXRT's NAV, as Brian mentioned, we remain transparent of our view and what we're seeing in the market. Our new midpoint is $54.34 per share using a 5.5% cap rate on our revised 2024 NOI. And at today's prices, our implied cap rate is roughly 6%. As we've routinely done in the past, to the extent we stay at these levels, we use our NAB as our guideposts to utilize free cash flow and or to look to sell assets to free up liquidity and buy back our stock at a discount. In closing, I'll just reiterate that we're excited about the near-term outlook for the company, and we'll continue to work hard to generate another quarter of outsized NOI and core earnings growth. And that's all I have with prepared remarks. Thanks to the teams here at NextPoint and BH for continuing to execute. Brian.

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

Begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad, raise your hand, and join the queue. If you would like to withdraw your question, simply press star 1 again. Your first question comes from the line of Amatayo Kosanya with Deutsche Bank. Amatayo, your line is now open.

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 a 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 map out to the 1.7. So just kind of curious, kind of what else may have happened during the quarter, whether it's, you know, bad debt or something else that maybe we just haven't considered in that overall same store revenue growth number.

Yeah, it's great. It's a honor. I think that the two things that were really impactful this quarter, you know, thriving, continuing to drive occupancy growth. So, you know, we saw for the quarter, the, you know, financial occupancy got 94.5. We closed for quarter at 94.9. That was 140 basis points year over year. So, you know, 1.4% over the last third quarter on a financial occupancy perspective. And then On bad debt, bad debt continues to trend down for us. We had about 1.3% bad debt in the quarter, a little bit better than forecast. That's coming off a comp last year at 3.1. So those two lines really drove the increase in rental revenue.

Okay, that's very helpful. And then in the quarter as well, property G&A came down quite a bit. I know, again, 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.

Yes, it's Matt. You know, we continue to utilize, you know, AI and reduce leasing staff on site as, you know, the whole guided tours 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.

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 you know, really focused on, you know, ways we can trim expenses. Obviously, in a, you know, tougher leasing environment, you know, controllable expenses is really important for us. So, continued focus, you know, we're into 25 budgets and, you know, continuing to look very hard at, you know, ways we can continue to control those lines.

That's helpful. Thank you.

Again, if you would like to ask a question, simply press star or on your telephone keypad. Your next question comes from the line of Michael Lewis with Trivid Securities. Michael, your line is now open.

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?

Yeah, Michael, hey, it's Matt. Yeah, it's not only a definitional change, frankly, but it's the impact of the refinancing, right? So we're redoing all the debt and then removing the mark-to-market impacts, which have troubled some analysts, I think, including yourself. So those two things and smoothing it out for both this year and next year and the impact of the billion-four refinancing, incrementally positive is the result.

Okay. That's what we thought. It's really, I mean, all said and done, it's really an interest expense. Correct. Okay. Gotcha. And then, you know, what do you expect to do from, you know, a swap or a hedging perspective on all this new debt, right? So the SOFR rate is coming down and you've got a good spread. Do you ride this a little bit, right? A lot of your existing hedges burn off in, you know, 25 and 26. Do you float this for a little while, or do you start putting swaps on these as you do them?

Yeah, it's a good question. We, you know, we, I guess, holistically looked at this, you know, back when the five-year was, you know, 3, 3, 3, 3, 4, and thought that, you know, that could be a good level to start, you know, layering in some swaps. And then kind of concurrently with that, we got this refinancing done, which bought us a little bit of time in our view. And then the work that we've done to date, we think that as long as we can earn a 3% compounded annual gross return on the same store basis through 2027, that really offsets all the interest expense increase due to the expiration of the swaps. So that's the positive. The good news is we'll see what happens with the election and interest rates, but we are going to actively look to return to layering in swaps. We don't want to cannibalize that number, obviously, at these levels. We do think that the short end does come down somewhat materially here. You know, that's the long-winded answer. The short answer is we're going to look to, you know, take advantage of the interest rate environment to the extent that, you know, we get relief on the five-year.

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

Yeah. On a blended basis, new leases were down minus 6.43%. That's 93 bucks. on 1,730 leases. Renewals on 20 – 2,040 leases were up 2.2 percent or about 31 bucks. Perfect. Thanks. You bet.

Your next question comes from the line of Amatayo Gassanya again with WCA Bank. Amatayo, your line is now open. All right, so there's no further question at this time. I will now turn the conference back over to the management for closing remarks.

Yeah, thank you. Appreciate everyone's time and questions, and hopefully we'll see everybody in A-REIT here in a few weeks. Thank you.