NXRT - NYSE

Good day. My name is Ellie, and I will be your conference operator for today. At this time, I'd like to welcome everyone to the NexPoint Residential Trust First quarter 2024 Earnings Call. [Operator Instructions] I'd now like to hand over the call to Kristen Thomas, Investor Relations. You may now begin the conference.

Thank you. Good day, everyone, and welcome to the NexPoint Residential Trust conference call to review the company's results for the first quarter ended March 31, 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 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 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.

Thank you, Kristen, and welcome to everyone joining us this morning. I'm Brian Mitts. And I'm joined today by Matt McGraner and Bonner McDermett. I'm going to kick off the call and cover our Q1 results, provide our updated NAV and our guidance for the remainder of the year, which we are reaffirming. I'll then turn the call over to Matt and Bonner to discuss the specifics driving our performance and guidance. Results for Q1 are as follows: Net income for the first quarter was $26.3 million or $1 per diluted share on total revenue of $67.5 million. This includes a $31.7 million gain on the sale of Old Farm that was completed on March 1, 2024. The $26.3 million net income for the quarter compares to a net loss of $4 million or $0.15 per -- loss per diluted share for the same period in 2023 on total revenue of $69.2 million. For the first quarter of 2024, NOI was $41.1 million on 37 properties compared to $41.1 million for first quarter of 2023 on 40 properties. For the quarter, same-store rent decreased 0.4%, while same-store occupancy increased 0.3% to 94.7%. This, coupled with an increase in same-store expenses of $3.6 million -- sorry, 1.8% with an increase in same-store NOI of 4% as compared to Q1 2023. As compared to Q4 2023, rents for Q1 2024 and the same-store portfolio were down 0.1% or $2 sequentially. Reported Q1 core FFO of $19.6 million or $0.75 per diluted share compared to $0.71 per diluted share in Q1 2023. During the first quarter, the properties in our portfolio, we completed 59 full and partial upgrades, and leased 59 upgraded units, achieving an average monthly rent premium of $240 and a 21.8% return on investment. Since inception, for properties currently in our portfolio, we've completed 8,593 full and partial renovations, 4,829-kitchen and laundry plant appliances installations and 12,348 (sic) [ 11,614 ] technology packages, resulting in $170, $39 and $43 average monthly rent increase per unit and a 20.9%, 51.4% and 37.8% return on investment, respectively. NXRT paid a first quarter dividend of $0.46 per share on the common stock on March 28, 2024. Since inception, we have increased our dividend 124.5%. For Q1, our dividend was 1.61x covered by core FFO, with a payout ratio of 56.3%. During the first quarter, NXRT completed the sale of Old Farm for sales price of $103 million. This sale generated $49.4 million of net sales proceeds, a 22.1% levered IRR and a 2.98x multiple on invested capital. On March 5, 2024, NXRT fully repaid the remaining drawn balance of $24 million on its corporate credit facility. As of March 31, 2024, we had $37.1 million in cash and $335 million of available liquidity on the corporate credit facility. Further, we are pleased to report that we are scheduled to complete the sale of Radbourne Lake in Charlotte, North Carolina later today for gross sales proceeds of $39.25 million. This disposition is expected to retire $20 million of property level debt and generated $18.8 million of net sales proceeds. And approximately 19.3% levered IRR and a 3.64x multiple on invested capital. Given the success of our recent pending sales, their increase in liquidity position, and what we perceive to be an attractive public-private market arbitrage opportunity, where our stock trades above a 7% implied cap rate versus mid- to upper fives for the private market transactions. And it's notable to touch on Blackstone's recently announced purchase of AIR Communities. We initiated a share buyback program to purchase up to $25 million of our shares. To date, this quarter, we have purchased approximately 8.5 million shares at an average price of $31.75 per share, which represents an approximately 40% discount to the midpoint of our Q1 NAV estimate. And speaking of the NAV, let's move to that. Based on our current estimate of cap rates in our markets and forward NOI, we are reporting an NAV per share range as follows: $45.91 in the low end, $58.97 on the high end, for a $52.44 midpoint. These are based on average cap rates ranging from 5.5% on low end, 6% on the high end, which remained stable quarter-over-quarter. Moving to guidance, NXRT is reaffirming 2024 guidance ranges for earnings per diluted share, core FFO per diluted share, same-store rental income, same-store total revenue, same-store total expenses, same-store NOI, interest expense and its related components and reaffirming acquisitions and dispositions as follows: our core FFO per diluted share, $2.60 in the low end, $2.85 on the high end, for midpoint of $2.72. Same-store rental income, 1.4% increase on the low end, 3.2% increase on the high end, for a midpoint of 2.3% increase. Same-store NOI, negative 2% or a 2% decline in the low end, 2% increase on the high end with a midpoint of 0%. So that completes my completed remarks. Let me turn it over to Matt and Bonner for commentary.

Thanks, Brian. Let me start by going over our first quarter same-store operational results. Same-store rental revenue was 3.6% for the quarter, with 7 out of our 10 markets averaging at least 3% growth with our Charlotte and South Florida assets leading the way at 8.6% and 7.6% growth, respectively. We're also pleased to report some continued moderation in expense growth for the quarter. First quarter same-store operating expenses were up just 1.9% year-over-year. Of note, marketing and payroll declined 8.4% and 6.2% respectively in year-over-year, and R&M expense growth continued to moderate just up 2.9% from first quarter of 2023. Five out of our ten markets achieved year-over-year NOI growth of at least 5.9% or greater, with Orlando and South Florida leading the way at 12.3% and 9.9% growth, respectively. Our Q1 same-store NOI margin registered a healthy 61.9%. That's up 24 basis points from the prior year. Now turning to components of Q1 performance. With peak deliveries in most of our markets occurring in Q3 of this year, as detailed on Page 5 of the supplemental, we continue to focus on our operational efforts on maximizing resident retention, reducing our exposure to rising turnover costs and further centralizing labor. Maintaining and building occupancy has remained a key focus. The portfolio registered 94.6% occupancy to close the quarter. And as of this morning, the portfolio is 94.7% occupied and 93% leased. On the rental revenue side, new lease growth remains constrained due to near-term concentrated supply in our markets, but there are signs that the deceleration in new lease growth is bottoming. New leases for the quarter improved 130 basis points to negative 6.5% from negative 7.8% quarter-over-quarter. And April is trending better than Q1 by 80 basis points. Renewals are also positive for the quarter at 92 basis points and have accelerated sequentially since the third quarter of last year to 1.4% as we said in April. Bad debt is also trending in a positive direction, improving quarter-over-quarter. Q3 2023 was 3.2%. Q4 was 2% and Q1 was down to 1.8%, trending approximately 90 basis points better than our expectations. On the value-add front, during the first quarter, as Brian said, we completed 59 full and partial interior upgrades, achieving an average monthly rent premium of $240 and 21.8% ROI. We also installed 68 washer and dryer sets for an average monthly rent premium of $48 and a 54.6% ROI. Lastly, we completed a bespoke upgrades on an additional 55 units with average rent premiums of $56 per unit. And for the remainder of 2024, we intend to complete an additional 352 full or partial upgrade interior upgrades, 465 washer and dryer sets and 318 bespoke upgrades in units where we see demand to drive rental income. On the expense side, we completed our insurance renewal at the end of March, and I'm happy to report that our premiums will remain flat, which aligns with our midpoint guidance expectations. On the transaction front, we continue to actively monitor the investment sales market for opportunities and price discovery. While apartment transaction volume is at the lowest point in the past decade, over the last 60 days, private equity investors have aggressively priced over $15 billion of housing product in the low five in-place cap rate range. Over $240 billion of North American focused real estate closed-end fund dry powder, remains on the sidelines in search of 13% to 20% levered IRRs according to [indiscernible]. Against this backdrop and even with the near-term elevated supply picture, our strategically positioned Sunbelt Portfolio screens attractively, particularly given in our in-migration and demographic backdrop. Indeed, as you can see from the supplemental according to Costar, one out of every two jobs are expected to be created in NXRT markets through 2027. Now with the sale of Old Farm closed and with the closing of Radbourne later today, we will have roughly $36 million of cash to continue to buy back shares and/or pay down debt. And given our current cost of capital, we have prioritized this balance sheet cleanup and share buybacks over external growth pursuits. At current levels, NXRT's implied cap rate remains north of 7.5% and with the construction view -- a constructive view, sorry, on when supply will wane, we believe repurchasing our shares at these levels makes the most sense. In closing, we are happy with the start of 2024 through late April. We will remain focused on occupancy and controlling expenses to maximize NOI growth. In the long term, we remain bullish on our Sunbelt market as we expect to outpace northern and coastal cities and population, job and wage growth. In the short term, we expect to see modest growth, specifically in the second half of the year as supply growth begins to decline. That's all I have for prepared remarks. Thanks to our teams here at NexPoint BH for continuing to execute. Now I'd like to turn it over to the operator for Q&A.

[Operator Instructions] Our first question comes from Kyle Katorincek from Janney.

What does concession usage look like across the portfolio? Is concession usage picking up in April versus 1Q '24?

Yes. I don't -- and [ Brian ], you can just chime in too, if you get anything to add. Concession usage going forward does pick up for in the second quarter, in the third quarter and then starts to wane in the fourth quarter. That's one reason why we're maintaining guidance until July. So we have a better view on just how the supply is impacting the market rents. But as we stated, the blended rents have appeared to bottom in our view. And so the use of concessions, which were a couple of weeks free to waving the normal fees that we would charge, have begun to dissipate. And so while we're still underwriting that, we'll have to use them. We're hopefully optimistic that we won't. [ Bonner ], anything to add to that?

Yes. And just to quantify it a little bit. So first quarter concession use was about 24 basis points on TPR. It's not in every market. We see it more in the high supply markets. Having been out and seeing some sites, we're talking more in a couple of areas of Phoenix, a couple of areas of Charlotte. Broadly, areas where we have more new supply delivering. There's sort of a market expectation for a concession but we're trying to maintain about 2 to 4 weeks free where the new development, particularly in the highest supplied areas, are two and even after three months free.

Okay. And then how far are you guys to the various upgrade opportunities within the portfolio? Just trying to get a sense of the runway left ahead of you versus all the units you've already done. Are you basically done with the technology package upgrades at this point, having done more than 12,000 of them?

Yes. We're basically done with the tech packages. There's a low-hanging fruit, as we mentioned, on the washer and dryers, which will hit this year. And then as it relates to -- it's sort of the full interior package. We go in an audit on an annual basis, what kind of bespoke upgrades we can do. And then taylor-make those upgrades as we go throughout the year, depending on how the asset, in particular, is performing. But as kind of like a Gen 2, I think we have roughly 5,000, 5,500 units still to do, which gives us another about 1.5 years, 2 years of internal growth to go pursue as the supply picture wins, and we can be more competitive. That's another kind of key component why we've paused and hit the brakes a little bit versus years prior. But as the supply starts to dissipate in Q4 and certainly into '25, you'll see us ramp those upgrades pretty quickly.

Our next question comes from Tayo Okusanya from Deutsche Bank.

Wow, Deutsche Bank. Okay. So a quick question on guidance. Again, very strong quarter, again, understand you're going to have the asset sales, which are somewhat dilutive to earnings as the year progresses. Could you kind of walk us through, again, 4% same-store NOI in 1Q, but full year guidance somewhere between negative 2% [ and 2% ]. Again, what's causing some of that deceleration? Is it just overall concerns about supply and the impact on portfolio performance. And then also just guidance range still remains pretty wide. So is the thought get through spring leasing season, have better clarity, and then maybe at that point, start to narrow the guidance range?

Yes, that's exactly right, Tayo. We feel good with how the first quarter came in. Absorption was better than we thought. Bad debt was, as I said, 90 basis points better than we thought and occupancy was better than we thought. And obviously, renewal rates are -- and on the new lease side, we're negative 5%, 6%. As we get into the second and third quarter, we're underwriting still almost a gain to lease, and the GPR, we're underwriting a GPR down another 90 basis points in the second quarter and then another 40 basis points sequentially into the third quarter and another 90 basis points into the fourth quarter. And so if that flips, then we'll be excited to report a narrowing range and hopefully raise as we work through the second quarter. But that's the biggest reason we're just being cautious for the moment.

Got you. That's helpful. And then if I may sneak one more in. again, the swaps that are going to be expiring this year, about $385 million of swaps. How do we kind of think about -- a lot of them are kind of in the money right now, so they are helping you. How do we kind of think about that as it drops off? You kind of put in new swaps at higher rates, go [ floating ] on that debt?

Yes, it's a great question. So we worked on this during the first quarter and are basically monitoring the fluctuations in interest rates. The -- it doesn't make a ton of sense, in our view, at peak rates and just where we think we are at least at peak rates to go ahead and layer on more swaps. And really, the math isn't as dangerous or as gloomy as folks might think. We did some work, and we only have to CAGR NOI at 5% for over the next '25 and '26 to maintain a current FFO levels and have the swaps, all of them, expire. And that's assuming we could refi and turn out all our debt at the 5% rate. Now if we're able to CAGR at a higher rate, which we have historically done since we've been a public company at 6%, 7%, 8%, and we're able to fix our debt at a lower than 5% rate, then we get into the $3 core FFO range. And so that's a long way of saying we're going to watch the yield curve. And we believe, as rents are decelerating, that those numbers will eventually make it into CPI and allow for some easing. And while -- if and when that happens, we'll be doing the same math. But really, the powerful point is that this company will grow same-store NOI in the mid- to high single digits going forward, especially as supply becomes non-existent, and that's illustrated in the supplemental where we lay out the deliveries in our submarkets. We can see it. There's not going to be any supply coming in '26 at all. And at that point, our swaps are expiring. My guess is our equity cost of capital will improve or -- and/or the value of the company will be higher than it is today.

Got you. And then what do you think you can actually raise fixed rate paper today, whether it's 5-year or 10-year, unsecured? .

Yes. Unsecured, we don't have an unsecured rating, so that's not really applicable to us. Fannie Freddie debt is pricing in the 6% range on a 10-year fixed basis. You could do things -- we could do things a little bit better as a [ select ] sponsor of Freddie, probably in the mid-5s, but that's where it is today if we went out and try to fix everything.

Our next question comes from Barry Oxford from Colliers .

On the interest line item quarter-over-quarter, can you talk about what drove the interest line item to be down as much as it was? And how should we think about that going forward? .

Yeah, Bonner, you can take that one.

Yes. I think given what we thought we were looking at the end of the year, looking at the forward curve, obviously, it was priced in a pretty significant amount, you know, five cuts. We were talking in Q4. Now that market is somewhere around two cuts, plus or minus. The SOFR curve at [ 12/31/24 ] is significantly steeper than it was expected to be here when we talked 2 months ago. That has an impact on the fair value of the swaps. So there's some noncash mark-to-market activity that I think was a little bit more significant than we estimated. We got a benefit in the first quarter from that. I think that that's the biggest differential you're probably seeing in the interest expense line.

Right. So with the adjustments in the swap value? .

That's right.

Right. Okay. No, great. It's kind of what I thought it was, given your comments previously. But switching gears, you indicated that you were looking to buy back shares. Are you prioritizing the buyback of shares over acquisitions or not necessarily you could be doing both of them at the same time?

Yeah, we're prioritizing the buybacks as it sits today because there's still a clear gap between public and private market values, like significance. Almost 150 to -- in some cases, 200 basis points as it relates to our company. The Blackstone AIRC deal was 5.9% headline cap rate, but if you dig into it, it's 5.3%. That's a big bet. We can't find anything in the market, and the transaction volume is, again, the lowest it's ever been in the last decade. So it makes sense to buy a portfolio that we know and love in the sevens.

Right. Exactly. That makes sense.

No further questions as of the moment. I'd now like to hand back over to the management for the final remarks.

Nothing further from us. I appreciate everyone's time and thoughtful questions. And we'll speak next quarter. Thank you.