NexPoint Residential Trust, Inc. (NYSE:NXRT) Q1 2024 Earnings Call Transcript

NexPoint Residential Trust, Inc. (NYSE:NXRT) Q1 2024 Earnings Call Transcript April 30, 2024

NexPoint Residential Trust, Inc. misses on earnings expectations. Reported EPS is $0.68 EPS, expectations were $0.86. NXRT isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day. My name is Shelly, 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] Thank you. I’d now like to hand over the call to Kristen Thomas, Investor Relations. You may now begin the conference.

Kristen Thomas: 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, Assets 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. These statements made during this conference call speak only as of todays 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.

Brian Mitts: 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 first quarter of 2023 and 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% that’s 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, at least 59 upgraded units, achieving an average monthly rent premium of $240 and a 21.8% return on investment.

Since inception from properties currently in our portfolio, we’ve completed 8,593 full and partial renovations 4,829-kitchen laundry plant appliances and installations and 12,348 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 and 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 an 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 to what we perceive to be an attractive private market arbitrage opportunity, where our stock trades above a 7% implied cap rate versus mid- to upper price 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’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 from 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% increases 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 at the midpoint of 0%. So that completes my complete remarks. Let me turn it over to Matt and Bonner for commentary.

Matt McGraner: 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 Ford 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. Marketing and Payroll decline 8.4% and 6.2% respectively in year-over-year R&M expense growth continued to moderate just up 2.9% from first quarter of 2023. Five out of our 10 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 later. 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 dryer sets and 318 bespoke upgrades and 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 5 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 East Dole. Against this backdrop and even with the near-term elevated supply picture, our strategically positioned Sunbelt portfolio screens attractively, particularly given 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 Radon 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.

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