NexPoint Residential Trust Inc (NXRT) 2024 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the NexPoint Residential Trust Q4 2024 earnings call. (Operator Instructions)

Thank you. I would now like to turn the call over to Kristen Griffith, Investor Relations. Please go ahead.

Thank you. Good day, everyone, and welcome to NexPoint Residential Trust Conference call to review the company's results for the fourth quarter ended December 31, 2024. On the call today are Paul Richards, Executive Vice President and Chief Financial Officer; Matt McGraner, Executive Vice President and Chief Investment Officer; and Bonner McDermett, Vice President, Asset 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 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 risk and other factors that could affect any forward-looking statement. The statements made during this conference call speak only as the certain state, 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 Matt McGraner. Please go ahead, Matt.

Thanks, Kristen. And before we dive into our prepared remarks, I want to take a moment to congratulate Brian Mintz on his well-earned retirement, which officially took effect on December 31, 2024. We're incredibly grateful for his years of dedication, the countless long days he put in, and the instrumental role he played in shaping NXRT into what it is today. While Brian has stepped back from day-to-day operations, we're fortunate that he remains a valued member of our Board, continuing to provide guidance and insight as we move forward.

At the same time, I'm pleased to officially welcome Paul Richards as our new CFO, and having worked closely with Brian and me for over a decade, Paul deeply understands our strategy and our approach to execution. He's a strong leader, and I have full confidence in his ability to drive sector leading long-term results for our shareholders.

And with that, I'll turn the call over to Paul to walk us through our fourth quarter and full year 2024 financial results.

Thanks, Matt, and thanks, Kristen. And welcome to everyone joining this morning. I look forward to our conversation and we appreciate your time. I'll kick off the call and cover our Q4 and full year results and highlights, update our NAV calculation, and then provide additional 2025 guidance. I'll then turn it over to Matt and Bonner to discuss specifics on the leasing environment and metrics driving our performance and guidance and details on the portfolio. Let me start with results from the fourth quarter, which are as follows.

Net loss for the fourth quarter was $26.9 million or $1.06 per diluted share on total revenue of $63.8 million as compared to net income of $18.4 million or $0.70 per diluted share in the same period in 2023 on total revenue of $68.9 million. For the fourth quarter, net operating income was $38.9 million on 35 properties, compared to $42.2 million on 38 properties for the fourth quarter of 2023, a 7.6% decrease in NOI.

For the fourth quarter same store rental income increased 90 basis points, and same store occupancy remains stable at 94.7%. This coupled with an increase in same store expenses of 2.2%, led to a decrease in same store NOI of 40 basis points as compared to Q4 2023. Rental income for the fourth quarter of 2024 on the same store portfolio was up 20 basis points quarter over quarter.

We reported Q4 2024 core FFO of $17.7 million or $0.68 per diluted share compared to $0.75 per diluted share in Q4 2023. We continue to execute our value-add business by completing 58 full and partial renovations during the quarter and lease 31 renovated units, achieving an average monthly rent premium of $150 and 19.2% return on investment.

In such a day, in the current portfolio as of yearend, we have completed 8,348 full and partial upgrades, 4,730 kitchen and laundry appliance installations, and 11,389 technology package installations resulting in $175, $50, $43 average monthly rental increase per unit and 20.8%, 64.8% and 37.2% return on investment respectively.

Moving to the full year. Full year results are as follows.

Net income for the year ended December 31 was $1.1 million or income of $0.04 per diluted share, which included a gain on sales of real estate of $54.2 million and $97.8 million of depreciation and amortization expense. This compared to net income of $44.3 million or income of $1.59 per diluted share for the full year 2023, which included gain on sales of real estate of $67.9 million and $95.2 million of depreciation and amortization expense.

For the year, NOI was $157 million on 35 properties as compared to $167.4 million on 38 properties for the same period in 2023 or a decrease of 6.2%. For the year, same store rental income increased 2.3% and same store occupancy remained stable at 94.7%. This coupled with an increase in same store expenses of 3.3%, led to an increase in same store NOI of 90 basis points as compared to the full year in 2023.

We reported core FFO in 2024 of $73.1 million or $2.79 per diluted share compared to $2.92 per diluted share for 2023. Since inception of the business in 2015, NXRT has generated 10.8% compound annual growth in core FFO.

Turning to our NAV estimate. Based on our current estimates of cap rates in our markets at core NOI, we are reporting a NAV per share range as follows: $44.56 on the low end, $58.52 on the high end, and $51.54 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 remain the same as last quarter and remained flat over the last year, reflecting stability in capital markets and cap rates in our markets.

For the fourth quarter, NXRT paid a dividend of $0.51 per share on December 31. Since in session, we have increased our dividend 147.6%. For 2024, our dividend was 1.47x covered by core FFO with a payout ratio of 68% of core FFO.

Finally, before discussing guidance, I'd like to touch on our 2024 transaction activity and subsequent events.

NXRT disposed of Old Farm on March 1, 2024; Radbourne Lake on April 30, 2024; and Stone Creek at Old Farm on October 1, 2024, these sales generated 20.2 levered IRR at 2.96% multiple uninvested capital, and $92.4 million on net sales proceeds, which we used $24 million to pay down drawing balance in the credit facility. In the first half of 2024, we retired $14.6 million in common stock at a weighted average price of $33.19, which represented a 37% discount to the midpoint of our Q1 2024 NAV range.

In two closings on October 1, 2024, and November 29, 2024, the company entered into [Q34] loan agreements for total gross proceeds of $1.466 billion which is in aggregate representative of 97.7% of the company's total outstanding debt. Notably, NXRT agreed to refinance at an interest rate pricing improved from prior terms. This refinancing activity extended the company's weighted average debt maturity schedule to 7 years.

Holistically, these refinancings reduced NXRT's weighted average interest on the total debt by 48 basis points to 6.21% before the impact of interest rate swap contracts. Accounting for the hedging impact of the swaps and expertise adjusted weighted average interest rate was reduced from 3.64% to 2.96% as of December 31, 2024. With the completion of these refinancings, the company has no meaningful debt maturities until 2028. On February 24, 2025, the company's Board of Directors declared a quarterly dividend of $0.51 per share, payable on March 31, 2025, to stockholders of record on March 14, 2025.

Going to our guidance for 2025, we are issuing initial guidance as follows.

For core FFO per diluted share, $2.83 at the high end, $2.56 at the low end with the midpoint of $2.70. For same store revenue, 1.3% increase on the high end, 20 basis points decrease on the low end with a midpoint of 50 basis point increase. Same store expenses, an increase of 2.4% on the high end, 4.9% on the low end, and 3.7% increase for the midpoint, which results in the same store NOI of a 50-basis point increase on the high end, a 3.5% decrease on the low end and a negative 1.5% decrease at the midpoint.

And with that, I'll turn over to Matt for comments here in the portfolio

Thank you, Paul. Let me start by going over our fourth quarter same store operational results.

Occupancy ended 2024 at 94.7%, stable year over year. We saw sizable occupancy growth in DFW in Charlotte, finishing the year 96.3% and 97% respectively. Orlando, Tampa, and South Florida remained strong, finishing the quarter at an average occupancy of 94.9%. T4 same store NOI growth was a 40 basis points, driven by 90 basis points of growth in rental revenue and 60 basis points growth in total revenues.

Operating expense growth finished the quarter at 2.2%, maintaining the moderate growth we've seen over the last several quarters. Renewal conversions were 55.4% for the quarter. In 2025, retention has started off strong with both January and February over 53.3% in March is projected to finish at the same clip.

That debt continued to trend down, finishing Q4 at 90 basis points, and for the full year, we averaged 1.3%, which was down from 2023's average of 2.7%. Operationally for the quarter, payroll declined 30 basis points year to year. R&M expense growth was 4.3% in the quarter, continuing to moderate off of an elevated post-COVID comp in 2022, 2023. Real estate taxes have also moderated, and tariffs booked in Q4 reflect a reduction to our overall real estate tax for the year and negative 6.5% growth.

On the occupancy front, we're pleased to report that Q4 same store occupancy was 94.7%, positioning us well for 2025. And as of this morning, the portfolio is still 94.7% occupied with a 60-day trend of 96.3%.

Our full year 2024 same store NOI margin was a healthy 61%. Same store revenues for the year increased by 2% while same store NOI improved by 90 basis points, despite the impact of record deliveries in our markets.

Indeed, 5 of our 10 same store markets grew in Hawaii by at least 3%. Those notable growth markets for the year were Las Vegas at 8.6%, Orlando at 8.6%, Orlando at 6.6%, Raleigh at 5.2%, and Atlanta at 3.5%.

Turning to 2025 guidance, as Paul said, we're guiding between a 3.5% decline and a 50 basis point increase in the same store NOI growth for the 2025, with the midpoint projecting a 1.5% reduction year over year.

Across the portfolio, we are forecasting a negative 0.5% to 1% rental income growth that assumes a 94% to 94.3% physical occupancy with peak occupancy model for Q1 and moderating slightly as we focus on rent growth in the back half of the year. It also assumes a negative 90 basis point earnout from lease trade outs and gain the lease inversion in 2024. Also includes a 1.5% market rent growth in 2025. Also includes a 50 basis point top line growth attributable to our value-added activities and ROI CapEx spending.

We're also forecasting a negative 30 basis point reduction in financial occupancy from 92.3% from 92.7% at the midpoint. Finally, we're assuming a 30 basis points increase in bulk wifi and other rent charges. From a market perspective, we're expecting our top performing revenue markets will be South Florida, Las Vegas, Raleigh, Nashville, and Atlanta, each expecting roughly 2% to 4% growth in these markets.

On the expense front for the year, we're forecasting a 50 basis point controllable expense decline. Within that number is a negative 1% R&M and cost growth assumption, a 3% labor growth increase, a negative 3.8% growth in advertising and a negative 2.6% growth in G&A expense.

On a non-controllable front, we're forecasting a 2.4% to 4.9% total expense growth. The components of this are 4.1% utility expense growth, a 7% insurance growth, assuming a 5% target growth on our April 1 renewal. In an 8.6% real estate tax expense growth which we expect to which we're hoping to achieve better results. This all equates, as Paul mentioned, to negative 3.5% to 5% same store NOI growth.

We continue to be an internal growth business at our core, and to that end, our guidance includes the following assumptions regarding our value-add programs still aligning with our historical 15% to 20% targets in which we anticipate to accelerate as the year progresses amid declining supply. We expect to complete 425 full interior upgrades at an average cost of $18,000 per unit, generating a $269 average monthly premium.

We expect to complete 36 partial interior upgrades at an average cost of $5,200 per unit, generating a roughly $86 average monthly premium. These partial upgrades include varying bespoke additions such as new stainless steel appliances, hard surface countertops, updated tub enclosures, and private yards, among other aspects. These partial and bespoke rehab initiatives are strategically tailored by property to drive rent growth where we see opportunities among competing properties. Finally, we also plan to install 661 washer and dryers at an average cost of $1,000 per unit, generating $53 dollars in average monthly premium or a 64% ROI.

On the acquisition and disposition guidance, we will continue to underwrite the limited value-add pipeline of opportunities out there in the first half, but we do expect the volume of opportunities to potentially increase later in Q2 and into the second half of the year as prospective buyers can finally underwrite rent growth.

On the capital markets and balance sheet and liquidity front, NXRT today has $23.1 million of unrestricted cash and $350 million of excess capacity on our unsecured corporate credit facility, giving the company $373 million of available liquidity as we head into '25. In June, we expect to finalize a recasting of the corporate credit facility, and we're well down the path to finalizing an agreement with a strong syndicate of banks to continue to provide liquidity and flexibility on our balance sheet. We appreciate that partnership and look forward to welcoming new relationships to the platform.

So far in 2025, we're off to a good start prioritizing margin expansion and increased resident satisfaction and retention. We are excited to execute on our strategy this year and initiatives. We expect to see a transition year leading to outside growth in 2026, in 2027, specifically in the second half of the year, when supply begins to wane. Indeed, Q4 saw another sharp pullback and starts to just 37,000 quarterly units in the quarter, that's the lowest level since Q4 of 2011.

It's all I have for prepared remarks. Thanks to our teams here at NexPoint and BH for continuing to execute. With that, we'll turn the call over to the operator for questions.

(Operator Instructions)

Kyle Katorincek, Janney.

Total rental income for Atlanta was up 160 basis points quarter over quarter, but average effective rent was negative 10 basis points and occupancy was negative 160 basis points, so what drove the positive result there?

Yeah, I think in Atlanta we've had a little bit higher there, pulling up exactly what you're looking at. The other benefit that we've added to total revenue in Atlanta here recently isn't bolt Wi Fi. We've rolled that out across the three assets over Q4 and Q1, so you see some total revenue growth there, that I think is going to benefit. We're getting 1GB fiber [retrofit] in units, and so that's offsetting some of the loss and downward pressure and both actions in that.

In 2025, just to add the Bonner's point, the bad debt we're expecting and have seen bad debt improvement in the market, underwriting a positive inversion this year of almost a quarter million bucks, that's improving to 1.8% in 2025 versus 2.6% in 2024, so that's a little another impact.

And then can you please provide some color on what drove the 290-basis point decrease in occupancy in the Raleigh Durham market?

Yeah, I think in Raleigh we're -- it's one of the larger supply and expansion markets for us. We've seen some pressures, particularly in the Mooresville submarket. Our high house asset was under a little bit more pressure. We're better today and we stabilized rate.

We also have a little bit of personnel change there, so I think it's something that we've dealt with and are moving forward on. We still love the love the Raleigh market and yeah, I think the supply that picture gets better, particularly for the back half of the year.

And then one more, I know you guys mentioned a little bit about the full interior upgrades. But early in 2024, you mentioned there was about 5,000 to 5,500 units left there and that you, like you mentioned in your prepared remarks for '24 and '25, you start to ramp up that supply started to dissipate any changes, material changes to that plan based on current market conditions and any markets you're focusing the upgrades on?

Yeah, we're prioritizing the renovations largely in places where we can still push rates so that's largely South Florida, Raleigh in the second half of the year, and then Vegas, the upgrades in Atlanta that Bonner just mentioned. I'd say that the revenue, or excuse me, the rehab output this year, we're pleased that it's double the output of last year and it's still not at our 300 to 400 quarter pace that we were historically done since 2015.

Our goal and our hope is to re-evaluate this output every quarter. And hopefully, as the industry is expecting an inversion in rate in the second half of the year that we can add additional output to the rehab pipeline and have some upside in this guidance. So, that's the goal.

Omotayo Okusanya, Deutsche Bank.

We could see how what you think about in 2025 against some of the higher level of that item.

Yeah, sorry, it's bad. I'm having a difficult time hearing you. I think one question or part of the question was how the slop expiration plays in through the guidance. Is that is fair?

Yeah, that's it. Can you hear me?

Yeah, I can hear you better now. Sorry.

Yeah, so we have a quarter million of our swaps expiring in June, and then we had a 50-basis point decline in our spread. So yeah, that is as a component of our guidance is actually a $0.12 benefit for 2025, this is 160 basis points, 109 basis points, reduces the total interest expense. Now, the higher -- we have to take some assumptions on higher for longer. And if we do see Fed cuts in the second half of the year or any more that that's baked in, we do think there's an upside in the core numbers, but we're being, I think, appropriately conservative at this juncture.

There are no further questions at this time. With that, I will now turn the call back over to the NexPoint management team for final closing remarks. Please go ahead.

All right. Thanks, everyone, for calling in and we look forward to speaking to you next quarter. Have a great day.

Ladies and gentlemen, that concludes your conference call. We thank you for participating and ask that you please disconnect your lines.