NexPoint Residential Trust, Inc. (NYSE:NXRT) Q1 2023 Earnings Call Transcript

NexPoint Residential Trust, Inc. (NYSE:NXRT) Q1 2023 Earnings Call Transcript April 25, 2023

NexPoint Residential Trust, Inc. beats earnings expectations. Reported EPS is $-0.15, expectations were $-0.16.

Operator: Thank you for standing by. At this time, I would like to welcome everyone to the NexPoint Residential Trust Q1, 2023 Earnings Conference Call. Thank you. Kristen Thomas, you may begin your conference.

Kristen Thomas: Thank you. Good day, everyone and welcome to NexPoint Residential Trust conference call to review the company's results for the first quarter March 31, 2023. 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 to 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.

Brian Mitts: Thank you, Kirsten. Welcome to everyone joining us this morning. Appreciate your time. I'm Brian Mitts. As Kirsten mentioned, I'm joined here with Matt McGraner and Bonner McDermett. Let me kickoff the call and cover our Q1 results, give our updated NAV, and then update our guidance for the remainder of the year. I'll turn it over to Matt and Bonner after that to discuss specifics on the leasing environment and metrics driving our performance and guidance. So let's start Q1 results which are as follows. Net loss for the first quarter was $3.9 million or $0.15 per diluted share and total revenue of $69.2 million as compared to a net loss of $4.7 million or $0.18 per diluted share in the same period in 2022 and total revenue of $60.8 million, which represents a 14% increase in revenue.

For the first quarter, NOI was $41.1 million on 40 properties as compared to $36.7 million for the first quarter of 2022 on 39 properties, representing a 12.2% increase in NOI. For the quarter, year-over-year rent growth on renewals averaged 4.8% across the portfolio, and year-over-year rent growth on new leases average 2.8%. Given where rental rates are in our markets for Class B apartments and equivalent as for product, we believe there's still room for future outsides rent growth for the remainder of the year. For the quarter, same store rent increase 13.3% and same store occupancy was down 3% to 94%. This coupled with an increase in same store expenses of 15.1% led to an increase in same store NOI of 9.4% as compared to Q1 of 2022. Compared to Q4 2022, rents for this quarter on the same store portfolio were up 0.6% quarter-over-quarter.

We reported Q1 Core FFO of $18.5 million or $0.71per diluted share, compared to $0.77 per diluted share in Q1, 2022. For the quarter, we completed 494 full and partial renovations and leased 565 renovated units achieving an average monthly rent premium of $153 and 21.2% ROI during the call quarter. Inception today in the portfolio we've completed 8,127 full and partial upgrades, which represents 54% of our current units, 4,914 kitchen upgrades and washer and dryer installments and 10,423 technology package installations, achieving an average monthly rent premium of $153, $47 and $45 respectively, and ROI of 21.8%, 65.6% and 37.4% respectively. During the first quarter, we refinanced the Venue on Camelback and paid down $17.5 million to the corporate credit facility through the refinancing proceeds and available cash.

As of March 31, the balance in the corporate credit facility is $57 million. and with the sales of Old Farm and Stone Creek in Houston, which we expect this quarter, we'll use some of those expected net proceeds of $63 million to pay down the remainder of the corporate facility. Moving to NAV, based on our current estimates of cap rates in our markets and forward NOI, we're reporting a nav range per share as follows. $66.66 on the low end, $76.82 on the high end, and $71.34 at the midpoint. These are based on average cap rates ranging from 5% on the low end to 5.3% on the high end, which remains flat from last quarter and has increased approximately 65 basis points from Q3, 2022. Moving to full year guidance, we're updating guidance as follows.

On Core FFO, we are guiding to $2.90 and the low end, $3.20 on the high end, with the midpoint of $3.06. For rental income, we're estimating 10.5% increase on the low end, 12.1% increase on the high end, for midpoint of 11.3% increase. For same store NOI, we're estimating 9.2% growth on the low end, 12.8% growth on the high end and 11% for the midpoint. And then to add some additional transparency and clarity in information. We are showing the components to interest expense as that's obviously driving some of our results and our guidance. We estimate total interest expense for the year at $65.2 million on the low end, $63.2 million on the high end, and $64.2 million at the midpoint. So with that completes my remarks, I'll turn it over to Matt and then Bonner for some commentary in the portfolio and lease environment.

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Matt McGraner : Thanks, Brian. Let me start by going over our first quarter same store operational results. Rental revenue growth continues to outperform across the board with year-over-year growth in Dallas, Phoenix, Atlanta and our Florida markets in the 12% to 17% range, with Tampa notching growth north of 20%. First quarter same store NOI growth continued at a strong pace in our markets, with the portfolio averaging 9.4% driven by 11.6% growth in total revenues. We have started to see expense growth moderate also with controllable expense of just 40 basis points quarter-over-quarter, and total operating expenses of 2.2% quarter-over-quarter. Six of our 10 same store markets achieved year-over-year NOI growth of 8.4% or greater with our Q1 same store NOI margin registering a healthy 59.8%.

The portfolio experience continued positive revenue growth in Q1 with nine out of our 10 markets achieving growth of at least 7.5% or better. Our top five markets were Tampa at 20.9%, South Florida at 15.3%, Nashville at 13.3%; Phoenix at 13.1% and Orlando at 12.6%. Renewal conversions were 60.5% for the quarter with six out of our 11 markets executing renewal rate growth of at least 3.5%. Our top five markets were at Raleigh at 7.7%, Dallas Fort Worth at 6.9%, South Florida at 6.6%; Tampa at 5.8% and Orlando at 5.7%. On the occupancy front, we're pleased to report as Brian mentioned that Q1 same store occupancy remained over 94% positioning us well as we entered the peak leasing season and as of this morning the portfolio is 96.5% leased with the healthy 60 day trend of 91.6%.

Year-to-date in 2023, market conditions have continued to spur our shift and operational focus towards maximizing resident retention, reducing our exposure to rising turnover costs and further centralization of our labor. Through Q1, 2023, we have seen new supply albeit primarily within the Class A stock continued to deliver in our markets. We are encouraged by the placement of our assets relative to the sub markets most directly hit with this new competition. And RealPage project supply inventory for our markets over the next three years to rise by just 7.5%, with most of that delivering this year and early next. Deliveries peak in ‘23 and then start to moderate in ‘24 and then literally fall off a cliff thereafter to just 2,700 units estimated in 2025 in our sub markets.

We illustrate this supply picture on page 5 of our supplemental. Our internal conclusion is we are currently still enjoying relative pricing power between our upgraded housing products versus new supply and/or SFR assets and expect this paradigm to be particularly acute in the second half of ‘24 and ‘25 when deliveries significantly drop. On the transaction front, we expect to complete the disposition of Old Farm and Stone Creek during the quarter. As previously mentioned, we'll use the sales proceeds to retire the full remaining balance on the revolver. We continue to actively monitor the capital markets for opportunities and to stay close to any movements on cap rates in our markets. We continue to see many institutional investors on the sidelines and we will wait for clarity around the interest rate environment and more recently, the regional banking stress.

We've seen cap rate expansion, however, flattened over the last several months. On average, we're seeing nominal cap rate ranges between 4.75% and 5% depending on class location and vintage. We're also monitoring a couple of large acquisitions expected to clear a 4.9 cap for large portfolio of assets similar to NXRTs, which is a positive REIT through turn NAV of 70 to 75 share versus the current market price in low 40s. In closing, we're off to a strong start in 2023 through late April, where we are expecting to see continued strength in middle market rental housing, particularly in our markets. And we maintain optimism that 2023 will further demonstrate our ability to produce outsized growth in NOI, earnings and dividend growth. So I have full prepared remarks.

Thanks to our teams here, NexPoint BH for continuing to execute. Turn it back over to you, Brian.

Brian Mitts: Yes, let's go to questions.

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